To make better use of the WordPress facities and to have an easier address to remember, I’ve moved this blog to
This blog will stay ‘as is’ but future posts will be made at the new site.
To make better use of the WordPress facities and to have an easier address to remember, I’ve moved this blog to
This blog will stay ‘as is’ but future posts will be made at the new site.
Universal Credit is a simpler benefit than the complicated six benefits that it replaces; says the government. It is understood more easily because it matches the way in which most people in work get paid – monthly. Of course not everyone who is actually in work does get paid monthly, so those people who are paid weekly, or fortnightly, or four weekly, get Universal Credit paid on a different schedule to their actual earnings.
Universal Credit will be paid monthly, 12 times a year, and normally on the same day of the month. Notice the word “normally”; more on that later.
If you’re paid weekly then you would expect to have 52 paydays in the year; sometimes there will be 53 depending upon which day of the week you are paid and how many of those there are in the year.
Spread evenly, that would mean 4⅓ paydays per period for a 52 payday year and, if spread evenly, 4⅓ weeks’ pay in each period.
Universal Credit doesn’t believe in averaging, unlike most of the previous, slowly phasing out, ‘legacy’ benefits; instead it only counts income received during the ‘Assessment Period’ – the month (normally) ending seven days before Universal Credit makes its payment.
The consequence of that is that, in some assessment periods, people paid every week will have five paydays taken into account when assessing their entitlement to Universal Credit.
The DWP do make this clear on their website, if you dig a little.
If you’re paid weekly
If you’re paid weekly by your employer, you will get either 4 or 5 payments of earnings within a Universal Credit assessment period. Depending on the amount you get paid this may affect your Universal Credit.
When you have 5 weekly earnings payments within an assessment period, your income may be too high to qualify for Universal Credit in that month.
If this happens you will be notified that your income is too high and you will no longer get Universal Credit.
You can re-apply the following month as you should only get 4 wage payments in your assessment period then.
You will need to be prepared for a month when you get 5 wage payments in one assessment period and budget for a potential change in your monthly Universal Credit payments.
There’s even a pretty graphic to make it clearer.
They explain what happens if you’re paid fortnightly,
If you’re paid every 2 weeks
If you’re paid every 2 weeks by your employer, at certain points throughout the year you will get 3 payments of earnings within a Universal Credit assessment period
or 4 weekly
If you’re paid every 4 weeks
If you’re paid every 4 weeks by your employer, you will get one payment of earnings for each Universal Credit assessment period for most of the year. You will usually get 2 payments of earnings within a Universal Credit assessment period once a year.
Even if you’re paid the same amount of money on every payday, you will find that you get different amounts of Universal Credit sometimes, if you’re being paid weekly, fortnightly or 4 weekly.
Worse; you may very well find that you’re not getting any Universal Credit at all. To be fair, the DWP point this out again,
Depending on the amount you get paid this may affect your Universal Credit.
When you have 5 weekly earnings payments [or 3 fortnightly, or 2 4-weekly] within an assessment period, your income may be too high to qualify for Universal Credit in that month.
If this happens you will be notified that your income is too high and you will no longer get Universal Credit.
You can re-apply the following month as you should only get 4 [or 2 fortnightly, or 1 4-weekly] wage payments in your assessment period then.
So, not only may you find yourself without any benefit in that month but you have to reapply for Universal Credit in the following month. As long as you haven’t left it more than six months before re-claiming, you won’t have to go through the full Universal Credit claim process again,
You will need to claim Universal Credit online again. When you log in, the claim will show your circumstances on the date you last got Universal Credit.
You just need to confirm that the details in your account are correct to claim again.
and, you will continue to keep the same monthly assessment period as you had in the previous claim. If you are in the older ‘live service’ type of Universal Credit and don’t have an online account then the re-claim should happen automatically.
How likely is it that your Universal Credit will stop in one of these months, rather than just being reduced? It depends upon your earnings and the amount of Universal Credit that you receive, but the answer is quite likely, and more so if you’re paid two weekly or four weekly.
If you’re paid weekly, then you will find yourself with an extra week’s earnings, or 25% more, used in the Universal Credit calculation. If your Universal Credit is less than one week’s net earnings then it’s likely that it will be stopped.
If you’re paid fortnightly, then you will find yourself with an extra fortnight’s pay, or 50% more, used in the assessment. If your Universal Credit is less than a fortnight’s net earnings, then it’s likely that it will be stopped.
If you’re paid 4-weekly, then you will find yourself with an extra four weeks’ pay, or 100% more, used in the calculation. If you Universal Credit is less than your four weeks net pay, then it is likely that it will be stopped.
But wait – this is Universal Credit, it can’t be that simple.
It’s not, for many people. People with children or who are disabled. If you’re in one of those groups then some of the money you earn each month isn’t taken into account when calculating your Universal Credit in that month. It’s called a Work Allowance and it’s the equivalent of what are the Earnings Disregards in legacy benefits. Although the value of it, and who can get it, has been cut severely, it’s still worth having.
It’s applied at two rates; one for people who get help with their housing costs within Universal Credit and a higher allowance for those who don’t. The first group get a monthly work allowance of £198 and those without housing costs get an allowance of £409, at 2018/2019 rates. Because this is earnings that would otherwise have the Universal Credit 63% taper applied to it, the real value of the allowance is different. The actual values, after the taper is taken into account, are £124.74 and £257.67. People in these groups get this amount extra, every month, compared to someone earning the same amount but without children or disabilities.
If you have one payday in the Universal Credit payment period then you get one work allowance applied. If you have five paydays in the Universal Credit payment period then you get one work allowance applied.
Those with an extra payday in the month, whether that’s weekly, fortnightly or four weekly, won’t get an extra work allowance. All of the extra net pay will be taken into account, increasing the amount by which Universal Credit is reduced and making it more likely to stop entirely.
The pattern of these extra payment periods depends upon the date of claim and the date of payment. This table shows the 2 year pattern of paydays, in a calendar month period of Universal Credit, for paydays on Fridays over the 2 years following the date of writing. This is produced by Ferret’s Pay Period Reckoner (there’s a link to it later on).
|Universal Credit Period||Pay days weekly||Fortnightly||4 weekly||Monthly|
Still, at least if you are paid monthly, Universal Credit will fit in with your pattern of earnings and there’ll just be one payday taken into account each month.
Unless…. there isn’t.
Remember Universal Credit is simple, and so are the rules.
(2) Each assessment period begins on the same day of each month except as follows–
(a) if the first date of entitlement falls on the 31st day of a month, each assessment period begins on the last day of the month; and
(b) if the first date of entitlement falls on the 29th or 30th day of a month, each assessment period begins on the 29th or 30th day of the month (as above) except in February when it begins on the 27th day or, in a leap year, the 28thThe Universal Credit Regulations 2013 Regulation 21(2)
For people paid on a weekly based cycle, this has little overall effect, other than occasionally changing which assessment period has an extra payment date taken into account.
But for one group of people this can have extremely serious results. Those people in the large group who are paid monthly, on the last banking or working day of the month. According to the Chartered Institute of Payroll Professionals, “The last working day of the month continues to be the most popular pay day for monthly payrolls at 38.6%”. There are also problems for the 24% paid on the 25th of each month and for the 20.5% paid on the 28th, caused by weekends and, in particular, bank holidays such as Christmas and the New Year, especially if they fall on a weekend and the days following are then the bank holidays. Add to that the effects of the different bank holidays in the different parts of the UK and, it is possible, the results may be unclear to some people.
We should recognise that it is likely that a disproportionately large number of benefit claims are made towards the end of a month, as that is likely to be when people leave jobs, receive final pay or contracts come to an end.
There is also a lack of certainty, amongst some employers, about the dates of payment which should be submitted to HMRC when actual pay is made earlier than the due date because of bank holidays. HMRC’s guidance says “the date you paid them, not the date you run your payroll. Use the normal payday if it falls on a non-banking day”. HMRC are expected to clarify their guidance on this shortly as many employers, it is believed, do not follow this. Good Friday can cause particular problems if it falls at the end of the tax year and a different payment date, in a different tax year, is used.
The most extreme results are seen by those who are paid on the last banking day of the month and whose Universal Credit assessment period starts on the 30th of 31st of the month.
Take the example of a single person, working 35 hours at the National Living Wage of £7.83 an hour and paying £150 a week in rent.
Her net earnings will be £1089.27 and her normal entitlement to Universal Credit will be £281.57 a month. She is paid on the last banking day of the month and she claimed Universal Credit with an assessment period which starts on the 30th of each month.
Looking at her situation from October 2018 forwards, we see, using Ferret’s Pay Period Reckoner, that the variations above apply to her and the effects on her Universal Credit entitlement.
As may be expected, because of the way in which the number of paydays in each month is assessed, there are some months with two paydays and some months with none. In this example, in the months with two paydays there is no entitlement to Universal Credit because of the much higher earnings figure used. In the months where no payday falls within the assessment period, the Universal Credit figure increases very substantially because there is no earned income in the calculation. There is, of course, no work allowance in a month when there is no pay and only one in a month when there are two pay days, adding a further loss.
The work allowance issue does not arise in this example as there is no disability and there are no dependent children or young people. It might be thought therefore that, although there are clear budgeting problems, the situation would broadly even out over the course of a year or even be better for her because of the high rate of Universal Credit in months where she is treated as having no earnings.
Unfortunately, it may not work like that.
After each of the periods when she has no entitlement to Universal Credit, she will have to re-claim the benefit. Not only does that mean having to go through the, admittedly simplified, reclaim process but it brings her into a new set of rules.
The Universal Credit (Surpluses and Self-employed Losses) (Digital Service) Amendment Regulations 2015 (as amended by S.I. 2015/ 1754, S.I. 2016/ 215, S.I. 2017/ 197 & S.I. 2018/ 65. )
These regulations, which came into force in April 2018, provide that pay earned when there is no entitlement to Universal Credit, because the pay is too high, can be taken into account for a later Universal Credit claim, if Universal Credit had been in payment at all during the six months before the new claim. The description for this is:
Where a UC award ends due to excess income, these amendments allow for past earnings (employment, self-employment or a combination of both) to be taken into account on a further claim to UC within 6 months of the previous award. …. These changes ensure that those claimants with fluctuating earnings patterns, which may bring them in and out of entitlement to UC, are not unduly penalised or unfairly rewarded over those claimants who receive the same amount but are paid monthly and retain UC entitlement throughout.
The examples in the DWP guidance document for staff, use large bonus figures to demonstrate the workings of the rules but any earnings are caught by the regulations.
The regulations came into force in April 2018 but with a buffer of £2500 in each period which has meant that they have had no noticeable effect. This buffer is due to fall to £300 in April 2019, although there are powers for the Secretary of State to extend the larger disregard. The reduction in the disregarded figure will mean that the rules can apply to many more people.
In particular, they may apply to people whose entitlement to Universal Credit ceases because of extra paydays in a particular Universal Credit period, such as this example.
If we use the current figures for earnings and Universal Credit entitlement but apply the £300 buffer figure from April 2019 it is possible to show the effect on this person. The double earnings figure, which stops entitlement to Universal Credit in those months, will be used in a surplus earnings assessment when Universal Credit is claimed again.
The effect of taking into account the higher earnings during the double pay period, against the zero earnings paid in the following Universal Credit assessment period, is to count some of the higher earnings against the new entitlement. The result is shown in the assessment from Ferret’s Surplus Earnings Reckoner below.
The number of assessment periods between the two payday and zero payday months has been reduced in order to show the effect when those occur. The high UC figure in zero pay months is reduced by the excess income in the two payday months, although the buffer may be seen as providing some additional benefit.
Of course it’s not that simple, there are further potential complexities that need to be considered.
The situation of couples where both are earning and paid on different days in the month, or on different pay cycles, introduces further complexities. The output from Ferret’s Pay Period Reckoner, below, shows the mix of paydays in Universal Credit periods for a couple where one is weekly paid and the other paid on the last day of the month. It is clear, from the effect that this has, how difficult budgeting will be for this household.
There are maximum amounts of benefit which can be paid. The government has said that this is to ensure that people who are not working do not receive more than people working on average pay. The cap does not recognise that many people on average pay also receive benefits, because their needs are higher. Although this capping does not apply when people receive pay at more than 16 hours a week at National Living Wage levels, the effect of the pay cycle can mean that people may find their benefit capped in months when they are treated as having low, or no, earnings and consequently higher Universal Credit.
Receipt of Universal Credit means that a number of other, particularly health related, services, such as prescriptions, are free. This means that the loss of benefit, because of the notionally higher income in an assessment period, can also lead to the loss of these.
There is an entitlement to free schools where people receiving Universal Credit have less than £7,400 in earnings. Oddly, local authorities have been told to ignore the normal monthly basis for everything Universal Credit and, instead, to average earnings over the previous 3 assessment periods. These again could have varying numbers of paydays in them but potentially out of step with Universal Credit payments.
If she is contributing to a pension then 100% of those contributions are disregarded in the Universal Credit calculation. This means that the same amount of income is not taken into account in the calculation and the effect of this is that for every £100 a month paid into a pension scheme the Universal Credit entitlement increases by £63. If she pays £100 in a month when she is treated as having no earnings, she won’t get any extra benefit as it is an offset against earnings in the period. If she makes £100 contribution on each payday, for example as an automatic deduction, then she may still gain no benefit if her total earnings in that period stop entitlement to Universal Credit.
It is possible all to be a winner, or a loser, based simply upon the date that Universal Credit is claimed. A high earner who claims the benefit on a date which means that there will be no paydays in the assessment period will be able to qualify for universal credit for at least that month; and potentially for any following month with a zero pay day period, although subsequent months may be subject to the surplus earnings rules.
More concerning will be the case of somebody whose claim is made when there are two paydays in that month (or where there are extra paydays in one of the weekly cycles). They may find themselves with no entitlement to universal credit in that period and, unless aware or advised, may not realise that this is not their usual entitlement situation.
But… apparently, they don’t need advice. As ministers have said from the beginning,
We are making it a much simpler system
Ferret Information Systems
If you’d like to try out the Reckoners that were used here then, for a short time, you can find them at:
Ferret’s Pay Periods Reckoner
Ferret’s Surplus Earnings Reckoner
These are not for use with clients and no reliance should be placed on them as they are still in development.
 CIPP Payslip Statistics Comparison 2008 – 2016, Helen Hargreaves, CIPP
There is concern, increasingly voiced, by a number of well-informed commentators, about some of the consequences of the senior pension freedoms. The complexity of choices, the lack of knowledge of most pension savers and the actions of some advisers, particularly around pension transfers, have led to calls for changes that would lead to safer and more certain income outcomes. A number of the suggestions seem to involve schemes that could lead to almost compulsory regular incomes. Is AARP life insurance for seniors very affordable? Read this informative AARP Life Insurance Review
While I share their concerns, I’m not so persuaded by some of their suggestions. The problem is that while a ‘wage for life ‘or ‘certainty of income’ introduces more safety into the situation, it also has the potential to reintroduce the failings of annuities (as described later) for many people. The same issues arise for Equity Release where irregular amounts of drawdown can be very advantageous but regular income is a very poor choice for less well-off people, as is shown later.
People with above average levels of pension savings, or occupational pots, are in a very different situation to poorer people. What may very well be a sensible solution for them may not be applicable to everyone. The danger is that if some of the proposals being discussed were to be adopted as broad-brush answers, then many of the least well-off pensioners could become even worse off.
Most people, in the UK, live in a world where their retirement income depends on the state. That state contribution, in its most important form, is the result of the National Insurance system which is a product, in its current form, of the 1940s and the development of the welfare state. The second element, again from the welfare state, is the safety net. That safety net is the means tested protection against absolute poverty and destitution. Many people still need that safety net and, sadly, too many of those who qualify for that help don’t get it, because of that more and more people are lately intestered on ASDA life insurance over 50s, service is impartial and there is no specific life insurance company is endorsed.
I thought it worthwhile trying to bring together some of the reasons why this is the case, into one place, to help inform the discussion. While trying to keep this as short as possible, the complexities of interaction between many of the elements involved, and the internal complexities of some schemes, inescapably makes this a bit lengthy. I’ve also tried to pick up on internal inconsistencies in the way that pension savings and income are treated in the benefit system. I’ve summarised the main points below and expand or explain them later on in the document. I also provide a few detailed examples at the end of the document.
There seems to be an assumption that the people who most need a regular income, and the certainty that it would bring, are the least well-off in society. While it is undeniable that people with lower incomes need to be confident about their income, so that they can budget and plan, that does not mean that all their pension savings need to be delivered as a regular payment. For many people that can be the worst choice that they can make.
Viatical settlements and life settlements are different in that they represent different conditions and ages of respective insurance policyholders. With viatical settlements, you can be virtually any age if you’re old enough to hold the policy in the first place, your health is also in serious jeopardy, and you’ve likely only been given a certain amount of time to live.With life settlements, however, you are usually not facing such extreme medical conditions. You are also typically between the ages of 65 and 70.The purposes of both settlements tend to vary as well. When you sell your life insurance to a viatical settlement company you’re doing so because your illness invalidates the policy. Keeping up the payments on the insurance plan is thereby pointless, as neither you nor your beneficiaries stand to gain anything financially in the event of your death.
The Office for National Statistics produced a detailed report on ‘Individual personal pension wealth by age band July 2012 to June 2014’ in June 2017. It is an extract from the Wealth and Assets Survey (WAS) – a longitudinal sample survey of private households which started in 2006.
The relevant figures in the extract are defined as “PRIVATE PENSION WEALTH – The accrued value in all pensions that are not state basic retirement or state earning related. This includes occupational pensions, personal pensions, retained rights in private pensions and pensions in payment”. This is one of four categories in the report; the others being property wealth (less mortgages), physical wealth (including possessions, valuables and cars) and financial wealth (bank accounts, stocks, shares and cash but offset by liabilities).
The results are based on a large sample, when compared with other similar studies internationally, and careful weighting ensures that the results are robust. While the study looks at individuals, and it will be pointed out that in families cross-support and provision can be expected, the survey’s latest findings show only 11% of individuals expect to get financial support in retirement from current or former partners, from families or from someone else.
This report shows that over half of the population (51%) have pension savings of less than £10,000. Unsurprising perhaps, as that includes everyone over the age of 16, but focussing on older people demonstrates that:
33% (2,291,500) of people from 55 to 64 have less than £10,000 in pension wealth;
35% (2,048,800) of people from 65 to 74,
46% (2,221,700) of people aged 75 and over.
Overall, 37% (6,612,000) of people over 55 have less than £10,000 in pension savings. (Remember this, that £10,000 figure becomes important later).
The next band in the report shows:
13% (898,300) of people from 55 to 64 have between £10,000 and £50,000 in pension wealth;
13% (758,800) of people from 65 to 74,
21%% (1,056,100) of people aged 75 and over.
15% (2,713,200) of people over 55 have between £10,000 and £50,000 in pension wealth.
That means 52% of all people over 55 have less than £50,000 in pension savings – 9,325,200 people.
The safety net is intended (or at least was intended) to ensure that people had a minimum decent standard of living. It is still, in the main, made up of a number of different means-tested benefits. There are some benefits only for people of working age and others for older people. There are schemes to help with the cost of rent or council tax. For people under pension age the new Universal Credit scheme is taking over from many of the previous benefits but for people over pension age, the schemes that matter are Pension Credit, Housing Benefit and Council Tax Reduction.
All means-tested schemes have a common basis. They must assess how much you need, then look at how much you’ve already got and finally decide how much, if anything, you should be given.
How much you need is usually based on how many people are in the family, their ages, their health or disabilities and their housing costs. Confusingly the interaction benefits are assessed for families while tax is individually based.
How much you have is calculated from their family’s earnings, other income and capital. Capital is normally taken into account by calculating a notional income that could be received from it; normally at a much higher than realistic rate.
The simplest situation is typically someone who has needs but who has no resources. In that situation, for most benefits, they will be entitled to receive the amount that they have been assessed as needing. Think of that as the starting point. From there on, the support starts to be reduced.
While there are some earnings disregards which may not therefore affect the amount taken into account, most other income including state and private pensions will reduce their means tested amount penny for penny. For many people that means that they will have very little, if any, real gain from a small level of pension or annuity. Over the past two decades, governments of all persuasions have been more generous to pensioners with state support than to those of working age. Means tested benefits have also risen faster than National Insurance based pensions as well; at least until the introduction of the New State Pension (nSP) in 2016. In recent years, that meant that the basic State Pension (bSP – the old State Retirement Pension for those who reached pension age before 6th April 2016) fell behind the amount of money that means tested Pension Credit said people needed.
This caused a real problem. By 2015, the means-tested Guarantee Pension Credit for a single person was £151.20 a week while those on a full bSP received £115.95; a difference of £35.25 a week (£152.75 a month). The Moneyfacts website reported in 2015 that a single person aged 65, with a £10,000 pot, would typically get an annuity of £476 a year (£39.66 a month). Someone getting Guarantee Pension Credit of £152.75 a month, who then bought their annuity which gave them £39.66 a month would just see their Guarantee Pension Credit reduced by the same amount. They wouldn’t gain a penny in real income. On the basis of the Moneyfacts annuity estimates, the Guarantee Pension Credit would be reducing penny for penny until it ran out with an annuity bought with a savings pot of £38,514.
Viewed on a chart, the actual net income of somebody in this situation, as their pension or annuity income rose, would just be a flat line.
Until the pension freedoms, there was, effectively, no choice for people in this situation – they were forced to buy an annuity; and pay the consequences.
To try to mitigate this ‘flat line effect’, a second Savings Pension Credit was introduced with a complex calculation which attempted to give a small top up to those with low amounts of pension savings. From a starting point with a relatively small maximum value, this benefit has been reduced year-on-year and now abolished for those receiving the nSP.
In April 2015, the average pension pot was £29,000, according to a report published in 2017 by Aegon. That amount would provide an annuity of £115 a month. The net result, in extra money to spend, for a full bSP pensioner would be zero.
In 2015, a full bSP was £115.95 a week, or £502.45 a month. If we were to add £115 a month of regular income, then the results would be:
Guarantee Pension Credit of £37.74 a month – the annuity would not be enough, even deducted penny for penny, to wipe out the entitlement to this means tested benefit.
The anti-flat-line Savings Pension Credit would have been £41.55 a month.
Even though the total state pension and annuity fell below the personal tax allowance, the means test effectively produced a marginal deduction rate of 64%.
With pension savings of £10,000, which would produce a regular income of £39.66 a month, there would have been a Guarantee Pension Credit entitlement of £26.10 and no entitlement to Savings Pension Credit.
A marginal deduction rate of 100%.
Further problems happen because of other ways in which the means test interacts. The needs figure can be higher if the person has disabilities, some housing costs or is a carer. A greater needs figure means that it takes even more other income to reach a point where the Pension Credit stops and any real gain in income begins. If income is lower then, again, it takes more money before any real gain is seen as the benefit reduces pound for pound.
The poorer someone is, the more annuity, wage for life, pension or other regular income is needed to get any real increase in income.
The income of poorer people is not helped by failings in the support system. There are few circumstances in which benefits are given automatically to those qualified to receive them. The norm is that such benefits must be claimed, often with a lengthy and off-putting process. The result is that many benefits go unclaimed. This is income for people who would be found to have less than they need to maintain a decent standard of living. There are many reasons why these benefits are not claimed but research shows that the main reasons are ignorance of the benefit or of entitlement.
The numbers of older people who do not receive the benefits to which they are entitled are large:
Working age benefits and tax credits are poorly claimed as well, of course, and are going to have an increasing role in supporting older people and pensioners in the future, as pension age rises.
Help with housing costs, as part of the safety net, is again an element which makes understanding real income difficult. Some kinds of housing support have been built into the main means tested benefits; in particular, help with mortgage interest. From April 2018, direct mortgage interest support will stop and be replaced by loans, repayable on death or sale of the property and with compound interest being charged. Poorer people though are more likely to rent than own their homes, giving them an ongoing liability and less assets. Support to help with home ownership tends not to benefit the poorest or oldest either.
Help with rent and Council Tax has been given by separate benefits administered by local authorities. Although local authorities in England now operate their own Council Tax Reduction (CTR) schemes for people of working age, they must follow national rules for older people. There is a UK wide scheme for rental support called Housing Benefit (HB).
Both these benefits are automatically paid at the maximum eligible rate, if Guarantee Pension Credit is being received. Once it stops being paid then their own means test, which has a broadly similar way of assessing need, begins to be applied.
One crucial difference between the locally administered means test for these benefits and that of Guarantee Pension Credit is that there is a test of capital and savings which stops all support for housing, once capital reaches £16,000. There is no such capital cut-off in Pension Credits. It is very easy therefore to lose a substantial amount of housing support by taking a few pounds too many from your pension savings.
Pension savings and income have been treated differently, by the benefit system, for many years. The options that are open to people, in the way that they can use their pension savings, following the introduction of the pension freedoms, have meant that some of the different treatment now seems less justified.
There are important differences in the way savings are treated by different benefits as well; largely because of age.
Pension savings that are not being used are completely ignored for people below state pension age. The savings are not treated as being capital in the way that other savings are. Only once money starts to be withdrawn from the pension scheme is it taken into account.
Where some people may treat a drawdown account in a similar way to an ISA, or other bank account, the value of the pot is ignored where it is saved as a pension but taken into account when in any other form. This means that a value of over £16,000 in savings may disqualify someone from receiving any means tested benefits. People who are advised to move their pension savings into some other form, such as buy to let properties, ISAs or other investments, may suddenly find themselves losing their previous benefits.
For people over state pension age, there are different rules. If pension savings are not being used, but could be on request, then an amount of income is calculated from it. The amount is based on the annuity tables produced by the Government Actuary’s Department (GAD). If money is being withdrawn from the scheme, but at a lower rate than the GAD table’s amount, then the higher figure is used as income in the means test calculation.
Income is taken into account in its entirety, reducing Pension Credit by the same amount. Capital generates a notional or ‘deemed’ income. For Pension Credit, the calculation takes into account any amount above £10,000. For every £500, or part, the means test assumes an income of £1 a week. That reduces the benefit by the same amount. Any real income derived from capital, such as interest or dividends, is completely ignored.
Working age benefits have an even more extreme notional interest rate where £1 a week is generated by every £250, or part, above £6000 up to the benefit cut off point of £16,000.
Unlike other forms of income, income from pensions affects the usually non-means-tested contributory benefits as well. For working age pensioners claiming Employment and Support Allowance (contribution based), half of their pension income over £85 per week will be taken into account. For Jobseeker’s Allowance (contribution based), all of any pension income over £50 per week will be taken into account.
For pension providers there are also significant administrative overheads where there are untaken pension savings. As the DWP official guidance points out:
Pension fund holders must provide the Decision Maker with information about
This information is based on tables prepared by the Government
This requirement has become more onerous following the pension freedoms as, from the guidance:
The claimant’s pension pot is required to be re-valued
For Pension Credit, the disregard of the first £10,000 of capital can be important and useful. Not only is the capital itself ignored but any income derived from it. Above that figure the usual capital rules apply.
The first £10,000 of pension savings are not ignored. They aren’t treated as capital but they do generate the notional annuity figure set down by the GAD tables. In January 2018, the notional income from £10,000 of pension savings, for a 66 year old person, would be £43.33 a month.
This leads to what may seem to be a contradictory results for those with small amounts of pension savings.
Take money from your pension savings as regular income and it’s all taken into account reducing your benefit. Don’t take money from your pension savings and it is assumed to generate an income which reduces your benefit. Take that money as lump sums however and the first £10,000 you hold, at any one time, is ignored. Effectively the notional income rules assume that somebody receives 5.2% interest on their pension savings. Unless their pension savings are growing at more than this rate, there seems no real incentive to leave their money unused. This is reinforced by the fact that any income they could derive from the money when withdrawn is also ignored.
The actual position is, of course, complicated by the tax treatment of money withdrawn from the pension pot and I have commented on that in other papers. In the case of low levels of pension savings the tax effect is not enormous.
As a dangerously broad generalisation, it is true for many people that their best option financially, with such low pension savings, is to withdraw it from their pot and to put it somewhere safe, ideally that generates income. They will find that their Pension Credit increases, once the withdrawal is made, because there is no longer any notional income assessed on it. As long as the total amount of capital that they possess at any one time is less than £10,000 there is no effect on their Pension Credit.
The effects of low amounts of regular income can be substantial for those with full basic state pension. The non-coincidental level of the full new state pension, at just above Guarantee Pension Credit rates, is intended to ‘float’ people off a means-tested dependency. It will no doubt achieve this for many people; and is the justification for the abolition of Savings Pension Credit for recipients of the new pension. But it will not work for many people.
Some will have higher needs amounts than the basic Guarantee Pension Credit minimum income, because of disabilities or caring responsibilities. More will not have a full nSP. There are many reasons for this; insufficient contributions over a working life or inheritance of pension entitlement are probably the most common. Women may be the most likely to find themselves in this position and are also the most likely to have smaller amounts of pension savings. Over a third of women reach retirement single because of divorce or bereavement. Those receiving the basic state pension may also not get the pension at the full level but, for those who do, even the full level is not enough to float them off Guarantee Pension Credit.
These examples, with the tables and charts, are generated by Ferrets pensionForward system for advisers. Some apparent rounding errors in the tables are caused by the banding used in the assessment of income and capital by benefit rules.
Outcomes are very dependent on individual circumstances and no attempt to be made to extrapolate these results into other circumstances. These examples are all based on a single man aged 68 paying rent of £100 per week to a social landlord and paying £1250 per annum in Council Tax. In these examples, only basic state pension is being used. We will be happy to provide additional examples of other circumstances including new state pension, couples and different rates of pension savings and withdraw. All assessments are based on benefit rules and rates in the 2017/2018 tax year. The ‘Current Income’ figure shown in the tables and charts is, in these examples, state pension alone.
The top line shows the total income.
Full basic state pension
Varying Levels of annuity
|Pension Income||Guarantee Pension Credit||Savings Pension Credit||Housing Benefit||Council Tax Reduction||Total including state pension|
The results above show the effect of purchasing an annuity of amounts from 0 to £1000 a month. The effect of means testing this case is shown clearly by the fact that a £1000 variation in income received is reduced to £301 in value by the reduction in benefits. The first £60 of annuity income produces no real increase at all, until Savings Pension Credit begins.
Varying Levels of annuity
|Pension Income||Guarantee Pension Credit||Savings Pension Credit||Housing Benefit||Council Tax Reduction||Total including state pension|
The results above show the effect of purchasing an annuity of amounts from 0 to £1000 a month. The benefits support for somebody with severe disability is higher. It therefore takes substantially more income before any real net gains seen. The effect of means testing this case is shown clearly by the fact that a £1000 variation in income received is reduced to £134 in value by the reduction in benefits. The net income from all sources, with an annuity of £160 a month is £1,556. Increase the annuity to £420 a month and the net income stays the same.
Regular withdrawal of income
|Pension Income||Income Tax||Notional Income||Guarantee Pension Credit||Savings Pension Credit||Housing Benefit||Council Tax Reduction||Total including state pension|
This example shows the effect of drawing down income (with a 25% tax-free allowance). The green cells show the amount taken into account as income, where the amount drawn down is less than the notional income figure that notional amount is used. Where the amount is greater, the actual figure is used. Somewhat misleadingly, it appears that taking less than the notional income figure gives a real gain of the whole amount in income. What is happening in fact is that this amount has already been deducted because of the use of the higher notional income figure. Once the actual amount being withdrawn is used it can be seen that a marginal deduction rate of about 85% applies across much of the range.
Taking lump sums from pension savings
|Pension Capital withdrawn||Capital received after tax||Notional Income||Guarantee Pension Credit||Savings Pension Credit||Housing Benefit||Council Tax Reduction||Total including state pension|
The illustration above shows the, initially, counterintuitive effect of taking money, as lump sums, from pension savings. The increase in capital, in this example, does not reach a level to effect any entitlement to Pension Credit. As capital is taken out of the savings, the remaining amount reduces and sodas the notional income that it generates. The effect is to increase the entitlement to benefits.
For many people, particularly the kind of customers that financial advisers deal with, the considerations discussed here may not be relevant. But many people is not even most people. Many people may benefit from their pension savings being converted into a wage for life but that is not justification for forgetting that many people may not.
If the reaction to some difficulties or abuses, that have followed the pension freedoms, is to return to a compulsory regular income, or even to the situation where that is the default preference, then many people may be badly affected.
The sadness is that many of those people are already affected, because they are not getting the advice and information they need to make properly informed choices. Many people – most people (including policy makers) – are not aware of the issues touched on in this paper. Finding a source of information or advice, which can offer the detailed personal assessment that they need, is virtually impossible. Funding for advice services in this country has fallen very substantially in recent years, financial advisers do not deal with these type of clients and government funded provision cannot go into sufficient detail.
What is needed are services beyond silo-limited specialists, however well motivated, who only understand part of the picture. Perhaps the new single financial guidance body, to be set up by the Financial Guidance and Claims Act will be able to offer the necessary holistic support.
(Please let me know if you’d like this as a PDF).
 Income-related benefits: estimates of take-up. DWP 2013
 Council Tax Benefit – Income-related benefits: estimates of take-up DWP 2013
 Government Actuary’s Department tables
Before the pension freedoms of April 2015, the practical reality, for most people with pension savings, was that they had to take an annuity. For those with benefits entitlements that was often a pretty poor bargain. The annuity was taken penny for penny from any means tested benefit entitlement that they had, whether Pension Credit for older people or Jobseeker’s Allowance, Employment and Support Allowance or Income Support for those of working age.
For a single healthy person with a basic state retirement pension and no other income then that meant the first £35.25 of an annuity was just handed straight back to the state. There was, for some, a small offset from Savings Pension Credit but that has been reducing for several years and will disappear completely for those receiving the new state pension after April 2016.
With the pension freedoms, things have changed. People are now able to exercise many more options, take capital in one lump sum or in multiple drawdowns or just leave their pension savings where they are.
Leaving the pension savings where they are, once somebody is able to make use of them, does not mean that they are ignored for benefits assessments. Somewhat unusually they are not treated as a capital lump sum but they are treated as producing a notional annuity value.
This notional income only applies to those claiming Pension Credit. For those getting working age benefits, there is no effect from untaken pension savings, even if they can be accessed. Only actual sums taken from those savings have an effect on the benefits assessment.
The notional value for Pension Credit claimants is calculated using tables produced by the Government Actuary’s Department, and depends upon the amount of money in their pot, their age and the current yield from 15 year Gilts. The tables and Gilt yields produce a notional annuity value for each thousand pounds in the pension pot and this is used to determine the notional income for benefit purposes.
No notional capital value is applied to the pension pot.
In many cases this might be seen as a relatively straightforward calculation. It can however become quite complicated when people start to make use of the money in the pension pot, because then the notional annuity value changes.
The chart below shows the, initially rather puzzling, situation where someone can take capital out of their pension pot and
This is because of a number of factors. In this example the pot size starts at £35,000 and the new capital axis shows the amount withdrawn from that.
At first, the capital withdrawn is disregarded, as the amount taken is below the £10,000 level that is ignored for Pension Credit.
The reduction in the pot size also reduces the notional income which is used in the benefits assessment.
Benefits increase as there is less income taken into account.
When somebody has more than the disregarded £10,000 of capital then a notional income, called deemed or tariff income, begins to be taken into account. In Pension Credit that is calculated on the basis of £1 a week for every £500, or part, above £10,000.
When deemed income begins to be taken into account the increase in that income at each step is higher than the reduction in notional income because of the reduction in the pot size. That means that benefit entitlement begins to fall.
In the chart, it can be seen that the reduction in the notional annuity figure, as the value of the pension pot reduces, actually produces an entitlement to Guarantee Pension Credit with the passported entitlements which accompany it.
When taking increasing amounts of income from a pension pot then, for benefits purposes, there can be a steep initial rise in net income, which later becomes more gradual. An example of this is shown in the chart above.
The steep gain in net income initially happens because while the income taken is less than the notional income level, the calculated notional income is used in the assessment of benefits.
The actual amount of income taken is ignored for benefits purposes but produces an increase in real net income.
Once the real income taken is higher than the notional income level for the pot, the real income is used in the calculation and the benefits level reduces with the income increases rather than having been constant with a fixed level of notional income.
The notional value of the pot reduces by the amount by which the real income is greater than the notional income. Check out Goodwin Barrett.co.uk for legal advice on this issue.
The table above shows the result and the way in which the switch from notional to real income occurs in the benefits assessment.
The charts and tables are produced by Ferret’s pensionForward advice system which calculates the tax and benefits impact of the pensions options open under the new freedoms.
The new pension freedoms have opened up options which can allow those on benefits to see less impact from their pension savings than was previously the case.
The new options introduce more complexity into the assessment of benefit entitlement and into the advice needs of clients. In order to provide an accurate picture of the effects and impacts of the different options, complex calculations are needed. This is particularly the case where notional income from untaken pots needs to be considered.
Tax credits are very much in the news at the moment, not least because of the powerful appearance on BBC Question Time of Michelle Dorrell with her concern about the personal impact of these cuts.
I have recently completed a big exercise, using our Future Benefits Model, looking at the effect of all the announced changes on people over the next five years.
Like all of the other analyses, I found huge cuts in real income that will not be offset by increases in tax allowance or the new National Living Wage (a misleading label, as it has no relationship to any assessed living costs or needs).
I haven’t yet published anything covering my modelling around tax credits, as it seemed that it would be fairly repetitive, although I now have a very rich data set covering hundreds of thousands of scenarios.
The focus on tax credits cuts at the moment, although they will cause enormous suffering to many people with svag credit, may be diverting attention from something even more serious.
Tax credits, and their cuts, will not be with us for too many more years. They will be replaced by Universal Credit in due course, albeit several years later than planned. It seems unlikely, but not impossible, that there will be tax credits in payment in 10 years’ time.
Well before then, Universal Credit will have become the standard way of delivering support to people in low-paid work, such as Michelle Dorrell.
On today’s rules, when she moves onto Universal Credit she will find herself much more worse off than under tax credits, even after the cuts come into effect.
As a self-employed person with four children, and extremely low earnings, several commentators have pointed out that she may not be affected by this round of tax credits cuts directly.
Her current earnings appear to be lower than the reduced threshold at which reductions will start to be applied and, as her children are already born, she will not be affected by the forthcoming tax credits limit on the number of children receiving support.
On the other hand, as she is self-employed, the National Living Wage won’t change her earnings either that it will have no direct impact on the prices asks for her services. She also doesn’t seem likely to gain from the rise in personal allowances she doesn’t earn enough to pay tax.
She can move onto Universal Credit in one of two ways.
The first, and the best for her, will be if she is ‘migrated’. This means that she would be moved from the tax credits system to Universal Credit as part of a ‘managed move’. This will happen when the DWP are transferring people from the old benefits and tax credit systems en masse. The old benefits system will be closed down and everybody moved onto Universal Credit. This may not happen at the same time across the country but there will be no individual circumstances which force the move.
People who are migrated will be entitled to be ‘transitionally protected’. That means that, if their calculated entitlement to Universal Credit is less than they were getting previously, they will continue to receive the amount of money that they were getting under the old system. Their Universal Credit won’t however go up annually when benefits rates change. They will continue to get the same cash amount of benefit until their Universal Credit calculated entitlement passes that amount.
The other way she might move onto Universal Credit is because her own circumstances change. For example, if her earnings were to rise, so that she was no longer entitled to tax credits, and then drop later then she would have to claim Universal Credit and her entitlement would be whatever the rules in force at the time said. There are many possible ways in which she might have to move onto Universal Credit.
Transitional protection will be very important particularly for those people moving from tax credits where the rules about earnings and capital are very different from those applied by Universal Credit.
If she doesn’t have transitional protection, or if circumstances were to change in such a way that she lost the protection, she would face a very much less generous situation than the tax credits would offer, even after the cuts.
If you’re self-employed for Universal Credit then the way in which earnings are treated is very different than that for tax credits, which follows closely on from their treatment for tax.
Universal Credit needs the self-employed to provide, every month, a statement of the money in and out of their business. The difference is treated as their earnings.
If they earn less than, typically, 35 times the minimum wage each week then their benefit is calculated as if they were earning that amount. That level of notional earnings will, of course, reduce their entitlement to benefit. On today’s minimum wage figure that means that Michelle would be treated as having a net income of over £1000 a month when calculating her entitlement to Universal Credit. That’s a lot more than she appears to be actually earning, which is the figure used for tax credits.
Each notional £1 above her real earnings figure will reduce her real Universal Credit by 65p.
In 2017 the government are introducing stringent new rules about the number of children who will be entitled to benefit. Only the first two children in the family, where there are any born after that date, will count towards tax credits. All children born before April 2017 will continue to count for tax credit purposes.
That’s the case even where tax credits are claimed after that date.
It’s not the case for Universal Credit. Where there are more than two children born before April 2017 they will count where Universal Credit was being claimed at that date and continues to be claimed. If Universal Credit stops for some reason and then is reclaimed only two children will count regardless of when they were born.
So Michelle’s four children will continue to count for tax credits, as long as she continues to receive it or reclaims it, but they won’t count for Universal Credit if she was to stop getting it and then have to reclaim.
On today’s figures that means a drop in her benefit of £5,500 a year – £105.77 a week.
That’s on top of the equivalent changes that are being made to Universal Credit to match the cuts in tax credits.
The tax credit changes are indefensible, if this government is genuinely trying to support and help low-paid workers. They will make the worst paid of the hard-working worse off.
The cuts are being carried across into Universal Credit as well, removing much of the work incentives which were such a foundation of that benefit.
If you are self-employed with low earnings, or if you have more than two children, then you will find yourself hit worse under Universal Credit than under the tax credit cuts.
If you happen to be self-employed with low earnings and to have more than two children then you face a very bleak future.
There is always another option. If you are looking for a long-term loan, you can make use of resources from Investors Choice Lending.
I wrote some time ago, over 3 ½ years in fact, about the consultation and call for evidence that had been published by the government announcing their policy intentions for support for mortgage interest in means tested benefits – http://blog.cix.co.uk/gmorgan/2012/01/06/mortgage-interest-support-consultation/.
The Summer Budget 2015 has now produced the date of introduction of the proposal – April 2018 – and more detail of the implementation.
There have been a number of changes to the proposals as originally suggested. The core elements remain; there will be a second charge on the property and the loan will carry interest and service charge. There will not though be a two-year period where the current mortgage interest scheme operates, loans will be made for up to £200,000 of mortgages and existing recipients will be transferred onto the loan system. If you are looking for a loan you can check out Investors Choice Lending to get loans easily. Another option is Myinstantoffer offering financial aid to individuals in the form of loans.
Related: How the personal loans Canada work?
The waiting period for help with mortgage interest will be extended, again, to 39 weeks.
Gone is the suggestion, which would have been difficult to administer, that liability would cease to increase once the property went into negative equity. Instead, repayment will be limited to the amount of remaining equity in the home and any additional balance would be written off when the account is settled.
The absence of a two-year period which would have been loan free may introduce new complexities for those people with irregular work patterns. Loan repayment will be expected not just on the sale of property, or the death of the owner, but when the claimant enters work.
Universal Credit has a ‘zero earnings policy’ where no help with mortgage interest is available if there are any earnings at all. Loans will therefore be available only when there are no earnings at all. Irregular earning patterns, which for current benefits will normally mean over 16 hours a week’s work before it happened stops, are much more likely for Universal Credit claimants.
Before loans are made, financial advice will have to be received by the claimant. This is described as ‘industry-standard advice’ although this is described only as ‘explaining the consequences of taking a loan’. This advice will be made by ‘a non‐governmental organisation which will also be responsible, on behalf of the Secretary of State, for registering charges on claimants’ properties and for the recovery of the debt’. Whether this will be an entirely new organisation or whether an existing organisation expected to take on these functions is unclear. There does seem to be some potential conflict within these different roles.
All of the following examples are concerned solely with mortgage interest. They assume that no capital repayment takes place. Shortfalls in interest support are added to the capital amount owing while higher amounts of support than interest due, reduce the capital outstanding.
I had to visit Summit Mortgage for details and used the current support for mortgage interest (SMI) rate of 3.12%, in place since July 2015, for modelling the current scheme effects. For the loan scheme I have taken the Office of Budget Responsibility (OBR) forecast for Gilt rates to 2020 and continued the last rate into the future.
Interest and charges have been added using the 2% rate applied in the examples in the 2011 call for evidence.
In these examples, for ease of calculation, I’ve used a case with £100,000 value and £50,000 mortgage, giving starting equity of £50,000.
To start with the simplest case; a mortgage interest rate of 3.12%, the same as the SMI rate, and zero assumed house price inflation (HPI).
Figure 1 shows that under the current SMI scheme, equity is unchanged across the duration of the claim, as the interest due on the mortgage matches the support received.
Figure 2 shows the situation under the new proposals.
The loan, together with the interest and administrative charges, will use up all equity in the property after about 20 years.
The repayment due is shown in figure 3.
The joy of compound interest is shown by the fact that after 10 years and amount of just less than £20,000 would be due while after 20 years the whole £50,000 will be due.
Where the actual mortgage interest due is greater than the SMI rate, the normal approach under the current scheme is to add the shortfall to the mortgage amount owed. Figure 4 shows the effect that this has, with a real interest rate of 4%.
The real equity is reducing slowly; by year 20 it has fallen to £37,824.
Under the new scheme, shown in figure 5, things are different.
All equity has gone by 17 years but, presumably, the continuing interest shortfall will move the borrower further into negative equity.
Figure 6 shows that the amount repayable peaks and then reduces after 17 years as the first charge amount owed on the mortgage increases. There is no net gain for the borrower from this as there is no equity for them remaining in the property.
If there is house price inflation, which seems to be the assumption behind the justification for this policy, then the situation becomes more complex.
Assuming 2% HPI and a mortgage rate which matches SMI then the situation under the current support scheme is shown in figure 7.
The interest on the mortgage has been met by SMI, but the increase in the value of the house all accrues to the claimant. The original £50,000 equity reaches £110,843 in the 25th year. The capital outstanding remains at £50,000 and, in this example, there has been no shortfall in mortgage interest.
Applying the rules of the new scheme, as shown in figure 8, changes the situation dramatically.
In this example, the increase in the value of the house is not reflected in the equity possessed by the claimant. Their equity falls as in previous examples, although much more slowly.
The repayment of the loan makes most use of the increasing running of the home is shown in figure 9.
The OBR, in their July 2014 working paper No.6 – Forecasting house prices forecast that “assuming consumer price inflation in line with the Bank of England’s 2 per cent target implies 5.3 per cent a year nominal house price growth in steady state”.
That house price growth produces a substantial change in house values, and thus equity after the fixed mortgage amount is deducted.
Continuing the current SMI support scheme with this level of HPI and a mortgage rate at the same level as SMI would produce the result shown in figure 10. There is a substantial increase in equity for the claimant, even after the effects of inflation at the OBR assumed rate of 2%.
Figure 11 shows the effect of the new loan proposals. With this level of house price inflation, a substantial amount of equity would remain even after repayment of the loan and other charges. If you know how to apply for a payday loan refund, this process will be familiar to you. The same conditions need to be met.
Figure 12 shows the substantial payment, which would be recovered in these circumstances, is almost dwarfed by the increase in house prices.
House price inflation at this level would clearly make the changes much more acceptable.
Although these are only a small number of very simple examples, some conclusions seem reasonable to draw from them.
The acceptability of the scheme, to claimants and to others who may benefit from the remaining equity after loans and charges are repaid, appears to depend upon substantial and continuing increases in house prices. There is no certainty, as has been seen over the recent period, that this will occur.
If it does not, and HPI is lower than the OBR forecasts, then what?
The reduction in equity, in particular for those likely to remain dependent on benefits for a lengthy period, will be substantial. This will affect both individuals and others in many ways.
Local authorities see their long-term care costs substantially contributed to, by the remaining equity in their homes, of those entering residential care. That contribution may be reduced by this proposal, with consequent effects on local authority budgets.
Individuals, who have seen the equity in their homes as contributing to their retirement funds, care needs or as an inheritance for their heirs, may have to alter their plans.
A homeowner with a mortgage who becomes unemployed in their late 50s may see little opportunity for employment but expect over 20 years more of life. If the example shown in figure 2 is to be expected, any equity in the home would have been lost by this time.
An Equity Release scheme could allow them to make early use of the equity and, if gradually applied, need not affect the net amount of their benefit income. Releasing funds early, in this way, may benefit the financial services industry and reduce government costs in the short term. The additional needs of older claimants and those in need of care may, however, outweigh these effects.
The impact assessment for this measure has not examined this area carefully, but it would be very interesting to see the internal policy briefings which have, presumably, been produced.
There are big changes coming in April to the way in which people, from age 55, can access their ‘money purchase’, or ‘defined contribution’ pension savings. These are pensions where the amount you get is decided by the amount that you’ve paid in to your ‘pot’ – the total value of your pension savings. The changes don’t, in the main at the moment, apply to occupational or ‘defined benefit’ pensions where what you get is linked to your pay.
These changes, announced in the April ’14 Budget, will give much more freedom to people who would previously have had to buy an annuity. Now they will be able to take their pot in many different ways. 25% of that pot will be tax free but the rest will be taxed, as extra income in the year it’s taken, whether it’s taken as income or as capital. That means that it can be easy, when taking capital, to see it taxed at higher rates. Pension pots vary enormously in size but the average used for an annuity before the budget announcement was £33,400 according to the Association of British Insurers.
The government recognised that these freedoms required people to have access to guidance about the new options that were open to them. They are funding a new service, Pension Wise, which can be accessed on the internet at https://www.pensionwise.gov.uk/ (provided by the Money Advice Service), by telephone where the service is going to be delivered by The Pensions Advisory Service or face to face at 44 Citizens Advice Bureaux delivery centres across England and Wales and CABx in Scotland.
I’ve been working on the ways in which people will be able to understand the effects of the various options that will be open to them. It’s crucial that people understand one thing,
What you take from your pension pot is not what will end up in your pocket
Some of what you start off with will normally see tax taken off it. The more you take, the more likely that some of it will be taxed at higher rates. At larger amounts, the money you take will reduce your tax allowance making even more of a deduction.
Even more importantly for many people with lower value pots, the money that you take, whether as income or as capital can affect your entitlement to many benefits.
That makes it really, really important that when people are thinking about what to do with their pension pot, they have help to understand the final value of income and capital that they will end up with – the ‘bottom line’. Without that bottom line figure, it’s going to be too easy to make wrong, uninformed and potentially very bad decisions.
My hope has been that the Pension Wise guidance sessions and website would recognise that and include it as part of their service. I’ve become less and less hopeful that they will include this essential part of guidance as April comes nearer. Now with the launch of the Beta website I’ve become sad and angry as it looks like they won’t be doing anything to help people understand their real position.
They do mention benefits on the website
Your eligibility for some benefits depends on what other income you have. Any income you get from your pension, eg a guaranteed income (annuity), will count towards the income these benefits are assessed against.
Your eligibility for some benefits is affected by what benefits you already get or by your other circumstances (eg savings, or if you have a disability).
ExampleYour income is £125 per week. You get Guarantee Credit (a part of Pension Credit), which increases your income to £148.35. You then buy an annuity and your income increases to £220 per week. As you now earn more than £148.35 – the Guarantee Credit threshold – you don’t qualify for Guarantee Credit any more.
But that’s pretty much it. They do point to online benefit calculators but that can’t do the necessary sums; as I’ll show later.
They then go on to completely ignore the existence of benefits in the information they provide. Here’s an example they give on their web page Work out how much money you’ll have in retirement
Pension Wise Example
You’re 65 and you decide to stop working. You have the basic State Pension and your pension pot.
What you have
Full basic State Pension per year
Your total pension pot
What you do with your pension pot
You decide to take 25% of your pot tax free and take money from this amount every year. You buy a single annuity with the rest. This kind of annuity won’t continue to pay to your spouse or partner after you die.
What you do with it
25% tax free
£7,500 in one go
You buy an annuity with the remaining pot of £22,500
This will pay £1,125 per year until you die
What you get from 65 onwards
Amount per year
Basic State Pension
Your total retirement income
Your income is below the tax-free Personal Allowance of £10,500, so you won’t pay tax on it.
You also have the £7,500 tax-free money to supplement your income.
Note the line – Your total retirement income = £7,006. That’s it! Then it’s on to the next subject.
Take that advice and the reader is going to join the third of people who don’t claim the benefits that they are entitled to.
Even if we assume that this person has no other needs; has no housing costs, no disabilities, no partner or dependent children and is not a carer then they’re still entitled to help.
They’d qualify for £13.62 a week, or £708 a year, Guarantee Pension Credit (GPC), a nice top-up to their annuity bringing their total income to £7,714 a year.
The income without the annuity would be £7,714 a year too. The Pension Credit top-up would be higher at £1,833 a year or £35.25 a week. If they only had a partial, or no, State Pension the income would be … £7,714 a year. That’s how means testing works.
It was the same under the previous rules but, then, people had to take an annuity, with few exceptions, so there were no options – now there are.
If people aren’t aware of the effects of taking an annuity, or not taking it, they can easily make choices that won’t be very wise. The same is true about other income choices or their options around taking capital instead, or as well.
Remember the average pot size is £33,400. At the 5% rate used by Pension Wise in their example, that would generate income of £1,670 a year or £32.12 a week. In the simplest Pension Credit case, with no extra needs at all and a basic State Pension, there’d still be an entitlement to Guarantee Pension Credit of £163 a year or £3.13 a week.
That means that anyone with, or less than, the average sized pension pot will not gain one penny from taking an annuity at Pension Wise’s example rate. Not .. One .. Penny!
That’s not something you’ll find out from looking at the Pension Wise web site.
In actual fact it’s not that simple, that’s only true for people under 65. The extra income would generate, for those over 65, an entitlement to Savings Pension Credit (SPC) which was designed to stop the penny for penny deduction for those with a little extra income or capital over State Retirement Pension level. Over the last few years though the rates of SPC have been cut to keep GPC in line with the pensions’ triple lock so it doesn’t always work. The chart below shows how this works.
About the first £40 a month of income, from an annuity or other source, gains the person nothing but after that Savings Pension Credit begins to kick in.
In their example the person would have a Guarantee Pension Credit entitlement of £35.25 a week, after taking into account the state pension. Taking an annuity of £32.86 a week would reduce the Guarantee Pension Credit to £2.39 but would create a Savings Pension Credit entitlement of £15.37.
The net increase in income from taking an annuity of £32.86 (assuming no tax liability) is £15.37.
What if they took capital instead? The chart below shows the effect.
There is no reduction in benefit, or total income for the first £10,000 of net capital withdrawn from the pot and held. After that a notional income is calculated with reduces GPC and, at first, increases an entitlement to SPC.
If someone is under 65, the qualifying age for SPC, then that benefit vanishes and the 100% deduction applies for much longer.
As the table above shows there is no gain for a pensioner under 65 until their income reaches £160 a month. For them taking capital, and keeping the amount held under £10,000 is a much better choice … but not one that Pension Wise will show them.
Working Age Pensioners
It’s not just people above pension age who will need to know what their options are. Anybody over 55 will be able to make use of the new freedoms. For them, up until they reach the qualifying age for Pension Credit (currently 62 and a half but increasing to 65 by 2018, then 66, then 67), their benefits will be the much less generous ones like Jobseeker’s Allowance (JSA) or the new Universal Credit (UC). Benefits whose basic rates are about half those of Pension Credit.
Benefits, also, with much harsher rules around capital. The working age benefits have an absolute cut-off from entitlement at £16,000 and a much higher notional income rate.
Baroness Hollis said, in a debate on the Pensions Schemes Bill on February 5th,
“It is essential that anyone on means-tested benefits at 56 knows what the hit will be for accessing their pension pot”.
The question is who will tell them?
Look at the chart below, again for someone with no extra needs, dependents, savings or housing costs who is unemployed and claiming JSA.
Until any extra income or annuity is more than £300 a month, after tax, no increase in bottom line income happens. £300 a month would, on the figures used in the Pension Wise example need a pot of £72,000 (after taking 25% capital tax free). That’s over twice the average pot size.
Taking 25% of the original pot of £96,000 would give the person £24,000 of capital in one lump.
The effect of that is shown in the next chart,
Over £16,000 stops entitlement to JSA, and other working age benefits, immediately and completely.
Even for pensioners the effects of capital can be equally severe, once entitlement to GPC stops. The chart below brings in Housing Benefit (HB) and Council Tax Reduction (CTR) which become subject to the same cut-off once GPC stops.
One pound too much held by the claimant can almost halve their income.
These are complex calculations but they are vital ones. Knowing that you can take an annuity, can take some capital tax free, can leave it in place or can draw it down in stages is important but ultimately, if you don’t know what that means to your overall situation, worthless or even dangerous. The figures matter and, if Pension Wise won’t give them then other advisers must.
The calculations need to be personal to each case, there are too many factors to be able to generalise.
Consider a 65 year old single person, severely disabled with a mortgage of £100,000.
Their income includes Attendance Allowance of £81. 30 a week and their full state pension of £113.10 a week. When we look at the effect of taking income from their pot we see the following in a chart.
Looking at those figures in detail shows the level of actual income which they will receive from increasing the income or annuity level that they take.
They gain from taking income up to £160 a month, which generates a net increase for them of about £72.80 (the variations in pence in the table come from rounding tapered amounts).
After that they gain nothing at all from taking extra income up to £740 a month. Taking £760 a month sees a reduction in real income of almost £60 a month, as passported Council Tax Reduction stops. It takes an income of £920 a month before that drop is recovered.
At that point the marginal deduction rate, from tax and benefits, is 91.3%.
The importance of understanding the effects over a range of incomes is clear; checking the effect on tax, benefits and overall income for any one amount tells very little. Knowing that you will get the same income if you took £740 a month from your pension as if you took £160 a month, tells advisors and pensioners much more. Knowing that if you took £760 a month, it would reduce your income by almost £60 compared to taking £160 a month is a real factor in aiding decision making.
When the same case is looked at for capital options, a very different picture is seen
There is no effect on income at all until net capital, after any tax has been applied, passes £10,000. There is then a gradual reduction income as the notional interest on increasing capital reduces the Guarantee Pension Credit. When that benefit ceases there is a cliff-edge drop in income of £106 a month as Council Tax Reduction also stops.
It should also be noted that there is still some benefit entitlement with capital of over £113,000 which would take £153,500 in pot value before tax is applied in this year.
The calculations depend upon the complex, real life, circumstances of individuals and families and generalisations or ‘traffic light’ advice will not suffice.
They must cover current entitlement to means tested benefits for both working and older people, with all the complexities of dependants, disability, housing type and costs, and other factors. They must then look at the effects of taking capital, income or both from pension pots, calculate the tax on them and the tax free amounts and assess the effects over a range of amounts so that the cliff-edges and flat lines can be identified and informed choices can be made.
Throwing in a quick advert, the tables and charts in this note are all produced by pensionsForward, Ferret’s new system which does all these calculations and produces detailed reports, tables and charts. It’s also great for doing what-if assessments for changes of circumstance.
I’ve also produced some notes covering other areas around the changes and advice and information.
You can download them from the links below.
It now seems that Scotland will get control of at least some of, what are now, national benefits. In particular it seems that Housing Benefit will be devolved to Edinburgh. According to the BBC, on the morning of the result, the Tories and Labour have agreed on this while the Libdems have not.
The move seems, in some ways, to be logical. The very similar Council Tax Reduction scheme has been devolved to Scotland already and, administratively, it would be a relatively simple undertaking.
What does this mean for Universal Credit?
UC is meant to be a universal ‘one benefit fits all’ for working age people; originally Council Tax Benefit was meant to be included as well – which would, as an aside, have been much better than the current mess. Pulling rent support out of it would be a serious dilution. Pulling it out only in Scotland would be difficult, confusing and add considerably to the IT woes of the project.
There are more fundamental problems though. Rent is integral to much of the UC scheme.
To point to only one, the variable levels of earnings disregards in UC depend on the rent element in the calculation. Reintroducing multiple tapers in different means-tested benefits will make things very difficult technically, more complex for claimants and a nightmare to administer. A mix of weekly and monthly benefit cycles, minimum notional income in some of them and the necessity to separately consider the needs of children and disability in each scheme will be ‘interesting’ to say the least.
Even if it works, socially, benefit tourism might become attractive if a bedroom tax exists outside Scotland and the rent caps and overall benefit cap may add to the differential between nations.
If it works is the big question though. My own feeling is that it will make Universal Credit unworkable, driving a rethink of the future – or provide a much sought for excuse to exit the mess.
The Shadow Secretary of State for Work and Pensions, Rachel Reeves, announced last week that the Labour party was looking to move to lower the earnings threshold for automatic enrolment in a workplace pension scheme from its current level of £10,000 to the Lower Earnings Limit for National Insurance, currently £5,772 a year.
As The Times pointed out “The threshold was first conceived at a lower level but was raised by the coalition under pressure from businesses fearful of the costs.”
The government in their review of the level in December 2013* said
“The earnings trigger determines who gets automatically enrolled. If the trigger is too high then people whom the policy is designed to target may miss out. If the trigger is set too low people who are very likely to receive a high replacement rate from the State may be included.
The Secretary of State considered all the review factors against the analytical evidence and the policy objectives and decided that the PAYE personal tax allowance at its 2014/15 level of £10,000 is the factor that should determine the value of the trigger for 2014/15.”
The response to Rachel Reeve’s announcement has been, as would be expected mixed.
The Association of British Insurers welcomed the proposals, although they wanted to “ensure they could be implemented with minimum unnecessary cost to scheme administrators and employers.”
The CBI said “Businesses would face increased costs from this change, and it’s not clear that automatically enrolling this group of low earners is necessarily in their long-term interests.”
The government tweeted that “Extending auto enrolment to those for whom it may not make -financial sense would be unfair and irresponsible.”
There is little surprising in these responses but one factor has been entirely ignored in the announcement, in the government’s review and by, as far as I can see, all the commentators.
Under the Universal Credit scheme, the bulk of low paid workers will see a cash increase in their benefit of £6.50 for each £10 they paid into a pension scheme in the previous month.
Unlike Tax Credits, the current in-work benefit for those working full-time (a complex definition in itself), Universal Credit will be based on net earnings not gross earnings. Part-time workers currently claim, normally, means tested Job-seekers Allowance (JSA) which is based on net earnings.
Tax Credits disregard pension contributions when calculating the income used in assessing entitlement but, because gross income is being used and the thresholds and tapers are complex, it is difficult to compare with net income based means-tests.
JSA disregards half of pension contributions when calculating net income for its means test.
Universal Credit is more generous; it disregards 100% of pension contributions.
In its means-test, Universal Credit is reduced by 65% of income, after any general earnings disregards have been applied. The result is that paying £10 into a pension scheme will reduce the income taken into account by £10 and increase the Universal Credit payable by £6.50 – the amount that would otherwise have been deducted.
I looked, a couple of years ago, at the increased generosity of the disregard here
(and at the way in which pension contributions can have a perverse effect on the benefits cap here)
As I said then,
It’s hard to see why anyone in this situation would not take advantage of what is in effect a 65% subsidy of their pension pot from the public purse. The beleaguered pension industry must surely be rubbing their hands in glee at the prospect (or will be, when they wake up to the consequences).
This doesn’t take into account the additional longer term tax advantages of pension contributions which further add to the attractiveness of the situation, for those who can afford the smaller drop in actual disposable income that increasing contributions brings.
* Review of the automatic enrolment earnings trigger and qualifying earnings band for 2014/15: supporting analysis. – DWP December 2013
The two sets of announcements about benefit cuts, and increases, that were made in the Emergency Budget (June 2010 in the tables) and Comprehensive Spending Review of 2010 (SR 2010) became a headline figure of £18 billion a year in cuts to existing benefits. That figure is still widely used today although it should be somewhat higher as some announced increases and cuts were later cancelled.
The government has just published an interesting set of figures which takes those announcements, and those made subsequently up to the 2014 Budget, and collates the costings year by year.
It’s well worth a look at the tables which can be downloaded from https://www.gov.uk/government/publications/welfare-reform-collated-costings-2010-to-2014
I’ve done some crude analyses of the figures, separating them into direct cuts/increases and process savings. I’ve then categorised the direct cuts / increases into broad groups of impact. There are some overlaps of course but I’ve tried to include items only in the most relevant grouping (my selection entirely – and apologies that the tables are odd sized images. I can’t get tables working sensibly in this blog).
In summary, after removing those elements which seem to be related to procedures and processes, I’ve ended up with direct cuts year by year, in millions, of:
BUT…. The notes point out “Most measures are costed to 2015/16, although some costings extend only to 2014/15. This does not necessarily mean there is no effect in 2015/16.”
There are a substantial number of elements in the tables without values in the 2015 – 2016 column, as can be seen below, which might be assumed to have some costs or benefits in that year. It can be assumed therefore that the total for that year may be higher than shown.
“If you invest your tuppence / Wisely in the bank / Safe and sound / Soon that tuppence, safely / Invested in the bank / Will compound,” – Mary Poppins
Compound interest is a wonderful thing; it makes value grow more quickly as time passes. Sadly it works both ways and that can be seen in the largest item in the tables.
The difference between the RPI indexation method of old and the new CPI (or frozen, or 1% or …) indexation is that each year there will be a smaller percentage increase on a smaller previous years increase. I’ve looked at this before, about two years ago in http://blog.cix.co.uk/gmorgan/2012/05/19/real-value-of-benefits-will-be-halved-in-50-years/ but the figures in these tables are revealing in their stark reality.
It’s interesting to look at the winners and losers in the groups that I, arbitrarily, chose.
There are winners though
The older people’s increase is not new money of course; it’s largely a protection against the cuts inflicted on other benefits by indexation changes and the need to match Pension Credit to SRP increases (thus avoiding cuts in Pension Credit). It must be remembered that there are future changes to older people’s benefits which are not yet included in these tables – mixed-age couples, abolition of Assessed Income Periods, a capital cut-off, new pension credit schemes, single-tier pensions etc.
To summarise the answer to the title of this piece – the answer is ‘More’. How much is unclear but it is clear that it will be increasing year on year.
For me; I’ll just be using £25 billion plus from now on.
It is useful that the figures include the original impacts of measures later withdrawn and an estimate of the offsetting spend consequential on the withdrawal. These figures are not necessarily identical of course. For example, the proposed increases in child tax credit appear in June 2010 and SR 2010 while the reversal of the second of both proposed increases appears in Autumn 2011 and excludes the first increases. A clearer example is that of the proposed Housing Benefit cut in ‘Reduce awards to 90% after 12 months for claimants of Jobseekers Allowance’ in the 2010 emergency budget. The reversal appears in the Budget 2011 as ‘Housing Benefit: not introduce reductions for long term jobseekers’. The savings figures of £100M and £110M are offset by £105M and £115M in 2013/2014 and 2014 /2015 respectively.
In the tables figures are £ million (negative figures represent a saving).