What State Benefits Are Affected by Taking Pension Early?
Published / Last Updated on 20/08/2024
We are approached every week with people wishing to access their pension lump sums and/or income early from their pensions. For some this may be to improve daily lifestyle with an income boost, pay off debts, pay off mortgages, take a holiday, buy a new car or even retire early and used funds to bridge the gap between today and when state pensions and other pensions start from say age 65 onwards.
Early retirement access to your 25% cash lump sum (tax free in UK) or the 75% taxable ‘income’ element as an annuity or flexible drawdown is a welcome option from age 55 (increasing to age 57 in 2028) but one of the first two questions you must ask yourself before you do this is:
- Am I currently claiming any state benefits?
- If so, are these state benefits means tested or not?
Forcing Access to Pensions
Social Services cannot force you to access your pension early until your normal retirement age if you need to claim benefits but if you voluntarily access some or all of your pension early, you have ‘crystallised’ it meaning it can be taken into account for any means tested benefits and Social Services can force you to access it if you have had some but left some ‘in the pot’ in flexible drawdown.
Most illness and disability benefits are non-means tested but most lower income support or unemployment benefits are means tested.
Non-Means Tested Benefits (not affected if you access pension funds early)
- Attendance Allowance.
- Bereavement Support Allowance.
- Carer’s Allowance.
- Disability Living Allowance (DLA).
- New Style Employment Support Allowance (ESA).
- Personal Independence Payments (PIP).
- New Style Contribution Based Job Seekers Allowance (JSA) payable for a maximum of six months based upon National Insurance Contributions (then switches to old style income based JSA, see below, that is being replaced by Universal Credit).
- State Pension.
Means Tested Benefits (benefits are affected if you access pension funds early).
- Old Style Income Support (being replaced by Universal Credit).
- Old Style Income Related Employment and Employment Support Allowance (ESA), (being replaced by Universal Credit).
- Old Style Income Based Job Seekers Allowance (JSA), (being replaced by Universal Credit).
- Tax Credits (Child Tax Credit and Working Tax Credit), (being replaced by Universal Credit).
- Council Tax Support.
- Housing Benefit.
- Pension Credit.
- Universal Credit.
- Cold Weather Payments.
- And now as part of the new Labour Government’s first actions: Winter Fuel Allowance disappears for pensioners if you do not receive Pension Credit so, if you draw pensions early and lose Pension Credit, you will lose Winter Fuel Allowance.
Capital Limits for Means Testing
- Capital below £6,000 = no loss of means testing benefits.
- Capital between £6,000 - £16,000 = reduction of means testing benefits.
- Capital above £16,000 = loss of any means tested benefits.
- Note: If you are over State Pension Age, the lower capital limit increases from £6,000 to £10,000.
You need to be careful in accessing private and company pensions early if you currently receive state benefits.
