Pensions  

Experts point to third way of funding care

Experts point to third way of funding care

Several pension and financial experts are calling on the government to solve the later life care problem with a simple solution – allowing individuals to pay for their care directly from their pensions.

The government is publishing its delayed green paper on social care in the autumn, and several solutions are said to be on the table, including a ‘Care Isa’ – a capped savings product, exempt from inheritance tax – and a 'care pension', which mixes drawdown and care insurance.

But specialists told FTAdviser there was an easier and simpler option for the government to consider.

"A much more useful approach would be to change the rules on existing savings plans so that they can be used to fund care bills if and when they arise," said Fiona Tait, technical director at Intelligent Pensions.

She said: "Isa withdrawals are already tax-free under specified circumstances, but the majority of money withdrawn from a pension is subject to income tax."

She added: "Before her tenure as pensions minister, [Baroness] Ros Altman suggested herself that the government could introduce a rule that exempts payments made direct to authorised care providers."

Ms Tait explained if this change was made, saving into a pension would become more worthwhile for consumers, who have the comfort of knowing that if they save enough they will always receive a benefit from their fund - a retirement income if they live long, healthy lives, and pre-funded care, plus potential death benefits for their family, if they do not.

Steven Cameron, pensions director at Aegon, expressed a similar view.

He said: "For many, the most obvious solution is likely to be linked to retirement savings, particularly where individuals have defined contribution pensions.

"Here, under the pension freedoms, individuals at retirement could notionally 'ring-fence' or set aside part of their retirement fund to meet possible future care costs, taking an income from the balance."

The difference between the drawdown-linked care insurance proposed by Royal London and this one is that Royal London’s solution would have a structure where the policy holder commits to pay a regular insurance premium directly from the drawdown account to the insurance provider.

Under these proposals, however, any money not used for care costs could be used for other purposes or left in the pension or to a partner or other beneficiary, which is already typically free of inheritance tax liability.

But before considering what solution will be best to solve the UK’s later care problem, Mr Cameron said, the government must clarify "how much an individual will ever need to pay towards their own care costs, so they can plan knowing inheritance aspirations are safe".

He added: "Without this information, and longer term political certainty, it’s difficult to go into detail on specific solutions."

It is estimated a mere 12 per cent of adults aged 55 or over are currently putting aside money to pay for their future care in the UK.