This might sound a bit cheeky… I work 30 hours a week just above minimum wage. I am in the workplace pension so my pension when I retire isn’t much.

One of my colleagues cashed theirs in at 55. The reason was they said they will have to pay full council tax when they reach state pension age so the work pension would have just paid that so they would not be any better off.

They said without the work pension they would receive council tax benefit at pension age. Is this correct?

Steve Webb replies: When designing the current retirement system, one of the big concerns of government ministers was that it should ‘pay to save’.

In other words, in a system where saving into a pension is ultimately voluntary (because you can opt out), it was important that those who did save were better off than those who did not.

But does the current system pass that test?

👇 Don’t stop — the key part is below 👇

+1

Steve Webb: Scroll down to find out how to ask him YOUR pension question

If we start with the basic level of means-tested benefits in retirement, pension credit, those who build up a full state pension and have a decent workplace pension should always be better off than those without any savings of their own.

This is because the level of the new state pension on its own (currently £230.25 per week) is above the standard pension credit level (currently £227.10 for a single person).

This means that those with a decent workplace pension on top of their state pension should be clearly better off than those who rely on pension credit.

However, this is less clear cut for those with very small workplace pensions.

Although those with small private pensions may have total income slightly above the pension credit level, those on pension credit qualify for various ‘passported’ benefits on top.

These include help with energy bills, Cold Weather Payments when it is freezing and free TV licences for the over 75s.

Once the value of these is taken into account, people on pension credit may be better off than those with a full state pension and a very small company pension.

Turning now to the example of council tax support, it is true to say that local authorities will generally pay full council tax for pensioners who are on pension credit.

But there is not a complete ‘cliff edge’ so that those who are £1 above pension credit levels lose all help with council tax.

The exact rules will vary from local authority to local authority, but most will give some help to pensioners who are above pension credit but still on a modest income level.

It follows from this that if you carry on saving in a pension and your colleague has given up, you might still be better off than him or her in retirement.

There are several other reasons why the situation might not be as clear cut as your colleague suggests.

First, and crucially, the only pensioners who automatically get full council tax paid are those who are actually on pension credit.

As explained above, someone with a full new state pension and nothing else will still be a few pounds above pension credit and therefore not eligible for a 100 per cent rebate.

So unless your friend has reason to think they will be short of a full *state* pension then they may not get pension credit in any case.

A linked point is that most people reach retirement as part of a couple. A couple with two full state pensions will be well clear of pension credit, and are therefore highly unlikely to qualify for a full rebate on their council tax.

I should also mention that if anyone acts in a way to deprive themselves of capital purely in order to qualify for benefit, then they risk being penalised.

If a local authority thinks that someone deliberately spent money which would have disqualified them, then they can treat them as if they still had that money.

Obviously, if someone cashes out a pension at 55 and doesn’t claim for help with council tax until they are 66, then it’s pretty unlikely that this would be picked up. But the closer you are to retirement when you cash out your pension, the greater is the risk that this will raise eyebrows.

Finally, it is a brave person who makes a financial decision now based on what the system of local taxes and local tax rebates will look like years into the future.

Local taxes may get reformed (we’ve had domestic rates, community charge and council tax during my working life), and low income benefits also get reformed on a regular basis.

So it is quite a high risk strategy to plan your financial future on the basis that the current system of local tax and local tax benefits will not change between now and retirement.

Ultimately, living through retirement depending on pension credit is unlikely to be a comfortable existence.

The rate of pension credit is short of the official poverty line and short of what experts think is a ‘minimum’ amount needed for a decent income in retirement.

If you can supplement your state pension with a workplace pension, benefiting from a contribution from your employer, and the chance to take 25 per cent out tax free, the chances are that you will be glad that you did, even if you end up making more of a contribution to your local tax bill than if you hadn’t bothered to save.

Phuong