Personal Pension  

Beware the spending spin

Beware the spending spin

No one can accuse the department for work and pensions of being asleep on the job when it comes to pensions and care fees funding. The coalition government has introduced:

• Freedom of access to private money-purchase pensions from April 2015.

• Major reforms to the State pension from 2016

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• Reform of care fees funding from 2016.

The problem with these reforms is not the changes proposed in themselves, but the political rhetoric that has surrounded their introduction and the impression given that easy access to pensions will be offset by an increase in the state pension and a cap on care costs of £72,000 a person. The detail is more complex than this, but the danger is that the political noise surrounding these changes could leave many underestimating the need to preserve pension funds and income for their later life needs.

This may not have been the intention of our legislators, but it certainly could be a consequence of the encouragement of early access to pension funds and the headline-grabbing assertions that no one will have to pay more than £72,000 of their own money before they get their care fees funding from the state. This, together with the announcement that everyone will get a basic state pension of £148.40 per week from 2016, which is an inaccurate portrayal of the state provision, could lead many over-55s to have a false expectation of what they will get from state benefits and thereby see them using pension funds as an alternative form of overdraft to meet today’s spending needs.

The impact of ill health and physical dependency on others is hard for most people to contemplate and to plan for. Most of us hope that the need will not arise, and even if we are prepared to admit it could be a possibility, determining to forego discretionary spending in retirement in order to plan for something which may not happen has little appeal. Most individuals are therefore predisposed not to plan ahead for care fees costs but instead to react to the need for care costs funding as and when it arises.

This can often result in poor choices being made from the point of view of accessing state funding, and the tax efficiency and sustainability of a particular funding route may become secondary to realising assets quickly. For example, it is common for children with elderly parents to seek to raise funds at short notice by selling their own investments. This can happen even where the parents are better off than the children, if the parent lacks capacity and no power of attorney is in place. While this provides short-term cash with no immediate tax consequences, the longer-term impact of loss of tax-efficient savings may not be apparent for some time.

These children tend to be in the over-55 age bracket with parents typically in the over-80 age group. One unintended consequence of the flexi access rules may be that we see more 50 and 60 somethings raiding their own pension funds to enable their parents to have access to the care of their choice. If that access to pension funds is undertaken without advice, and both income and cash are withdrawn, their future ability to rebuild pensions with the benefit of tax relief may be severely curtailed by the imposition of a £10,000 per annum limit on future funding with tax relief. What was seen as a short-term “loan” from the pension fund to deal with a family emergency could have a long-term impact on their own ability to fund and pay for their own care.