Could pension freedom be answer to cost of care?

Instead of a spending spree at the beginning of retirement, freedoms could provide for care at the end

Updated: 
Butcher

The average cost of residential care in old age is £28,500 - or £37,500 a year if you need nursing care. Even if you receive help in your own home, just two hours of care a week will set you back around £11,000. It's easy to see how after just a few years, your savings can be eroded, leaving you wondering how on earth you are going to cover the costs. However, there is good news, because a growing number of people are finding that pension freedoms hold the answer.

The reforms removed the requirement to buy an annuity, so that people can keep large sums in their pension pot, just in case they need care. The scrapping of the 'death tax' removed the disincentive to do this, because if you end up not needing care, any money left in your pension can simply be bequeathed to family.

The freedoms mean the amount of money that can be taken in any one year is not restricted, so for the first time people will be able to withdraw the kinds of large sums they need to pay for residential nursing care too.

Because pension funds are not earmarked for your care, you have the freedom to use it for others too. If your partner has smaller retirement savings, you can dip into your own pension to ensure they have the care they need.

Looking after his wife

This was the approach Mr Butcher (pictured above), a 66-year-old from St Albans, took when his wife was diagnosed with breast cancer. She needs care 24-hours a day, which he could not provide because he was working. The new pension freedoms, however, offered a solution.

He looked into withdrawing his entire pension fund of £134,000, so he could give up work, and buy his wife anything she needed. However, he discovered he would pay higher rate tax on much of the lump sum, which would destroy the value of the pension.

Instead he took his tax-free lump-sum of £33,500 and paid off his mortgage, so he would no longer have to think about paying off debts, and could focus on spending more time with his wife. He was then able to take an evening job, so he could be with his wife during the day, and her sister could then care for her during the evening.

The rest of the pension was invested into drawdown with Age Partnership, so he has the flexibility of being able to take additional sums if he needs to take time off work, or spend money on something to make his wife's life more comfortable.

It's a useful approach for many people, although it won't suit everyone because the pension remains invested, so the value of the fund depends on the performance of the underlying funds and can go down as well as up.

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