How does starting to claim a private pension affect benefits?

I have a private pension with the Pru that has been put on hold because I am disabled and can no longer work.

I am now almost 60 and the pension has to pay a small amount of about £31 a week or I can wait until a later date.

I receive income support. Am I legally obliged to apply for my private pension and do I have to inform the Ministry of Work and Pensions if I do not want to?

Would the pension be counted as potential income, even if I don’t claim it, and deducted from my benefit?

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Steve Webb replies: If you are entitled to an income-related benefit, such as a social assistance benefit, universal credit or pension discount, you are entitled to both your regular income and how much you have in savings or assets.

Money in a pension pot can be taken into account in some circumstances, which I will explain below, but DWP cannot force you to access your pension if you do not want to.

The good news for you is that, until you reach state pension age, money left untouched in a pension pot will be ignored when calculating your benefit.

While in theory you could have the money at your disposal from the age of 55, DWP believes that this money is really intended for your retirement and so it would be wrong to assume that you could use it to supplement your standard of living if you are in your late 50s or early 60s.

However, if you choose to withdraw money from your pension pot and then leave it in a bank account or invest it in an Isa or other investment, the DWP will charge this as capital.

Different benefits have different rules on how much capital you can have, but problems could start (for example, in terms of help with council tax bills from English local authorities) as soon as you had just £6,000 in savings.

As soon as you reach state pension age, the situation changes.

Assuming you moved into retirement credit at retirement age, and assuming you still had untapped money in your retirement pot, the DWP would then treat you as if you had spent your retirement on buying an annuity – an income for life.

DWP would use a standard ‘annuity rate’ to do this calculation, so the figure they use may be slightly different from the figure your insurance company provided, but it shouldn’t differ too much.

If you have a decent state pension, and DWP adds a ‘fictitious’ annuity income to it, this may be enough to exclude you from a pension reduction, even if your actual income was below the level of the pension reduction.

It might be tempting to think that you might be able to spend or give away the money from your pension so that you are then entitled to benefits, but you have to be very careful about this.

If the DWP (or a council for help with rent or council tax) thought you had deliberately withheld savings from yourself in order to qualify for benefits, they could treat you as if you still had the money.

There are no hard and fast rules about what spending for your retirement is against the rules and what would be acceptable.

As a rough guideline, decisions you would have made anyway (regardless of the benefit system), such as using savings to pay down debt or improving your home, would probably be OK, but spending your savings on something seemingly extravagant (such as a world cruise) with the conscious intent to qualify for benefits, clearly would not.

To be clear: at least for the next six years, up to the state pension age, you do not have to worry about your ‘pot of money’ pension when calculating your benefit.

If you can leave it untouched and hopefully grow during that time, it will increase your chances of a decent retirement.

If it is useful, you can read more about it how having money saved for retirement can affect your benefits by reading a paper on the subject here.