Can pensions help solve the social care crisis?

Another year; another political reshuffle and a clear indication of what the Government considers are the big issues. Jeremy Hunt’s increased responsibility for Social Care shows that this is rightly near the top of the Government’s agenda.

The NHS pays for the medical care but who pays for the social care – the dressing, washing and cooking? As the population ages this is becoming one of the biggest social dilemmas we face and the system we have now is already woefully inadequate.

The answer to this problem may involve taxation, insurance, charges on assets or loans from the public purse. Most likely a combination of all of these.

An additional dynamic that could form part of a solution are the pension freedoms and enabling people to more efficiently use their pension savings to pay for social care.

A pension fund, post the tax-free-lump-sum, is a collection of assets that may provide a regular income or it may be taken as a lump-sum. Regardless, it is taxed as income received in a tax year. Someone with no other taxable income takes £20,000 on 5th April they pay £2,000 tax; if they took £10,000 on 5th April and £10,000 on 6th April they would pay nothing.

This will come into sharp focus when it comes to paying for social care. If a pensioner has tens of thousands in a flexi-access pension account it is conceivable they’ll be required to run that down. If that is at a faster rate than planned then the taxation will go up and the fund will go less far.

Worse, if a one off lump sum is required, for example to make adjustments to their home so they can continue living there, and the way pension income is taxed means they could be pushed into a higher tax bracket for that year and the situation compounds itself.

With more and more people remaining invested in retirement to take advantage of the pension freedoms, pension funds will be an increasingly attractive liquid asset when it comes to the social care conundrum.

If pension withdrawals that are needed to pay for social care were tax free, or even incurred income tax at a reduced rate of say 10%, the purchasing power of those withdrawals would be increased, their pension funds would last longer and the point at which they become fully reliant on state care provision recedes.

Obviously there is a cost to the Government here but it would get the VAT and any profits/payroll taxes on the care provision and would keep people in private care provision for longer. This would seem to help whether the solution is a ceiling or a floor on what can be paid. After all taxation by level of health isn’t the best way to proceed. Let’s hope Mr Hunt can have all the tools at his disposal when sorting the issue.

Technical Resources Director

Peter spent 28 years in the Civil Service, working at HMRC, the DWP and the Cabinet Office. He led the team that brought us pension simplification, and more recently the team that required PAYE to be reported on a payment-by-payment basis. In AJ Bell he is responsible for all technical and business improvement matters.