Long-term care reforms could mean that if you spend your pension fund, you may struggle to pay for your long-term care.
If You’re Intending To Spend Your Pension Fund, Be Aware Your Local Council Could Refuse To Pay For Your Long-Term Care
If Your Health Declines, Spending Your Pension Fund Could Prove To Be An Expensive Mistake
While the pension rule changes coming into force next year, which permit you to withdraw your whole pension fund, could be a good thing, it might cost you dearly in the long run. That’s because reforms to long-term care may make this a very costly exercise.
Following the government commissioned review into long-term care in the UK by economist Andrew Dilnot, a £78,000 cap on care costs will be implemented in April 2016, as will an increase in the care threshold. If you have assets worth less than £17,500, you’ll receive free care. Over this threshold, the local authority will pay for part of your care. If you have assets over £123,000, you’ll receive nothing.
The calculation doesn’t just look at your capital. Pension income is also taken into account, which is used to offset some of the cost of your long-term care.
Blowing Your Pension Won’t Necessarily Guarantee Your Long-Term Care Payments
Whether you take your pension as a lump sum or whether you draw it as income, chances are it could be eaten up by your long-term care costs. There are fears this could push people to use the new rules to draw out their whole fund and spend the lot, meaning they’ll be entitled to free care. Estimates suggest that one in four people will do this.
The numbers are so huge, it’s been raised as a concern by the Treasury Select Committee, which has said: “The interaction between increased choice in how to use pension saving and the reformed long-term care model is of great important to the welfare of retirees and to the public finances. It is not clear how the two sets of reforms will interact. On the one hand, it may be that the pension reforms will assist pensioners in planning for their long-term social care needs. On the other hand, the pension reforms might tempt people to exhaust their pension pot to avoid being liable for the costs of their own long-term social care.”
Chancellor George Osborne told the committee: “The current social care means test does not take into account the changes to the flexibilities around pensions and so we need to change the social care means test to take that into account. I am absolutely clear that we want to make sure that this does not have an impact.”
Don’t Deliberately Waste Your Money
Spending your whole pension fund and expecting the state to pick up your long-term care bill is known as ‘deliberate deprivation’. If your local authority believes you have deliberately deprived yourself of funds to escape a long-term care bill, it can refuse to pay for your long-term care.
If you spend your money within the six months before you go into long-term care, then deprivation is automatically assumed. For longer periods, the assessment is subjective. If you fall foul of the rules, not only can the local authority refuse to pay for your long-term care, it can also demand any money, assets or property that have been disposed of be returned to cover your long-term care costs.
As we’re all living longer, and more of us are needing long-term care, it’s likely local authorities will try to control their budgets and clamp down on deliberate deprivation. If you receive domiciliary care or other medically-related benefits, such as the disability living allowance, you could be particularly hard hit.
Protect Your Assets With Long-Term Care Planning
There are a number of ways to safeguard your assets from the financially ravaging effects of long-term care costs. Effective asset protection can include the use of Trusts and a correctly drafted Will. And because of the deliberate deprivation rules, it’s so much better to sort this out earlier rather than later.
For detailed information on how to protect your long-term care costs and your other assets too, talk to your solicitor or send us a message using our contact form, and we’ll point you towards an asset protection specialist.
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