Lawyers have called on providers to ensure members are fully aware of how accessing their pension pots could affect future benefit claims, as schemes grapple with their ‘second line of defence’ obligations.
The concern follows the release of a factsheet by the Department for Work and Pensions at the end of March, in which it outlined how pension pots will be treated in the context of means-tested benefits.
An earlier DWP circular sent to housing benefit officers on February 27 said that where individuals choose to take a lump sum or drawdown, it will be treated as either income or capital and will be subject to means-testing.
Deliberate deprivation?
Helen Powell posed the following scenario: "What if an individual takes flexible access and invests the money in a scam scheme and subsequently loses a large proportion of their pot? Presumably this isn’t deprivation of capital because they didn’t intend to lose the money.
"Under the assessment rules, if the individual gives it away to grandchildren or to charity, then potentially that would be deliberate deprivation of capital. Would members be in a better position to claim, and possibly better off financially in the long-term, giving the money to a scammer than to charity?"
The factsheet aims to bring the new pension flexibilities in line with pre-existing rules on ‘capital deprivation’ in which an individual deliberately runs down their savings in order to access state benefits.
It stated: “If you spend, transfer or give away any money that you take from your pension pot, DWP will consider whether you have deliberately deprived yourself of that money in order to secure (or increase) your entitlement to benefits.”
However, Helen Powell, counsel at law firm Allen & Overy, said this presented a long-term risk to members, as well as difficulties for trustees and providers seeking to ensure members are making informed decisions.
“There will be people who have perhaps never claimed benefits in their life who, over time, use their savings up and come to point where they need to claim benefits,” said Powell.
“People need to be aware... that it’s not just the fact of taking flexible access which might affect benefit claims right now. If you take flexible access, spend that money and then later need to claim benefits, the facts of how you’ve spent that money may come under the spotlight.”
“At that point, because they’ve taken flexible access, someone looks at how they’ve used their pension savings and makes a judgment about whether or not they have deliberately deprived themselves in order to make or increase that claim.”
Powell said trustees and providers must work to ensure members have distinct clarity about what the rules are and to what extent their spending can be retrospectively assessed.
“People need to be aware... that it’s not just the fact of taking flexible access which might affect benefit claims right now," she said. "If you take flexible access, spend that money and then later need to claim benefits, the facts of how you’ve spent that money may come under the spotlight."
Purposeful deprivation criteria
Powell said judgments made were bound to be subjective and it would be difficult for benefit officers to retrospectively assess spending habits over extended periods.
The DWP’s rules for assessment of capital provide some guidance on what types of spending might be considered purposeful deprivation.
The rules state that capital used to pay off a debt or the purchase of goods or services, including a new car or a holiday, would be considered reasonable expenditure if appropriate to members’ circumstances.
However, under the rules, disposed-of capital by way of a gift to a third party – for example in a lump sum to a child or family member – would be considered purposeful deprivation.
The Financial Conduct Authority’s second line of defence safeguard – a series of questions that aim to ensure savers are making informed decisions – covers the potential impact on means-tested benefits but does not explicitly refer to future risks.
Francois Barker, partner and head of pensions at law firm Eversheds, said providers have already been wrestling with the second line of defence and would have to build this into member communication.
“A sensible course of action would be for providers to amend their second line of defence communications to make these risks explicit,” he said. “You could change the wording and try to flag up the future risks.”
Retrospective judgments
When questioned on how far back assessments would go, a DWP spokesperson said: “There is no set timeframe within which the rules can be applied, and the decision-maker will rule on whether or not an individual has deliberately deprived themselves of a pension in order to get means-tested benefits. If money is released from a pension pot and then spent, then deprivation rules may apply regardless of age.”
The DWP also confirmed that deprivation rules of this kind will be applied to assessment of a range of benefits including pension credit, housing benefit and universal credit.
“Who’s to say it won’t be applied to other means-tested benefits in the future that may or may not currently exist. That may include long term care costs,” said Barker.
The government’s older workers’ champion Ros Altmann said the assessment is an intrusive process and thought it unlikely pension savers would deliberately put themselves in such a position.
“This is not easy,” said Altmann. “It’s one of the side effects of the pension freedoms that needs to be borne in mind but I don’t believe it’s an insurmountable problem.”
She added: “It’s not automatically wrong to look at what people have spent their pension on in the recent past but going back 20 years is too much in my view.”
