What are the savings rules if you apply for a pension loan?

Rising bills mean an increasing number of older people are likely to apply for pension credits as they struggle to pay for essentials this winter.

Having some savings can affect the amount people receive in pension credit, but an emergency fund of up to £10,000 will not be taken into account if your income is low and you meet other rules.

However, this savings threshold has not changed since 2009, and although inflation remained sluggish for many years, a £10,000 fund is certainly worth much less than it was then.

The pension credit tops up weekly earnings up to a minimum of £218.15 for single people and £332.95 for couples.

You can earn thousands of pounds on top through help with housing, heating, council tax, TV licenses and other bills, and unlock cost of living payments from the Treasury.

The Government has urged older people in poverty to apply for pension loans and ignore myths that could deter them from applying, including that having savings, a pension or owning a home are barriers.

It has launched a trial aimed directly at people who could qualify for a pension credit and encouraging them to sign up. Seniors living in households receiving housing subsidies in 10 municipalities receive “invitation to claim” letters for the subsidy.

What are the savings rules for pension credit?

You can have up to £10,000 in savings and investments without this having any impact on your pension credit if you meet other eligibility rules.

This is to recognize that many older people will have accumulated a lot of money over the course of their lives, even if they are on a low income, so they have something to fall back on in emergencies.

The Government also does not want to penalize people for saving.

However, every £500 you have saved above £10,000 is counted as £1 of income per week when calculating your pension credit.

Therefore, £10,000 is not a hard limit, just the threshold beyond which the amount of pension credit you receive begins to be affected.

However, it creates an effective, or assumed, interest rate on savings of more than 10 per cent – £1 in every £500 – which is surely not obtained from savings accounts.

It’s not as punitive as it sounds if you only have small amounts over £10,000, as it only applies to the part of your savings above that level.

Meanwhile, in terms of other income, here’s a full list of what counts towards it. (your state pension, other pensions, any income) and what not (housing benefit, council tax relief).

As mentioned above, the savings threshold has been frozen since 2009. There is no law mandating a review each year as is the case with other key benefit figures, so changes are at the discretion of the Government.

Should the savings threshold be changed? This is what pension experts say

“Pension credit is means tested, but the ‘means’ tested are not what they were because of inflation,” says Henry Tapper, president of AgeWage and Pension Playpen.

‘Updating the amounts people can have in their accounts before losing a pension credit is fair and easy for the Department for Work and Pensions to do.

“An announcement from the DWP on this issue could cause many people to reconsider pension credit and advances for the estimated 850,000 pensioners who are eligible but not claiming pensions.”

Sally West, policy manager at Age UK, supports a review of the savings thresholds and limits that affect benefits.

“Seniors get very worried when they see their savings being used up on everyday bills,” he says.

“It’s difficult for them to build up savings again and there may be emergency bills they can’t cover.”

Age UK staff can help callers to their free helpline apply for pension credit (see box to the right).

Stephen Lowe, director of retirement specialist Just Group, says: “The lower capital limit of £10,000 means that every £500 of savings (not including main residential property) held by people who qualify for the pension credit counts as an income of £1 per week, which may erode the income received from the benefit.

‘This seems unfair on two fronts, given that many pensioners will try to maintain an emergency fund in case of emergency repairs or a major, unexpected cost.

‘It’s the equivalent of an interest rate of 10.4 per cent, around three times higher than most current best buy savings rates.

“Secondly, the limit has not been changed since 2009 and therefore more and more people are likely to see their benefit income reduced by falling into this group.”

Lowe says the key remains to raise awareness of pension credit and provide support to help people apply for it, because many people are currently missing out on the valuable income it provides.

It says it is important to encourage people to check their benefit entitlements and pension credit rules before turning to other sources of potential income, such as withdrawing a lump sum from their pension to maintain their savings.

This may inadvertently put them over the £10,000 savings threshold and they will find that the benefit they make is reduced.

Former Pensions Minister Ros Altmann, who now sits in the House of Lords, says: ‘There are huge problems with the help available to pensioners on lower incomes.

‘Many are too proud to claim what they see as “donations” even though this is part of their right, because we all know that the UK state pension is very low compared to all other developed countries.

“Those just above the pension credit level lose thousands of pounds of additional benefits that pension credit recipients can enjoy, such as council tax refunds and energy bills, free TV licenses and healthcare, for example. which end up in a much worse situation than others simply because they have small pensions or some savings.

‘Thirdly, the savings aspect of the pension credit does not take into account the real income that savers receive. If they have more than £10,000 saved, the means test assumes they receive a level of interest far, far above market rates – more than 10 per cent interest!’

What other rules must be taken into account when applying for a pension credit?

• You must have reached state pension age, currently 66, but you can start your application up to four months earlier. Applications can be backdated for three months, as long as you were eligible during that period.

• You are only entitled to receive it if you and your partner (spouse, common-law partner or someone you live with) have reached state pension age. There is an exception if one of you receives housing benefit for someone who has passed state pension age. The rules on mixed-age couples were introduced in mid-2019 and apply to people who have registered since then.

• You may be able to get a small extra top-up called a “savings credit” if you reached state pension age before April 6, 2016.

• If you defer a state pension or another type of pension, you will be assumed to receive that income.

• You can still receive pension credit if you leave the country for up to four weeks, or longer for exceptions such as bereavement or medical treatment.