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Mix and mismatch?

Combining pension products with long-term care cover is hardly a revolutionary idea but has gained ground with the revelation that the Institute for Public Policy Research is set to investigate the possibilities.

It has embarked on an 18-month project to look at the many ways in which LTC and pensions can be put together in different packages, according to researcher Will Paxton.

He says: “We are going to look at it on a macro scale and in terms of affordability. There are lots of innovative thoughts on this in the industry at the moment.”

But IFAs are more sceptical about the potential muddying of the waters between pension and LTC provision.

Cassidy Coutts Donald & Partners planning director Margaret Borwick says: “At the moment, a lot of pension funds are not big enough, so how on earth are this generation going to pay for LTC? It is not as simple as it sounds and maybe we should tackle pensions first.”

In contrast, Sedgwick Independent Financial Consultants technical manager Keith Watson is enthusiastic about the possibility of creating a product to cater for all a pensioner&#39s needs. He says: “If the Government could be persuaded to include some LTC insurance in the pension package, it removes the burden from the taxpayer and makes sense all round.”

He suggests the risk premium could be paid alongside pension contributions although this would require a change in legislation, which the Government appears reluctant to sanction, judging by the ban on risk premiums within stakeholder pensions.

But Chase de Vere savings and investment manager Anna Bowes is more circumspect. “While LTC is important, at the same time, having your everyday income and being able to live is vital. It would utilise some of your pension allowance, which means you would have less income in retirement,” she explains.

Borwick says: “In principle, bundling is not a good idea because it tends to be more expensive.”

A major problem with LTC at the moment is that it suffers from moral hazard – the problem of prohibitive cost associated with increased need. Only those people who think they will need LTC currently buy the insurance, so providers&#39 risk is increased. If more people bought LTC insurance, the risk would be reduced from providers&#39 point of view, so premiums would reduce.

Watson says an alternative to insurance is for IFAs to persuade people to pay more into their pension pot. But with a minimum of £350 to £400 a week needed for LTC, there are few pensioners and current workers who can fund to this level comfortably.

So Watson favours the risk policy approach. “I think people would buy it as part pension provision but not as a separate contract,” he says.

Bowes disagrees. She says: “If you get the right advice, you will attack both of them so I do not see there is any benefit in putting them together.”

But adding a risk premium to a pension policy is not the only way to tackle the problem and the IPPR is not the only body considering the options.

The Faculty and Institute of Actuaries&#39 Actuarial Pension Board Working Party chairman Leslie Gray says it is set to produce a report within the next month which looks at overall pension flexibility.

LTC plays a part in its review. He says: “We are considering a way in which the ann-uity fund is not all annuitised so some of the fund is left to pay for LTC.”

Gray says the system exists already in the Republic of Ireland as “set aside”.

But Borwick says the principle is flawed. “For individuals, the availability of benefits may not be large enough at the point of need,” she argues.

Scottish Equitable director of pensions development Stewart Ritchie suggests a flexible annuity which accommodates a change in need once the annuity has been taken out. He says: “When someone is assessed as being in need of long-term care, there is a marker for a decrease in life expectancy. In round figures, it is reduced to three years.”

Taking the example of two 80-year-olds who have identical annuities paying £10,000 a year, Ritchie says: “Say the annuity was one under which, on the diagnosis of long-term care being needed, it doubled for the purpose of paying it.”

He explains that the 80-year-old who does not need long-term care has a longer life expectancy than the one who does and, actuarially, these cancel each other out.

“If someone wants to buy an annuity where the facility is built in, it is not an unreasonable cost because of the actuarial cancelling out,” he says.

Another widely mooted suggestion is to scrap the requirement for pensioners to buy an annuity by the age of 75.

Ritchie says if you are ill enough to need LTC, you are likely to be over 75. “You could do it in drawdown if there was no requirement to buy an annuity by age 75,” he says.

He suggests this could work by scrapping the cut-off date and, say, doubling the upper drawdown limit because of the reduction in life expectancy.

However, Gray is against the abolition of the requirement to purchase an annuity by age 75. He says: “I do not agree with the view that no age is necessary. I think there is an age where you should buy an annuity because people who live to 100 could run out of money.”

Other proposals include earmarking the tax-free cash coming out of pension funds so it could only be used for the provision of LTC.

The industry will not know the results of the IPPR&#39s research until early 2002 but it is clear there is no lack of ideas on how to cater for LTC alongside pensions or any doubt about the Government&#39s wish to reduce the burden of retirement on future generations of taxpayers.


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