New flat rate state pension will lead to benefit cuts for some groups

25 November 2015

Low earning renters stand to lose the most from planned reforms to state pensions and long-term care if they are not protected, according to a new report from the Care and State Pension Reform (CASPeR) research team and funded by the Nuffield Foundation. 

The report examines how the introduction of a single-tier pension scheme in April 2016, coupled with changes to long-term care financing in 2020, will affect pensioners in different ways. Individuals will be able to use the potential increased income from the state pension reforms to pay for care costs which, combined with the introduction of a care cost cap, means some individuals will deplete their capital to a lesser extent.

For example a female home-owner on median income would use £46,000 less capital and a male home-owner on a high income would use £36,000 less capital. Low income renters are more likely to lose out from the pension reforms as they can lose more in means-tested benefits than they gain in state pension.

The CASPeR research team is comprised of members from the Pensions Policy Institute, the Personal Social Services Research Unit at the London School of Economics and Political Science (LSE) and the Health Economics Group at the University of East Anglia. 

Chris Curry, PPI director said: “The combined effects of these two sets of reforms have received little attention despite interactions between them. If an individual’s net income changes as a result of changes in their state pension entitlement, the contribution they are required to pay towards their care costs can change. An increase in state pension income can be wholly or partially offset by an increase in liability for care charges.”

Ruth Hancock, Professor in the Economics of Health and Welfare at University of East Anglia said: “Those individuals not eligible for state funding to cover their care costs can use the increases in their state pension income to pay for part of these and, if they hit the care cost cap, reduce their liability. Ultimately this can reduce the amount of capital that they have to use to pay for their care.”

“Medium to high earners who own their own homes do well from the state pension reforms as they age. Low earning renters are less likely to benefit or may lose out from the reforms as their entitlements to means-tested benefits can fall because of the removal of the Savings Credit. This risk is increased if there is no transitional protection for housing benefit and council tax support, and if the savings disregard for residential care costs is removed, as we have assumed in our research.”