MORE than 1.5million workers have been warned a simple mistake could have a devastating impact on their benefits.
Accessing pension funds using Pension Freedoms legislation may help in the short term, but it could see Universal Credit payments cancelled.
Pension Freedoms give people greater access to their pensions and allows withdrawals and investments.
Many approaching retirement may be tempted to free up some extra cash as UC cuts and the end of the furlough scheme approach.
But a worrying number of people aged 55 and over who access their savings pot are oblivious to the consequences it can have now, according to new research.
Taking money out now can affect benefit entitlement in two key ways.
Firstly, you may end up with more savings which increases your capital.
Those with more than £16,000 in capital when assessed for benefit are disqualified from UC.
Even having £6,000 in capital can see help from local authorities with council tax bills stopped.
The second way utilising Pension Freedoms could affect how much financial support you receive right now is if you use your pension to buy a regular income through annuity.
Each pound of annuity income could be deducted from your benefit salary, which again reduces your income.
Similar issues can apply to those over pension age who are on Pension Credit or Housing Benefit, though the rules apply in a different way.
The report, by consultancy firm Lane Clark & Peacock, found there are well over 1.5million people in the 55 to 65 age group on means-tested benefits such as UC or Employment Support Allowance.
If any of these takes money from a pension – perhaps because they are under financial pressure – this could have an adverse impact on their benefits.
The research warns: “There is a real risk that members could unwittingly think they are improving their financial position by drawing on their pension but end up making themselves worse off.”
LCP has designed a free website tool where savers who are on benefits and considering accessing their pension can get a feel for how this is likely to impact their finances.
‘NOT FIT FOR PURPOSE’
Co-author Peter Robertson, of EngageSmarter, said: “Our research has found that existing advice and guidance on how Defined Contribution pensions and state benefits fit together is not fit for purpose.
“There is a real risk that this leaves a gaping hole through which the most financially vulnerable may fall.
“We hope that our calculator will begin to rectify the situation, though ultimately this is a problem which the industry as whole needs to resolve in a systematic way.”
Pensions expert Steve Webb, of LCP, said: “Giving people a choice about how and when to take their pension is a good thing, but there is no doubt that people need more help and advice about how to make the choice that is right for them.
“The benefits system, particularly for those of working age, was never designed with this situation in mind.
“With millions of people starting to build up modest pension pots through automatic enrolment, this issue is only going to get bigger.
“It is unreasonable to expect individual savers to understand all of this complexity, so the industry and regulators need to work together to help people make the right choices.”
There is a real risk that this leaves a gaping hole through which the most financially vulnerable may fall.
UC and the way claimants can collect their benefits is facing a major shake-up.
The purpose of the reforms are to make the appeal process that bit less stressful for disabled people and people with health conditions, by making access less difficult.
Six million Brits are set to see their UC payments slashed when the benefits boost comes to an end.
The government introduced a £20 a week raise to help claimants through the coronavirus pandemic, but it will be scrapped as early as next month.