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Should pensions be used to fund long-term care?

The Institute and Faculty of Actuaries has called for a new pension-style savings vehicle to encourage people to save more to cover the cost of long-term care,  but experts remain unconvinced the idea will work.

Published last week, the report proposes a new “pension care fund”, a savings pot that would run alongside defined contribution pension schemes. Contributions would be tax-free, as with other pension savings, 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 Act received Royal Assent last week and it proposes capping local authority care costs for those over state retirement age at £72,000 though anyone with assets of more than £118,000 will have to self-fund their care.

The care cost cap will not cover daily living costs or so-called “top-up fees”, the cost of staying in care homes above what local authorities would typically pay.

The IFoA’s report says one in 12 men and one in six women going into care now aged 85 will reach the cap. It says on average people can expect to spend a total of 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, who is also head of technical pricing at Partnership, says: “Anyone expecting the cap to 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.”

Last year, thinktank the International Longevity Centre suggested personal care savings bonds as a way of encouraging saving to fund long-term care. A cross between premium bonds and national saving certificates, each bond would be entered into regular prize draws with winners able to take the winnings or add them to their fund.

ILC director Nick Kirwan says ideas similar to the pension care fund have also been proposed in the past but have not been taken up because they forced decisions about long-term care on people too early.

Kirwan says: “The point at which people start paying into a pension is too early for to decide how to divide your money between their pension and care. If it encourages more saving that is good but people would not be able to get the money out of that pot if they needed it for something else.”

Strategic Society Centre director James Lloyd says the inheritance tax shelter offered by the IFoA proposal would probably not be enough to encourage more saving.

He says: “We already have a problem with undersaving in pensions and so the chance people will save more, even with an additional tax incentive is remote. Better just to try and get people saving more into their pensions. If people are worried about inheritance tax they would probably just hand the money down ahead of the seven-year IHT threshold.”

Partnership corporate affairs director Jim Boyd says politicians have a responsibility, particularly in the run-up to election, to explain the system properly. He says: “If people think it is a total cap and find out it is not later on, it will mean a loss of trust and confusion. What is more, people will be less likely to engage with the long-term care process in the future.”

New products

Lloyd says it is very unlikely new products will emerge. Despite the existence of equity release products and disability linked annuities which can be used to pay for care with payouts rising if long-term care costs arise, Lloyd says immediate needs annuities which cover care costs in exchange for a lump sum will be the “only financial product relevant to social care”.

He says: “A few people think disability linked annuities will grow but if as a result of the Budget changes people are not buying annuities they will not be buying DLAs. And even if people want them with average the average pension pot somewhere around £20,000 the premiums are too high to make them relevant.”

“In terms of pre-funded products, insurers will not be able to judge when the people will start claiming care costs against the cap or when they will reach it. No insurer is working on any new products.”

Society of Later Life Advisers director Jane Finnerty says more products might not be necessary. She says: “We have a good stable of products which if advised on properly could do the job. But in future there will be less of a focus on products and instead it is about organising people’s assets in the best way they can. If they buy a product as a result of that then all well and good.”

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Comments

There are 5 comments at the moment, we would love to hear your opinion too.

  1. Julian Stevens 19th May 2014 at 5:41 pm

    Why is nobody talking about a nice simple and easy to understand solution such as insurance plans with the incentive of tax relief on the premiums? Take out one of those before you hit the big bad 6-0 to cover any anticipated shortfall between income and care costs and one would hope the premiums shouldn’t be too steep.

    The premiums might still be a bit much for many elderly folk but, if the next generation was faced with a choice between paying a few tens of pounds per month and risking their inheritance being decimated by care costs, they might well be willing to give serious consideration to an insurance plan.

    The trouble is, of course, there’s always a sibling or two who are adamant that they can’t afford their share. I still think insurance is the best way forward though. Aviva tried hard a few years ago to get the idea off the ground but people either didn’t want to think about the subject or they wanted to insure their granny who was only weeks away from having to go into care at the time the application was being submitted. Aviva should have stood firm and declared a ban on any applicants already retired. Still, what do I know?

  2. David Stoddart 19th May 2014 at 9:42 pm

    Care fees – lots of people want to avoid paying them altogether. The only way to get people to be willing to pay for them is to have totally different levels of care i.e. if you don’t pay you get very basic care and if you pay you get a better level of care. There are too many care homes that will give the same level of care and charge the person paying for it more than the care home receives from the local authority.

    Alternatively you make those who cannot afford to pay for care have to stay in a care home which is not in their locality. Then their families will have to decide if it is worth travelling for them to hide their parents wealth from paying care fees. Those who genuinely cannot afford care, then their families could be means tested in some way to provide them with money to pay to travel to visit their relative in care.

  3. Yes, you make some good points Julian Stevens. but what if the individual retires abroad ?
    If this is a government scheme then they could impose a similar policy to the frozen pension policy currently affecting about 560,000 ex-pat pensioners who get no indexing due to their country of residence.
    Regrettably the politicians cannot be trusted to be fair and honest with respect to the state pension so what hope does a future pensioner have in not being cheated out of his rightful and expected help ?
    I have referred here to the current pensioners but the new Pensions Bill has clause 20 included which will continue this same discriminative pension indexing theft for any pensioner choosing to retire in the wrong country.

  4. @Julian

    Lots of people are but the powers that be presumably for the moment see it as too expensive to offer. Personally I would say that care home fees are tax deductible if paid for from a DC pension fund. In my opinion it will encourage the continued contributions to a pension especially as talk is now of tax relief extending beyond 75.

  5. Long-Term Care is not a level playing field in the UK… There should be a minimum standard of care that everyone should pay for… why do those living in Scotland and certain parts of Wales get it for free?

    On the cost, if we’d had compulsory pensions for the last 20-25 years most peoples pension income would probably be sufficient to meet the costs of care when they get to retirement.

    Then of course there is the controversial side… many clients that I speak to about the cost of care, wouldn’t want to be in a home if they can’t walk, talk, feed, wash, go to the toilet themselves and can’t remember who, what or where they are while their estate gets robbed of its wealth.

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