A retirement crisis looms as inheritance tax changes could see pensioners hit with a £54,000 tax trap. Pensioners face a potential £54,000 tax trap if they save extra money in their pension pots to cover future care costs.
Retirees need pension savings of £340,000 to achieve a “moderate” standard of living in retirement, a figure that rises to £400,000 if they need to fund nursing care, according to calculations by investment service AJ Bell.
But changes from the Labour Party goverment from April 2027 means the £60,000 of extra savings could be subject to taxes of up to 90pc if the retiree does not end up needing care in old age. This would mean a potential tax bill of £54,000.
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This uncertainty creates the risk of a “tax penalty” in later life, according to Tom Selby of AJ Bell. He added: “Paying for care in your later years can represent a huge cost but nobody knows for sure whether or not they will need care, either for themselves or their loved ones – or how much it might cost.
“This makes it extremely difficult to plan for. Proposals to bring unspent pensions into inheritance tax from April 2027 will create an added tax penalty risk for beneficiaries where someone has built up a care ‘buffer’ but subsequently not needed to use this.
“Although this will only apply where assets are left to a non-spouse and exceed your inheritance tax nil-rate band.” Caroline Abrahams, director at the charity Age UK, said: “If you need social care for any length of time the bills really do add up, far beyond what most people could ever comfortably afford.
“The belief that social care is part of the NHS and so available to all for free remains quite prevalent, but sadly this is far from the truth. Unless you have pronounced care needs and very few assets it will be down to you or your family to meet the costs.
“What’s more, the value of your home if you are a home-owner is taken into account in this respect if you need to go into a care home, though not for visiting care in your own home. This affordability problem with social care has been getting steadily worse as the state-funded system has contracted over the years, leaving many older people who would never consider themselves particularly well off to foot stinging bills.”