Private Pensions and Benefits

Thanks to the pensions reform act, you can unlock your retirement pot once you reach 55. However, if you’re currently receiving means-tested benefits, it’s important to know how your personal pension – whether drawing down an income or not – could affect your financial position.

In this guide, we take a brief look at the relationship between personal pensions and means-tested benefits.

If you’d like tailored advice for your circumstances, we can put you in touch with one of the experts we work with for a free chat. We only work with regulated, independent financial advisors to make sure you truly get the right advice for your circumstances.

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Can you be on benefits and pay into a personal pension?

Absolutely. There are three personal pension subtypes for you to choose from: a stakeholder pension, a self-invested personal pension (SIPP), and a private pension.

Also known as a group personal pension, a stakeholder pension works in a similar way to a private pension; although these products are considered a lower-risk option as they’re regulated more heavily than a private pension.

The pension provider also cannot increase your minimum monthly contribution, unlike with a private pension, so a stakeholder pension could provide more stability.

Does your personal pension affect your benefits?

Yes, any income or lump sums from your personal pension can affect your benefits if your means (i.e. income, savings and investments) become greater than your needs (the amount the government estimates you can live on).

This applies if you take money out of your pot or leave it in.

‘Means-tested benefits’ are calculated based on how much income and capital you have, so once you start drawing down an income from your personal pension, your benefits will likely be reassessed.

Means-tested benefits can include the following:

  • Housing support
  • Tax credits
  • Income support
  • Income-based jobseeker’s allowance
  • Pension Credit
  • Income-related Employment and Support Allowance (ESA)

Taking out a lump sum from your personal pension and putting it into your savings could also affect your entitlement.

If you have under £6,000 (£10,000 if you’re over the state pension age) saved it will not affect your benefits, but if you have capital of £16,000 or more saved, you won’t be entitled to receive any financial support.

Anything from £6,001 to £15,999 will be treated as income for £4.35 for each £250, or part of £250.

For example, if you take out £8,000 from your pension and put it into your savings, the first £6,000 will be ignored, but the remaining £2,000 is counted as giving you a monthly income of £34.80, which will be factored in when assessing your benefits.

You can use the following calculation to work out this monthly income:

£2,000 ÷ £250 = £8

8 x £4.35 = £34.80

For the right information, speak with a pension expert for a free, no-obligation chat about your options.

How does it affect Pension Credit?

The rules will be different depending on whether you’ve reached your Pension Credit age. Pension Credit is a government benefit for people over the state pension age, though this age is different for everyone and depends on your sex and age. It’s designed to top up your income if you are struggling. See the sections below for more information.

Before Pension Credit age

Any money taken out by you or your partner before your Pension Credit qualifying age will be considered when your benefits eligibility is assessed. For example, if you draw down an income from your personal pension before your Pension Credit age.

After Pension Credit age

After you reach your Pension Credit age, any money you take out or leave in your pension pot will be considered when assessing your eligibility to receive means-tested benefits.

Does having a personal pension affect Universal Credit?

Yes, having a private pension could affect your Universal Credit. For every pound of non-work-related income you receive, your Universal Credit will be reduced by a pound. If you claim this benefit, any taxable income you take from a pension will also be taxable income for the purposes of tax credits. So, you could end up with tax credit overpayments that you would have to pay back.

You may also receive less tax credits the following year as they are calculated based on yearly rates and yearly income figures.

If you make personal pension contributions, you may want to inform the Tax Credit Office regarding the amount you contribute into the scheme, including any tax relief you may get.

While you don’t have to tell them about these changes until you claim renewal is due, you may want to tell them sooner to avoid any overpayments.

Will a personal pension affect an ESA?

Yes, it could do. Your Employment and Support Allowance (ESA) could be affected by regular income drawdown from a personal pension if you receive more than £85 a week. For every pound from your pension income that goes over £85 per week, your ESA will be reduced by 50p.

Does a personal pension affect carer’s allowance?

Yes, it may do. Carer’s allowance is taxable, but you’ll only have to pay tax if you take an income from your personal pension, or if you work part-time.

You can still contribute to a personal pension scheme. If you’re looking at personal pension plans because you’re worried that you are unable to work or don’t earn enough to make National Insurance (NI) contributions, you’ll get National Insurance credits which go towards your state pension (if you’re under the pension age).

Taking out a personal pension won’t affect these credits and while it’s always a great idea to think about your future by paying into another pension scheme, you may be thinking about how much it’ll cost you. Luckily, we work with independent pensions experts who can find pension plans with low contributions.

Make an enquiry and we’ll match you with someone for a free, no-obligation chat.

Can I claim jobseekers’ allowance if I have a private pension?

Yes, you can, although you may be entitled to less if you have a personal pension as New Style Jobseekers’ Allowance (JSA) is calculated based on your age, income and savings. If you’re currently paying into an existing personal pension plan and are worried about meeting the payments, you could request to pause or cancel your contributions into the scheme. However, this will depend on your policy’s terms and conditions, and what type of scheme it is.

Speak to an expert

Taking out a personal pension can give you an extra financial boost in your later years, but if you’re worried about how a pension could affect your benefits in the present, then speak with an expert.

They have experience in providing tailored advice to people with various backgrounds and can find pension plans to suit your needs. Your initial chat is free and there’s no obligation to take things further.

We can arrange a free pension review for you today

70% of customers who have a pension review find a better deal

We can arrange a free pension review for you today

70% of customers who have a pension review find a better deal

Book a free, no-obligation pension review today