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Ros Altmann: Good pension not always enough for a good later life

good pensionWith the first baby-boomers now reaching their 70s, what will they need for their future?

Approximately one in four older people (possibly one per couple) will need money in later life to pay for care. Final salary-type pensions or annuities are not designed for that.

The huge baby-boomer demographic means the number of over-85s is set to triple in coming years. Yet our care system is at breaking point even now.

Unlike pensions or healthcare, social care is not provided by the National Insurance system.

It is the responsibility of local authorities, and squeezed council budgets have meant significant cutbacks in the area.

Govt mulls IHT-exempt ‘Care Isa’

The strict means-test forces people to use almost all their assets, including their home, before receiving funding, and this help is further rationed so only those with substantial needs qualify. Unfortunately, most families have no idea the NHS will not look after them or their loved ones if they develop certain illnesses.

The strict means test forces people to use almost all their assets, including their home, before receiving funding and this help is further rationed so only those with substantial needs qualify. Unfortunately, most families have no idea the NHS will not look after them or their loved ones if they develop certain illnesses.

Policymakers have totally failed to plan ahead for care funding. There is no money set aside and almost no private savings products or pre-funded insurance.

Nevertheless, eight million over-60s have £300bn saved in Isas – usually with no specific purpose. Even a small part of this could play a role in helping the crisis.

So, what about making people think about keeping some of that money for care? Introducing Care Isas could help people recognise the need to put money aside and encourage those already in their 60s, who have been responsible enough to save so much in Isas already, to keep funds in case they need care.

At little cost to the Exchequer, a specific amount could even be permitted to pass on free of inheritance tax – perhaps £50,000
or £100,000 per person.

As long as that fund stays earmarked for care for the next generation, no tax would be payable. If it were withdrawn for any other purpose, tax would be payable. Of course, this is only part of any solution to such a huge crisis; a whole range of reforms will be needed.

Ros Altmann: How advisers and politicians can tackle the social care crisis

Other potential measures could include allowing tax-free pension withdrawals or state-backed equity release.

Insurance products might play a role but strict qualifying criteria could mean people need savings to fund care at an earlier stage than
a payout.

The government spends £40bn a year on incentives for people to top up their pensions but nothing to help them plan in advance for care.

Ideally, it should help people to pool risk, with everybody paying in something for a basic level of state care if needed, as is the case with pensions.

That said, any NI care system would be strictly limited, so advisers would still want to encourage clients to have their own private savings to give them the quality of care they choose. Indeed, advisers have an important role in this debate.

Ros Altmann is former pensions minister


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There are 24 comments at the moment, we would love to hear your opinion too.

  1. Ros, I agree with most things you have mentioned in your well thought out article, but please not another ISA, we have cash ISAs, Help to Buy ISAs, innovative finance ISAs, stocks & shares ISAs and Lifetime ISAs.
    We don’t need a sixth one.

    One ISA should fit all, can our Industry stop mudding the waters!

  2. What a lot of nonsense!

    Firstly, care ISAs are a fraud. Almost by definition, those who have an IHT problem will be able to meet the cost of their care. For everyone else they will be conned by a tax incentive on a tax they were never going to pay anyway. Remove that incentive and you have (ta-da!); the ISA.

    There are no pre-funded care products because there is no market for them. Those that can afford the premiums generally can afford the care anyway. All previous products had reviewable rates and anyone recommending an insurance product with reviewable rates is going to be getting very friendly with their PII underwriter very soon.

    The ‘dementia tax’ was the best funding idea yet, but so poorly presented that it got called…the dementia tax. I’m sure it will be re-visited once Brexit is done because it is actually financially viable.

    A ‘Care ISA’ would be a good idea for those that have to sell up to fund care. It is a grave injustice that those trying to eek out their savings have the drag of tax on interest and dividends.

    Ultimately the real problem with the current care system is that when people do run out of money, the state is paying less than the cost of providing the care. That means that most private homes will ask them to leave. That is where the exchequer should be focussing its cash, not on some guff extra tax break that can be exploited by wealthy people.

  3. We certainly need to do something, even though I have read that life expectancy has actually gone, slightly, backwards according to L&G.

    The lack of elderly care is a total disgrace, in this country, but indicative of successive governments own lack of thought and, in this governments case, lack of feelings for those people in dire circumstances. There would be money available if it wasn’t going to the wrong people or just being mishandled.

    This is a wealthy country and I, personally, know of someone that had to work full time as well as looking after her, almost penniless, mother who had vascular dementia in her last few years. The physical and mental toll it took on her was horribly stunning.

  4. Nicholas Pleasure (?) makes some good points but 1. I do not believe he has emphasized the injustice of the current system, whereby cash strapped councils pay a care home one (inadequate) rate and the private funder effectively subsides the shortfall. Totally inequitable. 2. In my opinion he is also correct about the dementia tax. How dare the government say ‘we will decide how much you can leave in your estate’! A ‘total care cost’ limit should be set – even if that figure is say £250k.

    • Hi Chris, I could have made numerous points and yours about the private funders effectively subsidising the local authority is a good one.

      You can’t set a total care cost limit because how do you decide what level of care you are going to cover? Look at the (pointless) previous cap. In my area the amount that the LA would pay for care was set at £507 a week, when most homes want double that. This is why the cap was a farce, it was always set at an unrealistic level.

      You also need the LA to monitor every pound spent on care, and we all know that this type of administration is not an area where most authorities are especially gifted.

  5. In a nutshell, I think we all agree that people need to save more of their income for more of their working lives in order to provide for themselves in later life. This will not happen without a degree of state compulsion.

  6. What on earth is wrong with an ‘ordinary’ ISA? I do agree that pensions are not a magic bullet. For most the tax relief is a Chimera. Pensions are best if the employer contributes.

    However all this talk of long term care misses a very viable option. Provided Brexit doesn’t mess things up it is certainly cheaper to employ your own carer and live at home (suitably modified if necessary)than spend fortunes on outrageously expensive care homes , where you are in effect a captive and possibly open to abuse and maltreatment.

    Care at home opens avenues for tax relief and you (or your power of attorney) are at least in charge and can hire and fire.

    • Ahhh…this myth again…

      If you are employing cheap carers from Eastern Europe, on self-employed contracts, it may look that way. However, when you add on the cost of running the house, heating and eating, you’ll find the total bill will be broadly similar to a good care home.

      Plus you’ll have to be prepared to manage sickness and absence yourself as the agencies can be pretty poor.

      Fully employed live in carers start at around £1100 a week…almost the same as a good care home.

      BTW…care homes that abuse their residents are similar to crooked financial advisers. There are a few around and they make the headlines but the vast majority are rather brilliant at what they do.

      • Sorry Nicholas, I know from first-hand experience – 1 uncle (lived to 100) and one aunt (lived to 103) and one father-in law (lived to 94) All had carers at home and the costs were hugely less than care home fees and they could all stay in their own home. In fact the aunt went into a care home and complained so bitterly that she was back in her own home after 9 months. They were all happier in their familiar surroundings and didn’t have to put up with a cramped single room and be amongst the dribblers.

        In fact the old guy across the road (in his 90’s) is doing likewise.

        (Carers from Far East and Philippines)

    • Harry, good point on the ISA but care at home only works if you are well enough not to need 24/7 care.

      Also there are different types of care homes for different needs (warden, residential and then full nursing). None of which are allowed to lock you in.

  7. What is wrong with an ordinary ISA is IHT, whereas I understand the writer is proposing a limited exemption.

    • For most the purpose is not to leave money, but to use it for their own benefit. If anything is left 60% of something is better than nothing and of course if there is a spouse then IHT doesn’t apply.

  8. Why not continue NI contributions into retirement at a substantially reduced rate,maybe calling it CI. Alongside some of the other ideas proposed, so as to provide an element of choice for your required care needs.

    • I wondered that. As I enter the “geriatric” stage of life (at which no doubt I’m likely to start requiring more of the services for which the tax was originally proposed) I’m puzzled why I will no longer have to pay NI, when my children all pay a substantial figure each month, and have in addition families and mortgages to support.

      Whilst inevitably pleased to pay less tax, I can’t help feeling this is somehow iniquitous.

      I do wonder if NI were chargeable on both earned and pension income how this would compare in relation to the NHS funding hole including care…

      • John Hutton-Attenborough 17th September 2018 at 9:38 am

        There is no such thing as the “Social Care” budget so NI is there to pay for other things. Until this is addressed and the CI suggestion should have legs this will never be resolved!

  9. Central government is awash with money from our endless taxes and NI contributions. Where does the massive 20% vat go,the huge amount of tax on fuel, insurance premium tax,alcohol,tobacco and that’s without income or corporation tax!!
    Pre-funded care plans existed in the early 90’s but providers backed off following regulatory interference. This whole financial debacle is a result of pathetic government by all parties over decades.
    The vast sums of money wasted on ‘red tape factories’is criminal without any real gain. As an example the RDR cost £9 billion!!!
    Too many ‘talking heads’stoking the fire’to keep themselves in the press.
    Government needs to be accountable for wasting our taxes and treating our elderly with contempt!

  10. Fir life expectancy we’re ranked 20th out of 202.

    United Kingdom 20 81.2

    25 countries have a life expectancy of under 60. 176 is Afghanistan. India at 175 has average of 67.47 Syria and Iraq were 129 and 130 respectively at average 69.
    If we don’t sort out the short life expectancy issues, don’t expect increasing life expectancy of the top 25 to be without societal disruption when Russia is 126 with under 70 too……
    Worry about the young, they haven’t had their lives yet, but if the middle aged continue to cock up what the older people cocked up, Europe is stuffed.
    I’d suggest Ros Altman reads “2020 World of War” and gets her priorities adjusted as she’s in the House of Lords.

  11. The bigger issue is that UK citizens are saving at the lowest rate since records began in 1963.3.3% of income was saved in 2016, 1.7% Q1 2017 (ONS)
    For comparison Germans save 16% of income, China 35%

  12. Long term care could be free if as a society we prioritised it. Taxes are deducted at far too small a rate because of a belief that we should keep as much of our own earnings and be responsible for our own needs. This works fine when we are healthy enough to feed clothe and wash ourselves. However there is no way that the majority of people can remain financially secure if they suffer the type of illness which renders them unable to care for themselves. I would prefer to see higher taxes which are earmarked to provide care.

  13. A Care ISA is not the answer, the problem is that not everyone has enough saved to pay for their own care. This is compounded by the complexity of the system of care funding which involves entitlement to free treatment for many but requires navigation of a complex set of rules involving DWP, local authority and NHS, which few families have the resources to explore.
    Matt Hancock needs to come up with a solution to the division of responsibility between Local Government and NHS, simplify the funding criteria and then with a genuine cost cap per person the insurance industry may be able to come up with a product to fill the gap.
    Don’t understand why you say pensions and annuities are not designed to cover this cost, they provide lifetime income and that is what care homes require to be paid to them.

  14. Well done to everyone for putting some great ideas into the pot. The first problem as I see it is that this is not being dealt with by the right govt people. A cap is important but in the meantime we as a nation have to encourage people to put sums aside. An additional tax free lump sum from the pension put could be used to buy an insurance bond specically taylored for this market. THe bond when called on could make payments (at a defined level when taken out) and would be extinguished on death. With only a small propotion of those going into care this should provide a good cushion.

    If this is sold as another tax it wont work so it needs innovation and a bit of tax relief. Perhaps once Brexit is sorted better minds may ddress this problem

  15. It’s all re-arranging the deck chairs on the Titanic if we don’t address inequalities world wide at the same-time. Have a read of “2020 World of War” available on Amazon and all good on-line book stores and then prioritize.

  16. There are a couple of relatively ‘quick fixes’ in my opinion but others will hate my suggestions. 1 – basic 20% taxpayers pay 12% NICs making a total of 32%. 40% & 45% taxpayers pay 2% above the 40% tax band. Why is this not 12%?
    2 – allow a transfer of pension funds (those remaining after PCLS/tax free cash element) to immediate needs annuities without income tax payable.
    I believe the above two approaches would immediately assist the balance of payments and make the whole system more equitable all round.

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