The government should relax the rules on defined benefit pension transfers to allow members to use the lump sum to cover the cost of care, former pensions minister Ros Altmann has said.
Baroness Altmann warned the UK crisis in social care was "potentially far worse than the pensions crisis", adding that both issues were a function of our the aging population.
She said the governments' failure to address the problem meant it was "turning into a disaster".
She urged the government to find innovative ways to encourage people to use their pensions to pay for care - including tax incentives and easier access to DB transfers.
She said the Financial Conduct Authority's strict approach to DB transfers "strongly discourage[d]" the practice.
"This should be relaxed. With the new freedoms for defined contribution pensions, there could be many people who would benefit from such transfers.
"Giving up a relatively small, guaranteed pension income might be the optimal decision for a family, particularly if they have other pension income and this is just one smaller deferred pension that will not make a dramatic difference to their lifestyle," she said.
She argued that a £50 a week final salary pension could be worth around £100,000 as a transfer value.
As an income, she said this might not be worth a great deal, but as a lump sum, it could be "hugely" beneficial in helping to pay for care.
"Transferring small deferred pensions can both help pre-fund care costs, and the surviving partner can inherit that sum in full, rather than just receiving a fraction of their deceased partner's pension if it were still in the DB scheme," Baroness Altmann said.
She also recommended allowing people to take money out their pension tax free if it was used for care.
"Doing this would give people a further incentive not to spend all their pension fund too soon. If they have money in their pension, but don't think about using it for care, then by the time they need care the money may all be gone," she said.
Baroness Altmann also recommended the creation of a "Care Isa" - an inheritance tax-exempt Isa especially designed to pay for care.
"I urge the Government to act swiftly on this issue. The system is already in crisis and is much more difficult to solve than the pensions crisis," she said.
The Department for Work and Pensions is due to release a green paper on DB schemes imminently.
It will follow a Work and Pensions select committee paper on DB schemes.
One of the committee's recommendations was to make it easier for members to access small lump sums from DB schemes - between £10,000 and £30,000.
james.fernyhough@ft.com
