The Government#'s reaction to the Royal Commission on long-term care report does not offer a magic wand removing the need for people to plan for it. The search continues for cost-effective practical methods to make contingency provision.
In the past, the possible use of pension assets to fund long-term care has been dismissed on the grounds that most people can#'t afford to divert savings from mainstream retirement pension. Also, most employers and their pension scheme managers are not keen to embrace the added complication of long-term care.
These are valid objections, but they do not apply in every case. There are ways of minimising their impact. Key statistics relating to long-term care are:
roughly one in four people will need long-term care towards the end of their lives the onset of this need is accompanied by a reduction in life expectancy to around four years most recipients of long-term care are over 80.
Bearing in mind these statistics, attempts have been made to offer enhanced annuity products under which the annuity payment goes up substantially upon an objective definition of long-term care need being met. This is not as expensive as it might at first seem, because of the offsetting effect of the reduced expectation of life after long-term care begins, and because only a quarter of pensioners are likely to claim it.
I am indebted to GE Frankona Re for supplying sample figures and historical information on this. Assume that you are in normal health and buy a level single life compulsory purchase annuity at retirement, where the annuity doubles if long-term care is subsequently needed. A comparison per £100,000 purchase price is shown in table 1.
Cannon Lincoln got Inland Revenue approval in March 1991 to sell a product of this nature, but the Inland Revenue abruptly removed that approval in March 1993. GE Life currently markets a variant of this concept which diverts a proportion of each conventional annuity payment to long-term care insurance.
Assume that instead of buying an annuity, someone goes into drawdown which, unlike today, can extend beyond age 75. During drawdown at an advanced age, the need for long-term care is diagnosed. The level single life annuity which could then be purchased per £100,000, compared to a person in normal health, might be as shown in table 2.
These tables represent a simplification of the true position because they ignore complications such as joint life annuities and the effect of mortality selection on the annuity rates for people not buying long-term care cover.
However, the sample figures in these two tables suggest to me that there is a significant potential for interaction between pensions and long-term care if the Government were to create the flexibility which would allow it to happen.
I have therefore three specific suggestions to make to Government:
1. Give Inland Revenue approval to the Cannon Lincoln concept.
2. Remove the age 75 cut-off for income drawdown (which I already favour for non long-term care reasons).
3. Increase maximum contribution limits by 10%, with the proviso that this extra can be used only for buying long-term care cover.
In the absence of a blanket solution to the problem of long-term care, these changes would at least not discourage employers and individuals from funding a solution for themselves.