Steve Webb: Time for action on care funding

Planning for later life should include consideration of potential care costs as well as pensions, taxation and inheritance

Advising people about their later-life options is getting more complicated by the day. A world before pension freedoms, a world where equity release was very much a niche product, and one where few people were unlikely to face substantial care costs was a much simpler world in which to advise.

But today it is hard to think about people’s quality of later life without considering housing wealth and potential care costs, as well as more traditional issues such as pensions, taxation and inheritance.

One thing that would make life easier for advisers would be greater regulatory clarity and stability. In simple terms, if advisers and clients knew what the state would (and would not) provide in retirement, then it would be possible to plan accordingly. But all too often the rules change or – as in the case of provision for long-term care costs – politicians seem unable to reach a decision.

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The news that the social care green paper has been put off until the autumn is further evidence that the government is struggling to decide how best to tackle the crisis in care funding. Indeed, it is tempting to think that it is called a green paper because that is the colour of long grass.

So, what needs to happen to put in place a rational system for funding social care, and what would this imply for the products that might be available to advisers to discuss with their clients?

There are two main models of funding for social care, each with various sub-options. Either we save more to fund our own future care costs, perhaps with incentives and encouragement from the government, or we pool our risk of facing high care costs with others, either through social insurance or private insurance.

In my view, the idea that we should all save towards our potential future care costs seems fundamentally flawed. The big issue with care costs is that they are unknown and probably unknowable. Some of us will simply drop dead suddenly and never spend a penny in social care costs. Others will develop a chronic condition which means that we need long-term, ongoing care, running up many tens of thousands of pounds in care costs.

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It is very hard to think of a savings product or strategy that addresses this huge variation in potential outcomes. Calls for a ‘care Isa’ are, in my view, fundamentally misguided for this reason.

When faced with huge uncertainty like this, the obvious response is to pool risk. For example, we do not all plan to save enough individually so that we could replace our car if it was written off in an accident. Instead, we pay a more modest sum each month and pool our risk with others so that the unlucky ones get the payout. The same principle should apply to care costs.

Clearly, some people will never be able to afford care insurance premiums and so there will always be an element of state insurance for those with little or nothing in the way of assets. But it seems to me politically unlikely that the government would be willing to raise taxes to the level that everyone could have free social care, especially against the backdrop of an ageing population.

On this basis, we clearly need to overcome the barriers to more individuals taking out their own care insurance so that more of us benefit from the ability to pool our risk of facing ‘catastrophic’ end of life care costs.

In a paper published earlier this year – ‘Is it time for the care pension?’ – I argued that it is going to be a challenge to get people to think about their own care needs
in later life. But what you can get them to think about is whether they want their children to inherit the value of their family home. Rather than market ‘care insurance’, we should market ‘inheritance insurance’, so that people can
pass on the value of the family home (largely) untouched in the event that they face high care costs.

Steve Webb: is it time for the care pension?

To encourage providers to enter such a market, and consumers to buy such products, we need action by the government. This should include tax breaks on premiums into care/inheritance insurance products and a government cap on the lifetime care bills that people can face. This would encourage providers to come up with innovative products such as a ‘care pension’, where care insurance was an integrated part of a traditional drawdown account.

After 20 years of Royal Commissions and expert reports it is time for action on care funding. Advisers and providers can be part of the solution, but it needs the government to decide on the care fund it.

Steve Webb is director of policy at Royal London  



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There are 3 comments at the moment, we would love to hear your opinion too.

  1. Are we going full circle?
    We had care insurance plans in the past – I seem to recall LTC products that were based on insurance and some that were investment-based, in particular PEP-based.
    Steve is right to highlight this but he also gives the main arguement against it – we don’t know if/when nor how much or for how long.

    It seems to me this would need a multi-pronged approach including an insurance-based product, possibly as a ‘bolt-on’ to a whole-of-life/PMI insurance, property-related arrangements such as equity release and investment-based ‘care-pension’. Having those options will allow those who own property to have options as well as those who don’t. It also allows those people who may be unable to take out insurance due to medical history to do something about it.
    This could result in something akin to the 401K plans in the US.
    One feature that should be built in (but how to police it?) would be to allow for some kind of release of funds to assist when the planholder is being cared for at home or within their own family environment. We are seeing a gradual return to multi-generational households with three or more generations in one building, albeit sometimes with a ‘granny-flat’.

  2. “For example, we do not all plan to save enough individually so that we could replace our car if it was written off in an accident. Instead, we pay a more modest sum each month and pool our risk with others so that the unlucky ones get the payout.”
    A compelling analogy, but the vehicle is a relatively standard structure and a driver weighing in at 25 stones can be as proficient as any healthy person. On the other hand, more pooling and cross-subsidisation could lead to an abnegation of personal responsibility in the the knowledge that someone else is going to pick up the tab anyway.
    Failure to plan or lacking the discipline to save is not just a matter of being “unlucky”. The unlucky ones are in fact those who are responsible enough to plan ahead and then find they may indirectly be paying twice.

  3. My father regularly regaled me with tales about that element of the population which spent everything and then relied on the State and the savers to bale them out.I remember that pre WW2 the New Zealand Government introduced a Postage stamp surcharge imprinted on every stamp to help finance health costs.
    As postage “hits” have declined through email and the advent of personal computers such as desk tops,tablets and smart phones which seem to be universally used I strongly suggest a “communication” tax shared between users and or provider companies such as Vodaphone Apple microsoft BT Virgin etc to spread the load.
    Perhaps the Treasury could clothe that idea with some figures ;we must have real information to make judgements

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