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Steve Webb: is it time for the care pension?

Steve Webb, Director of Policy and External Communications

Steve Webb offers a potential solution to the issue of funding long-term care, by asking whether it’s time for the ‘care pension’.

The UK’s long-term care system has been steadily spiralling out of control. Around one in four of us is set to spend more than £20,000 on care in later life according to the report of the Dilnot Commission.

At present there are virtually no financial products that allow people coming up to retirement to plan ahead for future care costs. Where such products have been on offer in the past, many consumers have been put off buying them. Incorrect assumptions that ‘the government will pay for my care’, limited access to specialist financial advice, lack of awareness of potential costs and a reluctance to think about needing to be cared for have all been cited as reasons to not purchase a financial product.

This reluctance works both ways. Insurers have been reluctant to offer such products, except at the ‘door of the care home’ through the sale of so-called ‘immediate needs annuities’.  A key barrier for insurers is forecasting potential future care costs, decades into the future, especially given the potential for major medical advances.  Care insurance has also often been sold in the past as a freestanding financial product, requiring advisers to acquire specialist qualifications, which some may be reluctant to do.

A simpler, more cost effective product for consumers to buy and insurers to provide could offer a resolution to help people cover mounting care costs.

Our latest policy paper points out that, following the introduction of ‘pension freedoms’, a growing number of people go into retirement with a pot of money from which they draw an income through retirement.  We suggest that care insurance could be ‘bolted on’ to these income drawdown arrangements, either in the form of a regular premium or a one-off lump sum.

To help make the product more attractive, we recommend that the government should allow tax-free withdrawals from drawdown accounts to pay for care insurance.  We also believe there needs to be an overall lifetime cap on care costs to make providing these products commercially viable.

From the perspective of an adviser, they would be able to offer clients care insurance as a feature of a drawdown product rather than having to sell a completely separate financial product.

One idea would be to brand this potential product ‘inheritance insurance’, as it could ensure that those who faced large care costs in later life were no longer at risk of having to sell a family home to meet care bills.

To make this work, we need government action. As such, we have submitted the paper to the Government as an idea to feed in to the Green Paper on social care.

With these changes, millions of people could start to build up protection against the risk of facing ‘catastrophic’ care costs in later life.

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Comments

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  1. In the early part of the millennium there were stand-alone insurance products which paid for long-term care but they are no longer available. So for all the exams and learning about long term care, advisers can offer no insured solution which pays for care. The only product available is an Immediate Care Annuity sold at point of needing care. And all this really offers is tax efficiency in return for an inflexible annuity. Better than nothing and very useful in many cases, but hardly a panacea. The only other options open to advisers are to help those needing care and their relatives to work out the most effective way to run off assets and use income to pay for care. Much of the expertise and value added by specialist care advisers is in helping families understand the system and how to try and work out the best way of paying for care, and arriving at a compromise which protects the family inheritance and still provides the care needed. Part of the reason no insured products exist is that too many people would need to claim on them, and the term of the claim could be many years. Perversely the better the care that is funded the more likely that funding is likely to be needed for a longer time. So it is too hard for insurance companies to avoid the risk of non-profitability. Pricing becomes very problematic. Combined with the fact that healthy people always think it is someone else who needs care not them, it means there is no real chance of private provision covering care costs. Hence the choice is a) make people pay for it themselves or b)increase taxes and health care provision and quality so that the taxpayer pays for it or c) a combination of the two. Too many people want to stay rich, but are not prepared to pay higher taxes to ensure that their mums and dads are cared for. Too many people see tax as an evil and so continually argue for a libertarian society where people are free to make their own choices. Fair enough if you feel that way, but in such a free market society which focuses on individual choice, the cost of care will be borne by the individual. I would vote for higher taxes and investment in care provision and quality, but most people want their parents cake and eat it.

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