Pension reform may lead to poverty: State will not support spenders with benefits

NEXT week's radical pension reforms could plunge thousands of older people into poverty with no hope of State support.

Senior woman looking at billsTETRA

The State may not help if pensioners spend all of their savings

People who take their pension as cash under the new rules may be refused means-tested State benefits if they spend all of the money.

Chancellor George Osborne's pension freedom rules, which come into force on April 6, will liberate the over-55s from the obligation to buy an annuity, an income for life, when they retire.

Instead they will be free to cash in their pension pots and spend the money on what they want.

But the Government has warned that people who spend their retirement funds or give them away cannot fall back on welfare.

The aim is to stop people blowing their pension on holidays or giving it all to their children, then claiming top-up benefits such as pension credit, housing benefit or income support.

However, it may also hit those who run out of money after misjudging how much they need in retirement, or fall victim to pension fraudsters lining up to cheat people out of their savings.

The Department for Work and Pensions (DWP) has issued a factsheet setting out welfare rules after pension freedom begins.

The DWP may refuse benefit applicants if it decides they deliberately spent their pension or gave it away.

If you spend, transfer or give away your pension the DWP may act as if you still had this money when assessing you for benefits

Tom McPhail, of Hargreaves Lansdown

Tom McPhail, head of pensions research at Hargreaves Lansdown, said the DWP fears the reforms will lead to a rise in pensioner welfare claimants.

"If you spend, transfer or give away your pension the DWP may act as if you still had this money when assessing you for benefits."

Neil Lovatt, director at Scottish Friendly, explained that the "deprivation of capital" rule is a big blow to the hype about pensions freedom.

"The Government is promoting the right of the individual to have control of their pension while reserving the right to decide whether they have used that money wisely."

Worse, the DWP has failed to make it clear how it will decide whether people have deliberately deprived themselves of capital.

Instead, pensioners will only find out if the DWP considers them reckless after they have spent their money, Lovatt said.

Pensions minister Steve Webb previously joked that people would be free to spend their pot on a Lamborghini if they wished, but the DWP is likely to take a dim view of anybody who does.

Lovatt said: "But if a pensioner loses money after investing in a buy-to-let property, will that be considered reckless?"

He said the Government is trying to protect taxpayers from having to support pensioners who misuse their pot but rules must be set out in advance.

"Otherwise we have bureaucrats making judgments on pensioners with the benefit of hindsight."

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