Pension reform may threaten right to free social care warn charities
People who cash in pension savings could find themselves trapped into paying care bills they could have avoided.
People who cash in their pensions in order to save or invest the money risk losing their right to free social care if they fall ill or become too frail to look after themselves, leading charities have warned.
Following chancellor George Osborne’s budget announcement that people will be able to take more money out of their pensions under more favourable tax arrangements without having to buy an annuity, there are increasing fears that some will make ill-informed decisions that could backfire.
On Saturday both the Joseph Rowntree Foundation (JRF), which works to combat poverty, and Age UK, Britain’s largest charity for the elderly, said people without large assets who cashed in pension savings could become trapped into paying care costs which they would have avoided if the money had remained invested in a pension.
Pensions experts also said that people would suddenly find that money they had withdrawn from pension pots could become treated as assets in divorce settlements after the new rules are introduced next year.
Osborne’s sweeping plans now have all-party backing after Labour threw its support behind moves that will give people greater control over their pension savings.
Shadow work and pensions secretary Rachel Reeves, writing in the Observer, says her party will back a benefit cap of £119.5bn for 2015-2016 proposed by Osborne in the budget – but says Labour will go further than the coalition to control welfare costs.
Under plans for the future funding of social care, to be introduced in 2016, money held in pension schemes is not counted as an asset when calculations are made about how much an individual has to contribute to their own care.
But if the money is taken out of a pension and held as savings or put in another investment it would be counted.
Julia Unwin, chief executive of the JRF, said the budget did little for people with low incomes and risked exposing some to avoidable care costs.
“Should pensioners buy property or put pensions into their savings, that will be taken into account as part of their asset base, which could mean they have to pay for care costs in later life,” she said.
Jane Vass, head of policy at Age UK, said people would need to bear in mind that drawing down on their pension could make them ineligible for free social care..
“The pension pot is protected from means testing. So when it is in a pension it can’t be touched but there is a risk when it comes out of that wrapper. We do welcome the increased choice but there is a whole range of risks. The better-off might be able to afford to take risks and afford to pay for advice, but it becomes difficult for those lower down the economic spectrum.”
A Treasury spokesman said the government was “committed to considering new financial services products” to help people pay their care costs. From April 2016, the government will introduce a limit of £72,000 on the amount any one person has to pay for social care, although this will not include the cost of food and accommodation in a home.
Those with assets of less than £118,000, including their home (and £27,000 not including their home), will have all their care costs paid. Someone who takes out a large sum from their pension, taking them over the limits, would be eligible for care costs.
Gavin Kelly, chief executive of the Resolution Foundation, said there would be “potentially big knock-on effects for social care funding” as well as the housing market and the future of pension tax-relief.
Treasury officials said people would be able to gain free independent advice that should allow them to make informed decisions.
On the broader costs of social security, Reeves says that the government is failing to control costs because it does not grasp the adverse effects that falling wages and rising rents are having in pushing up the welfare bill.