Pension Clinic: the problem of how to pay for care costs and who should pick up the bill has still not been resolved, but an age-related three-tiered approach is possible, says Steve Webb.
One of the biggest bills any of us may face in our retirement is the cost of care. While some will have very modest care costs, others could find themselves living in expensive residential care for several years, potentially running up a bill that runs into tens of thousands of pounds or more.
In some cases, the cost of care can mean families are forced to sell a family home in order to raise the funds to pay the bills. But the way that care is funded could be changing, depending on the contents of a government green paper on social care which, at the time of writing, is still unpublished.
It looks as though the government is considering new ways of raising funding for care for three different generations – those who are already elderly or frail, those who are coming up to retirement, and the current younger working-age population. The funding approach they are likely to take is different in each case.
For those who are already in need of care, it is clear that the public purse is simply going to have to find more money. It is well-known that we are ageing as a society and the number of those in the oldest age groups (such as those aged over 85) is rising particularly quickly. This means that the bill for care is going to rise sharply and it is hard to think that higher taxes will not be part of the solution.
New tax regime
Until now, much of the extra cost of care has been met by council tax bills. Local authorities have been given specific permission to increase their council tax by more than the rate of inflation, provided that the additional funding is earmarked for the rising cost of providing social care for those unable to fund it themselves. But council tax is not a popular tax and there is a limit on how far this funding mechanism can be used.
The government is therefore looking at a new tax – or ‘social insurance’ as it prefers to call it – which would apply to people over the age of 40 and would also include those over pension age. The thinking is that people may be more willing (or at least less unwilling) to pay a tax if they can see that it is ringfenced for a purpose they approve of – such as providing dignified care for older people.
The idea of restricting it to the over-40s is that younger people are regarded as being in a difficult financial position, struggling to raise the funds for a deposit, often leaving university with large amounts of debt and unable to access some of the high-quality pension schemes that their parents and grandparents enjoyed.
On the other hand, many of those over pension age are deemed to be doing relatively well and the government thinks it reasonable to expect them to play a part in funding the care costs of the very elderly.
A new tax will obviously help to meet today’s care costs, but the government is also keen to encourage more people to make their own provision without the state having to pick up the tab. For those coming up to retirement, the government is therefore interested in looking at ways to encourage them to take out their own insurance against high care costs. This could be funded perhaps by taking money from their pension pot or drawing a lump sum from the value of their house. In either case, some form of tax incentive might be required to make this sort of insurance attractive.
Automatic enrolment for social care costs?
Finally, for those much further away from retirement, the government is looking at some form of ‘automatic enrolment’, building on the success of enrolling workers into pensions. Under this model, workers would have a second payroll deduction, this time to help them build up a fund which could ultimately be used to buy care insurance later in life.
However, there are real concerns that an additional ‘automatic enrolment’ could complicate things and might lead some younger workers to opt out of payroll deductions for both care and pensions.
This is only a green paper and a lot more consultation and legislation will be needed before anything changes, but it is interesting to see the government exploring some more novel ways of tackling a funding issue which has defied solution for many decades.
Steve Webb is director of policy at Royal London.
- Read more: Steve Webb's Pension Clinic