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Forum Home  →  Discussion  →  Benefits for older people  →  Thread

Pension Credit and Small Pot Commutation

LF
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New Gorbals Housing Association

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Joined: 7 February 2013

client on GPC and has been getting occupational pension £203.99 a mth and has been advised she can take a small pot commutation of £27,188 which will be treated as earned income and taxed through PAYE. and give up any future rights to a pension.
I can see a trivial communtation lump sum is treated as capital and no deprivation of capital for mthly amount lost but can’t see if a small pot commutation is the same?

Any pointers would be appreciated.

Gareth Morgan
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CEO, Ferret, Cardiff

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The definitions are in the Finance Act 2004 as amended, in this case, by the Finance Act 2014.  They’re complex but, crucially, small pots and trivial commutations are different things.

As the SPC regulations refer specifically, in reg. 18, to a “trivial commutation lump sum”  only, I’d be afraid that small pots are taken into account.

It’s worth looking at recent guidance, given in anticipation of annuity sales becoming possible next year, to consider whether deprivation rules would apply.

HB A8/2016, published a couple of weeks ago for example says;

“4. The benefit rules are not changing. However, it is possible that some people
might expect to access benefits (or keep their existing benefits) by giving up their
annuity income, whilst obtaining potentially large sums of capital. The
government’s policy is that people should use their own resources before
seeking support from the state. Whilst people should be able to use their
pensions flexibly, they should not be able to substitute their pension income for
benefits. Therefore, you should continue to apply the existing rules around tariff
income and deprivation, treating each case on its own individual circumstances.
5. There may be circumstances in which it is appropriate to award (or increase)
benefits after someone has assigned an annuity, for example, if they use their
cash lump sum to repay a debt, or to pay for urgent home repairs.

Example 1 – applying tariff income
HB claimant is 67 years old and single. He bought an annuity in July 2014 and
receives £50 per week from it. He has £5,000 in savings. He receives Pension
Credit Guarantee Credit.

In May 2017, the customer assigns his annuity to a pension provider. They give him
a cash lump sum of £31,500, and in return the pension provider will receive the
income from the annuity. He now has savings of £36,500 and tariff income is applied
to his Pension Credit claim.
HB Circular A8/2016
Adjudication and Operations circular
12 September 2016
The customer’s Pension Credit Guarantee Credit is reduced but remains in
payment. This means HB remains passported and in payment.
The figures used are for illustration purposes only.


Example 2 – considering the deprivation rules
HB claimant is 67 years old and single. He bought an annuity on his 65th birthday in
July 2014 and receives £20 per week from it. Together with his State Pension of
£200 per week his total income is £220 per week. His rent is £100 per week and his
HB award is currently £66.66 per week.

In May 2017 the customer assigns his annuity for a cash lump sum of £15,000.
The customer’s income has reduced to £200 per week. However, his total capital is
now above the HB lower capital threshold and will attract tariff income of £10 per
week. The customer’s new HB award is £73.16 per week.

The Decision-maker should also consider whether the customer deliberately
deprived himself of the annuity income in order to increase his benefit award. If
there is sufficient evidence that this is the case the customer should be treated as
still receiving the original annuity income of £20 per week. Adding his £10 tariff
income would reduce the HB award to £60.16 per week.
The figures used are for illustration purposes only.  “

The second example is worrying as it proposes a double hit - the new capital generates a tariff income *AND* the original income is still taken into account as notional income.

LF
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New Gorbals Housing Association

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Joined: 7 February 2013

thanks very much Gareth much appreciated

Linda