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Govt urged to ringfence pensions to fund long-term care

The Government should introduce a new pension-style savings vehicle to encourage people to save to cover the cost of long-term care, according to the Institute and Faculty of Actuaries.

A report from the IFoA, published today, proposes a new “pension care fund”, a savings pot that would run alongside defined contribution pension schemes.

Pension contributions would continue to be tax-free and if the money is not spent on care it can be passed on free of inheritance tax to fund the care of a spouse or beneficiary.

The Care Bill, which is set to be debated in Parliament today, proposes capping local authority care costs for those over state retirement age at £72,000. The cap is due to come in in April 2016, but will not cover daily living costs or accommodation costs which are more than local authorities would usually pay, known as top-up fees.

IFoA’s report estimates one in 12 men and one in six women aged 85 today will reach the cap. It says on average people can expect to have spent around £140,000 before they reach the cap and that if they are in care for a decade the cost could rise to £250,000.

One of the report’s authors Thomas Kenny, also Partnership head of technical pricing, says with the average income in retired households in 2011/12 at less than £19,000 many will not be able to afford to cover the cost of care with their income alone.

He says: “Anyone who is expecting the cap will pay for care is in for a shock. The cap is there to protect against catastrophic care costs and we estimate few people entering care aged 85 will reach it.”

It is hoped the cap will make it easier for insurers to design long-term care products. But in February care minister Norman Lamb said insurers had told Government there needs to be regulatory changes before they would look to launch new products.

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Comments

There are 13 comments at the moment, we would love to hear your opinion too.

  1. Oh dear, oh dear! Talk about living in a bubble!

  2. senseof fairness 12th May 2014 at 9:06 am

    There was a time when we paid our taxes and people were looked after properly. Now, this Government allows the powerful to aggressively avoid tax, cuts tax for business (in last year’s budget for example) and dumps “responsibility” back on individual luck whether you get alzheimer’s, osteoporosis, diabetes, cancer or just happen to avoid these diseases. Take your chances, folks, the system is broken and the Tories have financial interests in ensuring it is not mended.

  3. Hmm. Sounds like a pretty good IHT planning vehicle. Instead of once again making pensions unattractive or a target of class warriors why not incentivise the use of insurance? Pension term or relevant life based prefunded policies sound like a start.

  4. I suppose the key driver is because when the welfare state was introduced there wasn’t the costly technololgy (with regard to medical care) nor logevity (with regard to pensions and long term care) we see now and the cost of adequately providing for those (and having a contingency) is clearly alienating the tax paying community.

    The country continues to amass debt and something needs to give. The policy makers are in a no win situation – everyone is encouraged to complain about everything, they expect the very best but wish to pay the least to achieve that.

    Transferrance of risk away from the tax payer to the individual lets people make their own choices. Furthermore, the uplifted BSP will result in the majority being above the means tested limit – which should encourage saving as saving should now clearly pay.

    I realise this all sounds very right wing but I feel that the policy makers have to contend with a situation and make decisions based on the views of their advisers. I’m not saying it’s right, I’m just saying that this is how I see it.

  5. Gemma Forthright 12th May 2014 at 9:53 am

    Is it true that asset protection trusts work in this regard?

  6. In 2010 the average pension “FUND” used to buy an annuity was just £25,874. Before the government talk about ring fencing pensions for care they need to be aware that most funds could not even provide sufficient funds to buy a car. Of course this does not apply the gilt edged unfunded superannuation pensions enjoyed by the public sector. The truth is domestic residential property remains the “only” method of funding care fees.

  7. @senseof fairness | 12 May 2014 9:06 am

    Sorry higher rates of tax do not produce higher rates of revenue. The lesson of history is that if you want to raise more revenue from the rich you need lower tax rates. The 50p top rate of tax has not raised any money. HM Revenue and Customs (HMRC) published a review this year which examined the effect of the 50p additional rate of tax, and found that the underlying yield from the additional rate is much lower than originally forecast (yielding around £1 billion or less). You may remember the Wilson government, the brain drain and the devastating impact of a higher rate of tax at 98%.

    If you do anything to help the aged then look at the 34 per cent of Britons who work for the state all on unfunded, unsustainable pension benefits and all funded out of taxation!

  8. @simonmansell

    You don’t need to lower tax rates to raise more revenue. All you need to do is make sure you collect the amount individuals and corporations should rightly be paying. If everyone paid the correct amount of tax, the basic rate could be lower, and we’d all benefit.

    It’s ok for politcians to ‘talk to talk’ on this, they just need to let HMRC ‘walk the walk’,, rather than cutting frontline staff.

  9. I think if you want to stand for Parliament of local Government you should have to start how much tax you have paid in each of teh 5 previous tax years in a band. less than £5k, less than £20k, less than £50k, less than £150K, less than and so on. That way if the person wanted to get voted for and they stated they were paying NO UK Tax, whilst driving a Ferrari, I think they might not get elected….. If they said they were paying NO tax, but had a push bike, they might get elected.

    Other than that, I pretty much agree with Paul stocks and Simon Mansell. Higher tax rates DON’T raise more tax, but paying a “fair rate” is essential to society, but what is “fair” varies from individual to individual and if yoru tax wasn’t private……. you could decide whether the person was gaming the system.

  10. goodness gracious 12th May 2014 at 12:57 pm

    So the Institute of Actuaries have written a report have they? Naturally this august body are experts in both the practical methods of providing a fund as well as their on the ground research to find out what people want.
    What they want is for their elderly relatives to be able to live free in a nursing home so their assets can be passed on to them upon auntie’s or mum’s death. Which means everyone else who pays tax pays for the care.
    LTC in a nursing home is often fairly short term, typically less than two years. Where issues come about is where someone, not necessarily that elderly, has a healthy body but a mind that sadly does not function well or at all. So there will be a cap on costs to the relatives of about £140,000.
    Where the statistics are a bit misleading are IFoA’s report estimates one in 12 men and one in six women aged 85 today will reach the cap. This really means that 11 out of 12, 85 year old men who are in long term care will not live long enough to get near the cap.
    How many people go into a nursing home out of the general 85 year old population? One in 8 maybe, I don’t know, but if it is somewhere near this number then you can see that if there are 250,000 men reaching 85 each year then there will be about 2500 men and 5000 women that will be effected by the cap. However, some of these 85 year olds will have insufficient funds to self fund anyway so the local authority pays. How much of an issue is it? Perhaps the product is a protection product, sold to the relatives that pays if the length of term in a self funded home exceeds a predetermined cost up to the full implementation of the cap. Mind you, difficult to sell, limited demand and hard to get to clients.

  11. Ah but with the new private pension regs if you have a capital sum and could draw it out, the capital is exposed to LTC charges

  12. goodness gracious 13th May 2014 at 10:40 am

    John.
    If the pension is taken in the form of an annuity it is also exposed to LTC assessment. A local authority can force someone with a pension to take it if it means the LAs contribution will fall. If the owner of the pension refuses they can reduce the sum the LA pays. So no change there then.

  13. Goodness Gracious. Thank you for your comment. What to do then to protect oneself? How about a double life insurance bond wrapped up in a discretionary trust? How long before the disorder is diagnosable would it be reasonable to set up the trust?

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