Retirement plan: What happens to disability benefits when I reach state pension age next year?
I am 65 and due to retire in January next year. However, I haven’t worked for over 10 years due to disability.
I have a pension pot of £62,000. I currently receive many benefits including Personal Independence Payment, Employment and Support Allowance, housing benefit and council tax relief.
I will soon need to make a decision on buying an annuity, but I am not sure how this will affect any or all of my benefits.
I don’t know what type of annuity to buy, or indeed whether to just keep my pot and draw down funds as and when needed.
I have around £1,200 in savings but this is reducing rapidly. I have a number of projects that I want to complete; renovating an ageing motorhome, garden landscaping and possibly upgrading my car.
I am considering taking some money from my pot but I am worried that this will affect my benefits.
I will be entitled to the full state pension. I would appreciate any pointers that you can provide.
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Steve Webb replies: Let me start by setting out how the rules treat your pensions and other savings at the moment, and then move on to how this will change when you reach pension age.
The first thing to say is that your Personal Independent Payment is based purely on the extra costs you face because of a disability, and the amount you get is entirely unaffected by your income or savings.
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This is Money’s columnist Steve Webb calls on elderly widows who might have missed out on a backpayment when their husbands died to get in contact.
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Find out if you could be affected, and how to contact Steve here.
> Did you miss out on state pension if you were widowed in retirement?
The other benefits you get – ESA, housing benefit and council tax assistance – are all paid on a ‘means-tested’ basis, which means that the amount you get is based on your income and your savings.
However, crucially, for as long as you are under pension age the value of any savings you hold in a pension will be ignored.
Everything will change when you reach state pension age next year.
The first thing is that your state pension will kick in, and it sounds as though you will be getting the full amount of around £10,600 per year.
This is slightly above the standard pension credit level, so if you had no disability then your state pension income would disqualify you from pension credit.
However, if you are getting the ‘daily living’ component of PIP, then the pension credit system is more generous and you could qualify if your state pension was your only income.
The next question is how the money in your pension pot is treated.
The way it works is that they treat you as if you had used the pension pot to buy an annuity (a guaranteed income for life) – whether you have done so or not.
Your untouched pension pot generates what is called an ‘imputed income,’ and this is added to your state pension income when your pension credit is worked out.
Given the modest size of your pot, it’s possible that you could still get a small amount of pension credit, provided that you qualify for the extra amount for disability.
In short, whether you keep your pension pot as an untouched fund which you tap into from time to time, or whether you use it to buy an annuity, won’t initially make a lot of difference for benefits purposes, as you will be treated as if you had taken an annuity either way.
When you reach pension age you would also need to be reassessed for help with rent and council tax.
If you qualify for pension credit ‘guarantee credit’ this is what is called a ‘passport’ to certain other benefits, and this would include covering your full rent.
The situation with council tax is more complicated, as each English local authority has its own system. However, provided that your local authority takes account of your disability, you should hopefully find that you get a 100 per cent council tax rebate as well.
With regard to the small amount of money you have in a savings account, this would be ignored for pension credit purposes, as savings under £10,000 are not counted.
I am assuming in this reply that you are not living with a partner.
In these circumstances, people are only eligible for pension credit either when both are over pension age, or when the partner who is over pension age claims housing benefit. The Gov.uk website explains the pension credit rules here.
Finally, you ask about the situation if you were to spend down some of your pension or savings.
The key thing here is that you cannot blow the lot simply in order to qualify for more benefit.
If the Department for Work and Pensions or your local council think you have deliberately ‘deprived’ yourself of capital (for example, by lavish spending on a luxury item) just to get benefits, then they can treat you as if you still had the money.
On the other hand, if you spent some of the money in a measured way on things like necessary home improvements or replacing a worn-out vehicle, you would be unlikely to fall foul of the rules.
Ask Steve Webb a pension question
Former Pensions Minister Steve Webb is This Is Money’s Agony Uncle.
He is ready to answer your questions, whether you are still saving, in the process of stopping work, or juggling your finances in retirement.
Steve left the Department of Work and Pensions after the May 2015 election. He is now a partner at actuary and consulting firm Lane Clark & Peacock.
If you would like to ask Steve a question about pensions, please email him at email@example.com.
Steve will do his best to reply to your message in a forthcoming column, but he won’t be able to answer everyone or correspond privately with readers. Nothing in his replies constitutes regulated financial advice. Published questions are sometimes edited for brevity or other reasons.
Please include a daytime contact number with your message – this will be kept confidential and not used for marketing purposes.
If Steve is unable to answer your question, you can also contact MoneyHelper, a Government-backed organisation which gives free assistance on pensions to the public. It can be found here and its number is 0800 011 3797.
Steve receives many questions about state pension forecasts and COPE – the Contracted Out Pension Equivalent. If you are writing to Steve on this topic, he responds to a typical reader question about COPE and the state pension here.