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Taxes on retirement withdrawals should be eliminated or reduced if the funds are used to fund care later in life, proposals published today suggest.
Benefits received from health insurance schemes may also be excluded from local authorities’ means testing, according to reports from the Association of British Insurers and Pensions Policy Institute.
The cost of residential care and home care has risen exponentially over the years and the government has delayed the launch of a lifelong care spending cap until 2025.
It means large swathes of older people in the UK are being forced to sell their homes, and sometimes face financial difficulties, in order to pay for their long-term care needs.
Health care costs: Tax on retirement withdrawals could be eliminated or reduced if resources are used to fund care in later life, proposals suggest
According to the ABI, current tax rules make the prospect of using pension withdrawals to pay for healthcare unappealing.
It said: ‘Current tax rules on retirement withdrawals can make pensions an unattractive way to pay for care, especially if larger withdrawals are made, which could be taxed at 40 percent or even 45 percent.
“People are likely to leave money in a pension to pay for care only if the tax treatment on death remains as it is, and this should be taken into account in any pension tax changes.”
The ABI suggests that pension tax rules could be changed to allow an immediate need annuity to be purchased from a pension and, instead of being taxed as a lump sum, the payments to the caregiver would be taxed as income at the customer’s marginal rate – or not taxed at all.
INAs are sold as they are needed and provide a guaranteed stream of payments for life to cover healthcare costs in exchange for a fixed amount.
Another proposed idea was to exclude the payment of amounts from the protection insurance from means-tested assessments for care.
Yvonne Braun, director of policy, long-term savings, health and protection, at the ABI said: ‘Many people will want care services beyond what their local government can provide.
“Insurance or pension benefits can help people afford additional payments for additional services. However, as it stands, most people would lose if they bought an insurance or long-term savings product upfront.
‘This research has revealed changes that allow more people to take full advantage of an insurance policy or a long-term savings product. The delay in reforms provides an opportunity to ensure that the new rules work in practice and benefit as many people as possible.”
Cost: a table showing how much a week of care costs across England
Children ‘can take out insurance for care parents’
The possible introduction of ‘informal care insurance’ was also signaled.
The ABI said: ‘This product does not currently exist. It would allow family members to pay premiums directly to receive a lump sum payment or income if, for example, their parents need care.
‘This would overcome people’s reluctance to think about their own care and its costs; and would bundle the risk, so that the costs can be controlled if the parent does eventually need care.’
The ABI said the Department of Work and Pensions should also improve the process for applying for care benefits and allow gradual payments “rather than carers receiving all or nothing.”
Last year the government came under fire for delaying the launch of an £86,000 spending cap on lifelong care until autumn 2025.
This constant kicking in the road is a nightmare for those seeking certainty about how much their care could cost
This would be accompanied by a more generous means test, increasing the capital level at which people qualify for support from the current £23,250 to £100,000.
But some experts believe there is a flaw in the plan, arguing that poorer people could still spend most of their wealth, including selling their home, if they need care, while the better off are a relatively would lose a small part of their wealth. .
The Institute for Pension Policy said: “While no one is likely to be worse off with the proposals, many people currently receiving support will see little change.”
It added: ‘It would take a self-funder more than three and a half years to pay for residential care at the average rate of local government agreed healthcare costs to exceed the limit, and longer for those receiving means tested support .’
On the back of today’s reports, Tom Selby, head of pensions policy at asset manager AJ Bell, said: ‘The latest version of healthcare finance reforms was put forward in 2021 by former Prime Minister Boris Johnson and would have expanded resources. tested support and capped lifetime personal care costs at £86,000 from 2023. The reforms are now not expected to be implemented until 2025.
He added: ‘This constant can kicking on the road is a nightmare for those seeking certainty about how much their care could cost. It also threatens to deter financial services firms that may offer long-term care products.
“However, a possible silver lining is that it provides an opportunity to identify whether there are features of the existing system that could be improved before the cost cap is delayed.”
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