Understanding the universal credit and private pension rules can be tricky. To save you time, we’re here to unpick those rules and answer the question, “does a private pension affect universal credit?”
We explain what you need to know about how universal credit is affected by your private pension. We also answer common questions like “does a pension lump sum affect universal credit?” and “does a private pension count as income?”
Universal credit is a means-tested benefit for people on low incomes who are out of work or can’t work. It was introduced in 2012 to replace child tax credit, housing benefit, income support and working tax credit, income-based job seeker’s allowance and income-related employment and support allowance.
To receive universal credit, you must meet the following criteria:
If you are 16 or 17 years old, you may also be able to claim in some circumstances.
Having a private pension pot won’t affect your universal credit if you’re not yet drawing from it. If you’re taking an income or a lump sum from your pension, then this may affect your universal credit.
Taking a private pension may affect your eligibility for universal credit. That’s because it’s means-tested and based on your income and savings. Withdrawals from your private pension pot are classed as pension income. They are treated just like any other type of earned income for the purposes of tax and calculating benefits.
Here are the main 2 ways that drawing your pension could have an impact on universal credit:
1. Income. Your entitlement is based on your level of income and any pension income will be taken into account. Universal credit reduces by 55p for every extra £1 you earn over your work allowance. The level of your work allowance is based on your circumstances.
2. Household savings. If you take a lump sum from your payment pension scheme, then this may push your savings over £16,000. If this happens, you won’t be entitled to universal credit. Savings of between £6,000 and £16,000 may also reduce your payments.
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You can claim universal credit while taking a private pension as long as you or your partner are under State Pension age. However, taking a private pension may affect your eligibility for universal credit. You won’t be eligible if the following applies:
Your payment could also be reduced if you have savings between £6,000 and £16,000. To see how your income and savings might affect your benefits, use a benefits calculator like entitledto.
A pension lump sum may affect your universal credit entitlement. This is because you won’t be entitled to universal credit if you have household savings of over £16,000.
Investments or cash held in your pension scheme won’t be counted as part of your household savings. However, your savings will be taken into account once you have withdrawn a lump sum from your pension pot.
Here are the rules about how savings affect your benefits:
Taking your pension may affect other means-tested benefits because it is classed as income. The benefits that may be affected include the following:
If you already get means-tested benefits, then drawing your pension may affect them. That’s because any money taken from your private pension is classed as income.
Some benefits are also affected by your level of savings. Universal credit isn’t available for anyone that has over £16,000 in savings and is reduced for people with savings between £6,000 and £16,000.
You’ll need to inform the government if you receive means-tested benefits and your circumstances change. This could include getting income from your pension or upping your level of savings by taking a pension lump sum.
Taking a pension may affect your eligibility for pension credit. That’s because pension credit is a means-tested benefit and is based on your income and savings.
You may receive pension credit if the following applies:
If you have savings over £10,000, then your pension credit payments may be reduced.
If you’re over State Pension age and have a private pension pot you aren’t using, this may also affect your benefits. The government will work out a notional income based on the size of your pension pot. It will use this notional income figure to work out if you’re entitled to means-tested benefits.
Here is some more detailed information about how pension credit works.
Taking your pension may affect your child benefit. That’s because you may have to pay a high-income child benefit charge if you or your partner’s income is over £50,000.
Any pension income will be added together with other income sources to work out your total earned income.
You can find out how your universal credit is affected by using a benefits calculator. You’ll need to plug in details about where you live and the type of housing, your income, your savings, your dependants and whether you are disabled.
The benefits calculator will give you an estimate of the benefits you might be entitled to. You can also get advice on your benefits by speaking to the charity Citizens Advice.
For most Brits on universal credit, taking a private pension could affect the amount of money they get. That’s because the government bases its assessment on your level of income and savings. People taking an income from their pension could see their payments reduced by 55p for every £1 they take. Savers with over £16,000 won’t get any universal credit and those with savings between £6,000 and £16,000 may also have their payments reduced.
The good news is that if you’re not drawing a pension yet, your pension savings won’t be taken into account when working out universal credit. That means you can keep saving into a pension pot without it affecting your benefits.
It’s important to understand how taking a private pension could affect your universal credit payments. That’s because understanding more about your future income will help you budget and plan your spending. It may also affect decisions you make about when to retire or how to take your pension income.
If you want to know more about your pension options, then you can make a free appointment with the government advice service Pension Wise. You can also speak to the charity Citizens Advice for help with your benefits.
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