The freeing up of pension pots announced in the Budget could have unintended negative consequences for the social care system. These need to be urgently addressed
The chancellor’s proposed reforms to pension annuities have been widely, if not universally, welcomed as the reactions to James Lloyd’s recent PF post illustrate.
However the impact of the proposals on the government’s plans for changing the way we pay for social care have attracted little comment, and at first glance the government appears to have missed a trick.
Just a few weeks ago the Department of Health and the Association of British Insurers (ABI) issued a joint statement committing to work together to develop better financial products enabling people to plan ahead for their care needs in later life. Underpinning the Dilnot Commission’s proposals to place a lifetime cap on care costs was that if the state accepted the ‘tail end’ risk, insurers would have a stronger incentive to offer products to protect people’s assets up to the cap.
The ABI’s review concluded that allowing people to have more flexibility over when and how they take income from their retirement products could help them better plan for their care. It floated ideas about changing the rules for capped and flexible draw-down products and the tax regime for annuity products.
Though mentioned in the consultation document, it doesn’t appear that much of this thinking has made it into the chancellor’s proposals. This begs two immediate questions.
The first is that if people were able to draw down large amounts of their pension pot, as proposed, and went on to develop substantial care needs, they would almost certainly fall foul of the local authority means testing regime as Age UK and others have pointed out.
Under the current regulations, income from a pension annuity is counted in the financial assessment (or 50% of it if the other half is given to a spouse). And where someone aged 60 or over has a pension pot that has not been used to purchase an annuity, the financial assessment will assume that it has. But if instead individuals convert all or part of their annuity as cash then all that would be subject to means testing - the threshold for which stands at £23,250 now (£118,000 from 2016.)
Whether this is a good or a bad thing depends on whether you think people should be expected to pay for their own care if they have the resources to do so. The picture is muddied by the widespread misapprehension that the state, via the NHS, will pick up their care bills, while there is little understanding of the limits of what local authority purchased care buys in terms of quality and choice.
It underlines the necessity of obtaining sound financial advice, in which people’s changed liabilities for future care costs are clearly explained, as part of the government’s proposed ‘guidance guarantee’. How this relates to provisions in the Care Bill currently before parliament about information and advice is unclear.
A second concern is the impact of the proposals on the annuity market. It is generally accepted that there will be no new market in pre-funded care insurance policies anytime soon, despite Dilnot, and the products more likely to emerge are those related to the assets people already have, notably their housing and pension wealth. These could be in addition to ‘point of need’ annuities already available.
But predictions of a rapidly shrinking annuity market do not auger well for the prospects of these more specialised products which could become costlier still. The collapse of the annuity market hardly represents a climate that will inspire the confidence of the wealthiest cohort of pensioners in history in new or existing products, especially those who have already had their fingers burned by past market failures in the financial services industry.
If the government is serious about wanting people to plan ahead for their care needs as well as their financial needs in later life, a much better infrastructure of information and advice, financial products and tax incentives will need to be in place. The consultation on pension reform is an opportunity to consider how changes in this area could be aligned with social care funding reform in a way that incentivises people to make provision for care in later life.
One option would be to offer a lower marginal tax rate where the draw down is used for care costs, or even complete tax relief if the pension is untouched and subsequently withdrawn after a defined period in order to pay care costs. It is surprising also that plans for a new savings bond for pensioners have been silent on related ideas for care ISAs and care bonds.
Already the government’s care reforms run the risk of adding confusion and complexity to a poorly understood system. Poorly thought-out pension reforms that could result in a ‘dash for cash’ underline the need for the government to be much clearer in its policy objectives that so that the benefits of one set of reforms are not cancelled out by the downside of another.
And there are many with little or no pension or housing wealth for whom both sets of reforms are largely irrelevant unless the wider and deepening crisis in public funding for both health and social care is addressed.
Hard choices are unavoidable, as the interim report of the Barker Commission – established by The King’s Fund to review the post-war settlement which established separate systems for health and social care – will make clear later this week.
Richard Humphries is assistant director, policy at the King's Fund
