Clarity on personal social care contributions opens up a new dimension to retirement advice, says Steven Cameron, Pensions Director at Aegon
Until now, advisers have faced an extremely difficult task in advising clients around the funding of possible care costs in older age. Previous rules with no limit on personal care contributions meant the more someone saved, the greater was the risk they’d face catastrophic costs if needing lengthy care.
The new deal for those in England includes a cap of £86,000 on contributions towards care, although room and board if in residential care will still need paid in addition. This brings a whole new dimension and further value to retirement advice.
Once all the details are finalised, advisers will be able to recommend the best approach to planning for ‘normal’ retirement, while factoring in scenarios where care costs might need to be paid. This will cover the best approach to utilising pensions, investments, housing wealth and other assets. Those approaching and many already in retirement may also benefit from periodic reviews throughout retirement.
The Prime Minister wants the financial services industry to offer care insurance and this needs to be explored, although the costs might be high, particularly if it’s those individuals most likely to claim who seek to purchase this.
An alternative to insurance is advance saving, notionally earmarked for possible care costs. Under the pension freedoms, individuals entering drawdown might ‘notionally ringfence’ the capped amount, with advisers helping them live off income drawn from the balance.
This offers tax efficiency while also leaving options open as if care isn’t needed, the funds are still available for later life needs or for passing on as an inheritance. Advisers will also be able to consider the extent to which room and board costs might be covered by retirement income.
Planning ahead for social care costs can also play a big role in protecting inheritance aspirations. It’s likely that the new social care deal will lead to an increase in the number of retirement advice sessions which involve more than one generation.
As the Government introduces this new deal, advisers will have a key role to play in helping individuals and their families first understand the implications and then plan accordingly.
