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Extension of income drawdown may be one answer to LTC

The royal commission on long-term care recently published its report. Yet only one page of it discussed the role pensions could play in paying for long-term care.


This is a pity. I suspect the reason why the royal commission dismissed pensions so lightly is the fact that it recognised that most people have trouble funding their main retirement and cannot afford to set aside extra for the chance they will be among the minority who need long-term care.


But there is one group of people for whom funding long-term care need not be in conflict with funding for retirement. They are those people for whom income drawdown past age 75 would be appropriate if the law allowed it.


The logic behind this is quite simple. If you are unlucky enough to need long-term care, it is likely to be caused by a deterioration in your health when you are over 80 years of age. But usually that deterioration in health will be accompanied by a reduced life expectancy.


Thus, an annuity purchased at the onset of long-term care will produce a significantly higher income which can be used for paying the care bills although paying the bills out of income drawdown could also be considered.


A variant of this is to allow an annuity to be purchased at retirement which increases if long-term care becomes necessary. However, this may significantly reduce the starting pension.


Sceptics may reasonably point out that the people for whom indefinite income drawdown is appropriate are precisely those for whom the cost of long-term care would be most affordable, since they will tend to be the better off. In response, I make four points.



Assuming that the royal commission&#39s conclusions are rejected, such people are also exactly those who will have to pay for long-term care because they will fail any means test which the state may set.


If only one of a couple needs long-term care, the other will still have the full costs of running the household.


If one of a couple dies while either one is in long-term care, there needs to be sufficient future income to look after the survivor for the rest of her or his life.


It is a perfectly respectable and socially beneficial objective for people to arrange their affairs so that their children have a reasonable inheritance out of non-pension assets which is not heavily depleted by the long-term care.



Taking all these points together, I suggest that keeping the pension pot flexible past age 75 is an option which should be available as a means of paying for long-term care, should it be needed.


The long-term care issue is only one reason why the law should allow annuity purchase to be deferred past age 75. For most people, annuity purchase is a good idea because it gives near certainty of income for the rest of life. But all people are not the same and there should be freedom to have the retirement solution which is most appropriate for the individual.


The Government seems to recognise this point in the context of compulsory pension scheme membership, where the pension Green Paper talks about people being able to justify why it should not apply to them.


The Government&#39s legitimate concern with the consequences of allowing people to go past age 75 without buying an annuity can be easily accommodated. Drawdown limits can be set conservatively so that people cannot run down the pension pot too fast.


The Revenue can extend the existing tax rules past age 75, which means that it always get its tax take when someone dies during income drawdown. The misguided can be protected by requiring that independent financial advice must be sought before drawdown extends past age 75.


The long-term care and annuity purchase issues are not going to go away because they both potentially affect so many people. Perhaps it is time for some “joined-up government” in this area.

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