How new pension freedoms will push up the care bill


old people holding hands....

The relaxation of the pensions rules is great for those coming up to retirement who will now be able to get their hands on their savings. But is the new generous regime storing up longer term problems?

There are concerns that the Treasury could lose as much as £24 billion in revenue as those nearing the end of their working lives pile money into their pensions and receive generous pension relief by taking out large chunks of it tax-free when they retire.

On retirement, pensioners are already allowed to take 25% of their fund tax free but it is assumed new products, retirement 'solutions' and tax loopholes will be found that will allow pensioners to take out even more cash without handing anything over to the taxman. This is the cat and mouse game the financial services industry has played for years.

But there is another more overlooked problem that Britain could face in a couple of decades and it is a particularly serious one; long-term care.

The pension reforms could affect care and the cost of it to the country in two ways.

Firstly, pension income is used towards the cost of your care should you be unlucky enough to be one of the one-in-four that will end up in a care home.

Secondly, any lump sums of cash and investments that you have go towards the means-test that determines how much you pay towards your care. Under the new Dilnot rules coming into effect in April 2016 anyone with assets of £17,500 or less will not have to pay for care at all and those with assets over that will pay on a sliding scale until you reach £123,000 where no help is given. However, no-one will pay more than £78,000 in care costs.

The problem is if you're allowed to take all your cash out and spend it and don't have the means to pay for your care then the bill will fall to the state. There is the 'deliberate deprivation' rule that states anyone who has deliberately spent their money to avoid a care bill will still have to pay it, but if the pension money is spent years before care is needed this rule can't be enforced.

The Treasury Select Committee has already flagged the issue of care and chancellor George Osborne has said he'll review it.

Personally I think the care rules will have to be radically revised to accommodate the pension changes otherwise many elderly people who need care will face a very bleak future indeed.