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?”
What is universal credit?
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:
- Live in the UK.
- Be aged 18 or over.
- Be on a low income or out of work.
- Have less than £16,000 in household savings.
- Be under State Pension age. (You may be able to claim it if your partner is under State Pension age).
If you are 16 or 17 years old, you may also be able to claim in some circumstances.
Does saving into a private pension pot affect universal credit?
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.
Does taking a pension affect 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.
Can I claim universal credit while having a private pension?
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:
- You have over £16,000 in savings.
- Your income is over the minimum level. This level varies and depends on various factors such as how many dependent children you have and whether you or your children are disabled.
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.
Does a pension lump sum affect universal credit?
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:
- The first £6,000 of your savings is ignored
- Savings between £6,000 and £16,000 are treated as if they give a monthly income of £4.35 per £250.
- Savings over £16,000 mean you won’t be entitled to universal credit.
Will taking my private pension affect my other 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:
- Income support
- Pension credit
- Tax credits
- Jobseeker’s Allowance Employment and Support Allowance
- Council tax support
- Housing benefit social fund
How does taking your pension affect the benefits you already receive?
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.
Will taking my pension affect pension credit?
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:
- You and your partner are over State Pension age.
- You have an income below £177.10 per week (or £270.30 jointly with a partner).
- You have income over £177.10 but also have a disability, you care for someone or you have housing costs.
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.
Will taking my pension affect child benefit?
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.
How to find out if my universal credit is affected
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.
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.
Frequently asked questions
More guides on Finder
How much pension do I need to retire?
We explain how to work out the retirement income you’ll need, and what you can do if you haven’t saved enough.
Taking your entire pension pot
We outline the pros and cons of withdrawing your whole pension as a cash lump sum, and why this could result in a high tax bill.
Retirement and pension advice
We explain the free and paid-for advice that’s available if you need help to understand your retirement options and make the right choices.
Is my pension lump sum taxable?
Under pension freedoms, you can usually take 25% of your pension as a tax-free lump sum. Here’s what you need to know.
Defined benefit and final salary pensions
Do you have a final salary or career average pension? If so, you’re in a minority. We explain the ins and outs of defined benefit pensions.
Moneyfarm pension review
We outline the pros and cons of Moneyfarm’s personal pension to help you decide if it’s the right home for your retirement savings.
Plum pension review
Plum’s clever micro-saving algorithm makes it easy to drip-feed your retirement savings. But is its personal pension worth having overall?
Taking money from your pension
We give you the lowdown on when you can access the money in your pension pot, and how pension freedoms work.
Can I get my pension contributions back?
Find out about getting your pension contributions back and how to get a refund.
We explain the potential tax benefits and the limitations of taking money out of one pension and recycling it into another.
Ask an Expert