The Low Incomes Tax Reform Group (LITRG) is warning those over the age of 55 who are thinking about drawing down their pensions early to carefully consider the impact on tax credit claims.
The lobby group says prospective pensioners should consider ‘the impact of their decisions on means-tested state benefits, such as Universal Credit and Pension Credit, in light of the new rules on pension flexibility introduced from 6 April 2015.
One-off or irregular sums taken from pensions could be treated as ‘capital’ for the purposes of means-tested state benefits. Regular amounts taken from pensions are likely to be treated as income’.
Depending on overall circumstances, either treatment (capital or income) could have an immediate effect on the entitlement to state benefits, and ‘local’ benefits like council tax support could also be affected.
LITRG warns that amounts withdrawn from pensions saving become taxable income and are treated as income for tax credits purposes.
Increasing a pensioner’s income this way could lead to them being overpaid tax credits which they will have to pay back. It could also mean they end up with less tax credits in the following year. As a result, planning ahead could help pensioners avoid potentially unnecessary tax and tax credits charges.
LITRG technical director, Robin Williamson, said: ‘Tax credit claimants are not obliged to tell the Tax Credit Office about changes to income until a claim is renewed at the end of the tax year.
‘However, our advice is to let them know as soon as possible about money taken from a pension pot to reduce the amount of any overpayment.
‘And if you need to take the money out of your pension, at least budget for a sizeable reduction in your tax credits award and the possibility of having to pay back credit already received.’