Spending all your pension may mean you end up struggling to pay for long-term care in older age.
By Michelle McGagh
The easing of the pension rules brought in the Budget mean every retiree will be able to take all of their pension savings as a lump sum but the changes run alongside reforms to long-term care that may make this a bad idea.
Following the Dilnot Report a £78,000 cap on care costs will be implemented in April 2016 as will an increase in the care threshold. Those with assets worth less than £17,500 will receive free care and those with assets above this level will pay for part of their care on a sliding scale up to £123,000, after which a person will receive no state help.
In order to determine your assets the local authority will look at how much capital you have such as cash in the bank and investments – known as means-testing. If it is over £17,500 then you will pay a proportionate sum towards your care. However, pensions are also taken into account and if you have a monthly income, from a workplace pension or annuity for example, it will be used to offset some of the cost of your care.
Brian Tabor, founder of independent financial adviser Carematters in Hertfordshire, said ‘self-funders’ – those who have been means-tested and have to contribute towards their long-term care costs – will see their pension used to pay for care whether they take it as an income or they take it out as a lump sum.
‘Assume you have a £50,000 pension fund and it is providing you with £300 a month through drawdown, that £300 a month is going to be used to reduce the amount the local authority pay [towards your care],’ he said.
‘If you have £100,000 [in your pension] and take out the whole amount – biting the [income] tax bullet – you have a £60,000 lump sum [that would be used when calculating your assets].’
Blowing the lot
This means that whether a pension is taken as income or as a lump sum it will be eaten up by care costs. There are fears that this could push people to use the relaxation of the drawdown rules to access their entire pot and spend all the money, depleting their assets and meaning they will be entitled to free care if they need it – which one in four will.
This is a concern that has been raised by the Treasury Select Committee in its response to the Budget.
‘The interaction between increased choice in how to use pension saving and the reformed long-term care model is of great important to the welfare of retirees and to the public finances,’ it said.
‘It is not clear how the two sets of reforms will interact. On the one hand, it may be that the pension reforms will assist pensioners in planning for their long-term social care needs…on the other hand, the pension reforms might tempt people to exhaust their pension pot to avoid being liable for the costs of their own long-term social care.’
Chancellor George Osborne has said he will review how the pension reforms could affect care spending, although there has been no confirmed consultation or plans to amend the Dilnot reforms.
Osborne told the committee: ‘The current social care means test does not take into account… the changes to the flexibilities around pensions and so we need to change the social care means test to take that into account. I am absolutely clear that we want to make sure that this does not have an impact.’
Deliberate deprivation
Tabor warned retirees planning to spend all their money and take advantage of the free care on offer to the poorest in the country that doing so could mean they end up entitled to nothing.
Spending all your money and expecting the state to pick up your care bill is known as ‘deliberate deprivation’ and if a local authority believes you have deliberately deprived yourself of funds to escape a care bill it can refuse to pay for your care.
Tabor called on the government to examine the interaction of new pension freedoms and care rules as there was concern that retirees would unwittingly fall into the deliberate deprivation category.
‘Deliberate deprivation is when the local authority believes there is no other reason to give away or spend money other than to deprive yourself of assets for long-term care costs,’ he said. ‘The local authority will not say "we can prove you have done this" they say "we think you have and you have to prove you did not". They make an assessment that you can challenge.’
If the money is spent within the six months before a person goes into care then ‘deprivation is automatically assumed’, said Tabor, adding that for periods longer than that the assessment was 'subjective’. If a person falls foul of the rules, the local authority can refuse to pay for long-term care and demand any money, assets or property that have been disposed of be returned to cover care costs.
He added that as people lived longer and more individuals needed care local authorities would try to control their budgets and clamp down on deliberate deprivation. Those who received domiciliary care or other medically-related benefits, such as the disability living allowance, would be particularly hard hit, he added.
‘[The local authority will ask] if you are receiving domiciliary care or some benefit which is medically derived, like disability living allowance and they will say a poorly person should assume they would need care,’ he said. ‘[The local authorities] are getting more aggressive and they are chancing their arm more.’
Source City Wire
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