Pensions freedom coupled with care fee reform could leave many facing little choice in long term care (LTC) provision and a large debt on their estates. Kay Ingram explains…
The coalition government will be known for its pension reforms. These include:
• Freedom of access to private money purchase pensions from April 2015
• Major reforms to the state pension from 2016; and
• Auto-enrolment of all employees into workplace pensions.
The problem with these reforms is not the changes proposed in themselves, but the political rhetoric that has surrounded them, giving the impression that easy access to pensions will be offset by an increase in the state pension and an increase in pension provision.
The details of the state pension changes are more complex than this and there is a time delay before the benefits of universal workplace pensions bear fruit.
The danger is that lack of understanding the details could leave many underestimating the need to preserve pension funds and income for their later life needs.
Advisers giving pension freedom advice need to be aware of the provisions of the Care Act, and the way in which the state support it will offer has also been overstated by politicians.
Those planning retirement now need to be aware that the care cap of £72,000 of personal spending on care is a massive understatement of the funds which an individual needs to put aside for care costs.
Care funding is essentially made up of three core elements with three different providers:
• Personal care: help with washing, dressing, eating and mobility > Local authority
• Medical care: anything which must be supervised by a clinician > The NHS; and
• Accommodation: Bed & breakfast or 'hotel' > The individual in care.
In assessing the amount spent, personal care costs do count but only up to the level approved by the local authority. Anything spent in excess of this is disregarded, and all hotel and accommodation costs are also not counted towards the £72,000 cap.
Partnership, the care fees funding specialist product provider, estimates that based on current care costs, the average an individual needs to set aside is double the £72,000 suggested by the headline legislation.
When advising on flexi-access, consideration to the cost of care in later life should be factored in at this higher level.
In the annuity versus flexi-drawdown conundrum, thought should also be given to the ways in which different sources of income are treated for the purpose of means-tested care-related benefits.
When an individual needing care undergoes a financial assessment of their means to contribute to the care costs, different sources of income and capital are assessed in different ways.
Where there is a scheme pension in payment or annuity income, 50% of this is disregarded if there is a spouse or other adult dependent to whom that income is being paid.
If instead, an individual chooses to access their pension income via flexi-drawdown, the whole of the drawdown fund will be deemed to be a capital asset, with an income tariff applied to it.
In the case of a pension fund, this will be on a single life, non-escalating annuity basis.
This could mean that a greater personal contribution is required from the care resident and that any provision needed for a dependent spouse will be depleted more quickly than would have been the case had an annuity been purchased.
Furthermore, the Department for Work and Pensions has issued a warning that those who flexi-access and who spend or give away their pension funds will be deemed to have deliberately deprived themselves of an asset.
They may make themselves ineligible for means-tested benefits such as Jobseeker's Allowance, Employment Support Allowance and Pensions Credit.
The announcement did not extend to care fees support, but this approach could be adopted by the care funding bodies if too many flexi-access their pensions and are left with less income later.
Where an individual lacks income or cash to pay the additional costs of their care, but has a home and has not yet exhausted the care costs cap, they may qualify for assistance from the universal deferred payments scheme.
This is a form of equity release whereby the local authority funds the extra care costs, but then places a charge on the property and charges interest on the outstanding debt - to be repaid when the property is sold.
The interest charge will accrue from the date of advance of the funding and will gradually erode the value of the property to be passed to the estate.
Flexi-access has consequences for care fees funding and these need to be factored into any advice.
State support, whether for care fees or the state pension, may need to be reassessed beyond the wishful thinking of politicians.
Kay Ingram is director of individual savings and investments at LEBC Group
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