Could ‘care pension’ proposal resolve long-term care funding crisis?

Royal London is urging the government to introduce a ‘care pension’ to tackle the long-term care crisis. This pension product would combine the increasingly popular ‘drawdown’ account at retirement with a care insurance product. 

In a new report, the insurer argues that such a ‘care pension’ product would mean that people’s family homes would no longer be at risk of being sold to pay for care. 

Royal London suggests that money used to buy the care insurance should not be taxed, making it attractive to consumers. 

The UK population is ageing, and life expectancies are longer than ever. By 2040, nearly one in four people in the UK will be aged over 65, according to a recent Age UK report. But the country has little money set aside for elderly care, at either the state or individual level. 

Many people assume the National Health Service (NHS) can be relied on to provide care for elderly relatives. But while the NHS can step in under circumstances of urgent need, most families have to fund care costs themselves or rely on cash-strapped councils whose budgets have been cut and who can now only provide the bare minimum.

Currently, it is estimated that one million older people who need social care in the UK are not getting the support they need.  

Royal London director of policy Steve Webb says: ‘More than 1 in 4 of us will spend some time in later life in residential care, and the total bill can easily run into tens of thousands of pounds. In extreme cases, people can be forced to sell their family home to pay for care.  

‘It ought to be possible to take out insurance against this risk, but insurers are reluctant to offer products and consumers have been reluctant to take them up.’ Webb argues there should be ‘an overall cap on people’s lifetime care bills, so that insurers are not taking on an open-ended liability and can therefore offer more attractive premium levels’.

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He cites several factors which put consumers off buying such products, including a lack of awareness of the likelihood of needing care and the potential cost of care; the fact that they don’t want to think about a time when they may need to be looked after; an (incorrect) assumption that ‘the government will pay’ if someone needs care; and the limited supply of specialist financial advice for those who do want to plan for care needs.

‘Our social care provision is more like that of a third world country, not a major industrial nation, with standards and funding woefully inadequate and no policy changes to address the issue,’ says former pension minister Ros Altmann.

Altmann argues that those who are already in or near retirement need a combination of existing savings or other assets - pensions, Isas, housing - to fund long-term care. She says: ‘I have long been calling for the government to incentivise the baby boomers to use their Isas or pension funds to help pay for elderly care if they need it. A Care Isa and Care Pension could happen if the government introduced slight changes to the current tax incentives.  

‘For example, allowing people to withdraw money tax-free to pay for care would encourage advisers and individuals to realise that not spending their pension too soon and keeping the money for much later life has significant benefits. Equally, allowing a Care Isa to be passed on free of inheritance tax would encourage people to use some of their Isa as a fund that would be there to pay for care if needed.  If it is not required, it passes on to the next generation.’

Responding to the Royal London proposal, she cautions that it is not entirely clear how any ‘insurance’ would work. ‘What would be insured? If there is a cap on the amount individuals need to pay, then one could either save or insure up to that capped sum. The Care Isa allowance could apply to the capped amount per person.’

Altmann says it has been clear that the ageing population will put extra burdens on society as more citizens become unable to live independently. ‘Successive governments have kicked the can down the road for years. This is a huge indictment of our system of social policymaking, which has failed to think long-term and focused too much on short-term issues.’

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