When planning for retirement, one of the big unknowns is how much we might end up paying out for care costs in later life. Some people will unfortunately not live to a point where they need care, whilst others will only have relatively modest care costs. But about one in four of us is likely to spend our final months or years in residential care, and the bills can easily run into tens of thousands of pounds. Given that the government is currently reviewing the way that social care is funded, what would be the best way to help us all to provide for such uncertain costs?
In my view, it is unrealistic to expect us all to save enough money just in case we face huge care costs. It is not uncommon for residential care to cost something like £700 per week or more, and with a typical stay of two to three years you could easily be talking about a total bill of more than £70,000. There aren’t many of us who could think of having this amount of spare cash, just in case we face a big care bill.
For those who have no resources of their own, the local authority may pick up the bill for care – but local authority provision is becoming increasingly tightly rationed. People are having to wait until their needs are relatively high before they are deemed to need a place, and many of the best care homes will charge more than the local authority’s ‘going rate’. More and more people will want to have provision of their own, so that they can choose when they enter residential care and which home they want to live in.
Given that our future care costs are very uncertain, it ought to be possible to buy an insurance policy to protect against future bills. But although such products were sold in limited numbers in the past, they are very hard to come by these days. Almost the only product you can get is what is called an ‘immediate needs annuity’, which you buy once you are on the door of the care home. Such policies can cost tens of thousands of pounds, but they do at least mean that if you have an unexpectedly long stay you won’t have to find any extra money.
What I would like to see is insurance policies where the cost and risk are spread over large numbers of policyholders and over many years, so that fewer people run the risk of having to sell their home to pay for care. I have recently proposed something called a ‘care pension’, which would focus on those currently coming up to retirement.
The idea would be to build on the increasingly popular ‘drawdown’ accounts that many people now have at retirement. These days, fewer of us can expect to have regular income from a final salary pension or from buying an annuity, but more of us will have a pot of money at retirement from which we will draw to support ourselves.
It would be possible to ‘bolt on’ a care insurance policy to a drawdown account – perhaps by paying a monthly insurance premium or a lump sum up-front – which meant that if you needed care in later life it would be covered. The cost of the policy would depend on how old you were when you took it out, but a 60-year-old could be looking at a monthly premium somewhere around the £100 mark if they were looking to cover the residential care costs that would not be met by their regular income in retirement.
To make the product attractive to savers, I would suggest a tax break whereby money going from the drawdown account to pay for insurance was not subject to income tax, unlike other withdrawals from drawdown accounts. I also think the product could be marketed as a form of ‘inheritance insurance’, since people with this sort of cover would get a payout if they needed high-cost care and so would be able to protect the value of the family home for future generations.
We have submitted this idea to the Whitehall officials who are currently working on the planned Green Paper on social care, but we will have to wait and see what ideas they come up with when the document is published in the summer.
Steve Webb is director of policy at Royal London.
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