Everybody wants to live their final years with dignity, but dignity is hard to afford if you need to pay more than £1,000 a week for a care home.
The incredible cost of social care combined with an ageing population and political paralysis due to Brexit makes it one of the great issues of our time.
Politicians understand the scale of the problem but have consistently dodged the issue as it is not a vote winner. The current government promised a green paper on social care back in 2017 but that has been repeatedly delayed. Similarly, the recommendations contained in the Dilnot Commission’s report of July 2011, such as a care-spending cap and an increase to the means-test threshold for residential care, have fallen by the wayside.
Earlier this month, the economic affairs committee in the House of Lords weighed in on the matter and called on the government to immediately spend £8bn on social care to help stem the crisis.
But this is a short-term fix as the demographics worsen and the dithering continues. The Office for National Statistics projects that more than 24 per cent of people living in the UK will be aged 65 or older by 2042, up from 18 per cent in 2016. The amount of welfare spending is also set to increase by £24bn by 2030 and £63bn by 2040.
A report commissioned by the Association of British Insurers and published by the Pensions Policy Institute at the end of June calls for a massive new campaign to raise awareness of the problem. It looks at the system in England where social care is not covered by social insurance or free at the point of use like the NHS.
Financial advisers are unsurprised the report finds that the majority of over-65s have no plan to pay for social care. The study also finds 51 per cent of people see the state pension as the likeliest source of funding to pay for care, with only 17 per cent saying insurance, and 26 per cent saying they would sell their home.
The report notes there is currently only a small market for social care-specific products, which consists of purchasing immediate life annuities, or premiums paid to an insurer to fund specific care needs.
These operate in a system where local authorities strictly assess eligibility for social care and provide support sparingly. An individual’s savings and assets are measured against a threshold currently set at £23,250. If they have savings and assets over that value they are not eligible for means-tested support and must pay for the care themselves.
However, the research identifies a target group that makes up approximately 37 per cent of people in England aged over 50 who could benefit from incentivising ways of self-funding care. These are people who have savings of more than the means-test threshold of £23,250, but less than £200,000.
Since advisers possess intimate knowledge of their clients’ circumstances, they are well placed to talk to them about the challenges around social care and find ways to financially plan for it. The ABI report makes five recommendations for policy changes.
- No income tax payable on pension income used to pay for care
- Tax-free pension withdrawals if used to purchase an insurance product that covers care costs
- Introducing a new care Isa with no inheritance tax paid on residual amounts at death
- Releasing equity from a property to purchase an insurance product that covers care costs
- Pledging equity from a property to cover care costs.
But would these be useful for advisers and their clients? Given the challenges of funding social care, what can advisers do to help solve the social care crisis and what are the intricacies of social care planning they need to be aware of?
The right focus
The advisers that Money Marketing spoke to are glad the report sheds light on an issue that cannot be ignored indefinitely.
They also lean towards the option of tax exemption on pension income used for care as the best one for clients, rather than an equity release solution.
That 90 per cent of over-65s have no plan regarding social care does not come as a shock to many.
Wesleyan senior financial consultant Jonathan Halberda says: “We’re living longer, we’re getting healthier, and the system can’t deal with that. People aren’t being told what will be required of them if they end up needing social care in the future, so we can’t expect them to be planning for it.
We incentivise people to pay into their pensions with the tax-free benefit, so we need to be doing at least the same with social care planning
“At the same time, we know that, if we carry on as we are, we’re going to end up in a position where people don’t have sufficient funds to pay for their own care.
“I do agree with the ABI that we need a new campaign to increase awareness, but we also need to be offering incentives for people to do something about it. We have a tax-free allowance for pensions, so why not care?”
Regarding how effective the proposals will be and whether they will catch on, Halberda says: “I’m not convinced any of the suggestions would work as well as we’d need them to, but scrapping income tax on pension income used to pay for care is probably the best.
“Personally, I think we’d need to go further and take away insurance premium tax too. We incentivise people to pay into their pensions with the tax-free benefit, so we need to be doing at least the same with social care planning.”
Mowatt Financial Planning director William Mowatt
We highlight in the financial plans that we prepare for clients the risk that care costs could arise in later life. In general, people accept this as a risk without having any specific plans. Often they would see some of the equity in their property as being the plan.
I like the Care Isa option as it is doing something before the need arises. Lots of people have Isas so it is familiar territory. Even though it might not affect that many people it feels like a step in the right direction.
I would avoid insurance-based options as from past experience they will be expensive and given the uncertainty on what the government might do going forward, it is difficult to justify taking out insurance. If the government brings in new legislation with, for example, a cap on costs, I think that would then be an opportunity for insurance-based products.
Apart from the technical dilemma of working out the best way for the client to fund social care, soft skills are also required to handle such a sensitive subject.
Halberda adds: “Everyone has individual needs and each client should be dealt with on a case-by-case basis.
“But social care planning isn’t currently a standard requirement of the financial advice process, so it’s important for advisers to start bringing this up with clients off their own bat.
“Lots of people assume that whatever position they are in now – whether that’s the assets they own, the savings they have in their bank accounts, or the health they enjoy now – that’s what life will be like in the future. But the fact is that circumstances change, and that’s when people are left short. It’s part of our job to point that out.”
Fighting the politics
Ashlea Financial Planning director Diane Weitz is an accredited member of the Society of Later Life Advisers and is pessimistic that the five proposals will address a crisis that is worsening all the time.
She laments the way successive governments have not been able to demonstrate leadership and come up with sensible policies to address the issue.
Weitz says: “Generally speaking, local authorities have an amount per week that is not sufficient to fund for care. In Cheltenham the best care homes are charging about £1,200 a week and that excludes nursing costs. Social care is a safe place to be and have domestic needs met while nursing care is a level above that.
“I don’t think what is proposed here would make any difference. There are reduced budgets on social services where the local care budgets have been cut and the government will go on reducing expenditure all over the place.”
Weitz is a fan of immediate care annuities as she argues they are an effective insurance-based product that offers competitive pricing for policyholders.
Three companies – Just Group Aviva, and Legal & General – that offer immediate care annuities.
They are written based on detailed medical information from clients who then pay a lump sum, say £100,000, that will pay an income for the rest of their lives.
Weitz says: “Rates of interest on immediate care annuities are competitive, and you can get figures in the region of £26,000 to £27,000 a year. So the client does not have to live long, maybe four or five years, to get their capital back. The difficulty comes when people do not have pension income. People with good defined benefit pensions have a headstart over those who do not.”
The lack of progress on social care is actually causing the public to lose interest, according to consumer research from Just Group. Its 2017 Care Report showed that 64 per cent of individuals aged 65-74 were confused by recent government announcements on the funding of residential care – equivalent to 4.2 million people.
Also, 59 per cent of those aged 65-74 were delaying making financial plans for residential care until new plans for funding long-term care have been introduced – equivalent to 3.8 million people.
For years the reports found around two-thirds of over-45s expressed interest in the debate, but the 2019 Care Report says that dropped to just over half, while those saying they are not interested in how care is funded almost tripled, to 17 per cent.
Just Group communications director Stephen Lowe says: “Repeated delays to government proposals appear to be corroding interest in the debate and that could well be further weakening interest in planning for care.
“With around 1.5 million people in the UK currently aged 85 or older this is a huge and growing market – the number of people aged 85 or older in the UK is projected to more than double to 3.2 million by 2041, and customers are currently extremely under-served in this area.”
Just Group estimates around 1,000 care-funding plans were sold across the market in the 12 months ending 31 March 2019. The market is very slightly lower than the prior 12-month period. The average purchase of the immediate care annuity is around £150,000.
Lowe adds: “Around one in three retirees is likely to need care at some point in their lives, so planning for this should be part of every adviser’s retirement planning service.
“Providing care-funding advice gives real help and reassurance at an extremely sensitive time; the benefit of this to clients can’t be understated. As more providers enter the care-funding market, this will help increase awareness of the options available and grow the market.”
For Hargreaves Lansdown senior analyst Nathan Long more radical action than that proposed in the ABI’s paper is needed.
“This is not the way you solve the social care crisis. All the initiatives are all just small fry compared to the big picture – that is, you have to find money to solve a massive problem.
“You are giving a handful of solutions that just help wealthy people. This is why the government keeps kicking the can down the road.
“It is going to cost a fortune to fix and it is not popular.”
Radical action is needed to fund social care properly
I believe the government should run the NHS and be in charge of welfare and long-term care. The only true solution is to pay more taxes so changes to National Insurance could make a big difference. The Office of Tax Simplification says National Insurance is out of date and wants to tie it more to the income tax regime.
The sort of things it is saying is why should people stop paying National Insurance when they retire?
It suggests National Insurance could be paid from an individual’s pension. There is also the issue of inheritance tax receipts that are not keeping pace with the amount of money being transferred.
Perhaps a change to the National Insurance tax regime so that older people pay a lower rate alongside higher inheritance tax could be a solution. But there has to be compromise if the government is going to charge people over 65 National Insurance on pensions, and charge more IHT.
Surely it would only be fair to increase the limit – the means-test threshold of £23,250 – as a compromise for what assets they can keep and potentially pass on to the next generation.
Social care is a massive problem and the government has to find the money to pay for it. This cannot be done by having more insurance policies and it has to look at raising more taxes in a fair way.
Neil MacGillivray is head of technical support at James Hay