We millennials are a foolhardy bunch. We live for today, without a thought about what will happen when we are old. Or so we are told.
But behind our brunchtime bravado we are pretty terrified of the time when we will need looking after. Specifically, how we will pay for it.
Social care funding is a pressing crisis. Younger generations simply won’t have the housing, savings or state pension wealth to fall back on should they need support.
The statistics in the ABI’s recent report on social care make for depressing reading, but there is hope among some of its recommendations. Most importantly, it lends weight to the argument that pension tax relief needs an overhaul.
The five proposals in the paper are: releasing equity from a property to purchase an insurance product that covers care costs; pledging equity from a property to cover care costs; introducing a new Care Isa with no inheritance tax paid on residual amounts at death; no income tax payable on pension income used to pay for care; and tax-free pension withdrawals if used to purchase an insurance product that covers care costs.
For the average client of a financial adviser, equity release tends to be viewed with scepticism, particularly if the client needs care for a significant number of years. The burden on future generations becomes great, and most parents would balk at the idea of their house being taken off their children because they needed to pay back the equity release bills. This does not provide the security and peace of mind elderly, infirm individuals desperately need.
I think the only way this wouldn’t happen is if a spell in a social care home rapidly improved one’s health, but this would be only in a minority of cases so we should focus on the pension options.
Auto-enrolment, not housing wealth, will be what drives available assets to fund our future care needs
We already have systems in place to facilitate tax-free withdrawals for certain uses, such as the pensions advice allowance. Your kids don’t risk having your house taken away, and you don’t get the pot dispersion that would come with setting up yet another branch of the Isa brand.
Having no income tax payable on care-funding pension income may look like another break for wealthy pensioners, but at least it ensures smaller-pot retirees aren’t penalised just when they most need the funds. The government would forgo pension tax revenue, yes, but it would also reduce necessary spending on other benefits such as housing and healthcare by having a care system individuals had more cash to fund.
Auto-enrolment, not housing wealth, will be what drives available assets to fund our future care needs. The government should allow us to take advantage of that, and remove the burden from the state to boot.
Justin Cash is editor of Money Marketing
Follow him on Twitter @Justin_Cash_1