In June I wrote a Money Marketing article on the subject of long-term care under the heading: “We have the Act, now we wait for the action”. My point was clear if, perhaps, somewhat abrasive.
We now have a Care Act which, while not perfect, is a substantial step forward. We also have a Government which is not only committed to education, but which at every step of the process made it clear that the development of new financial products was an essential element of long-term care provision.
My contention was there was a lack of any appetite amongst providers to act, despite the memorandum of understanding signed by various life companies and the Association of British Insurers. I said: “Parliament has done its bit but financial providers seem reluctant to step into the new care arena”. Or so I thought.
I have long held the view that the reason for disinterest from the financial services industry to develop products for the care market cannot solely be put down to the Government’s inability to “nail its colours to the mast” and outline precisely what financial safeguards it will provide. After all it is difficult, if not impossible, to design products that will fill a gap between what individuals need and what the state will contribute if you do not know the size of this gap.
There remains too the issue of prioritisation and the pressure to make best use of available income or capital for things like short or long-term savings, pension planning, school fees, helping children onto the property ladder, repaying debts and protection needs such as life assurance, critical illness and permanent health insurance. The purchase of some form of long-term care product probably comes a long way down, if not at the bottom of this list for most people. Let us not forget that while in the 1980s pre-paid long-term care policies enjoyed limited favour, it was ultimately a market that failed.
These pressures on income and capital still exist so even though we know what the state will, and most importantly will not provide, the question that remains is, are there possibilities for sustainable products in this market? Well, with a bit of imagination I believe the answer is, absolutely there are. If clients will not purchase a financial product that provides a single benefit, such as meeting care costs, the provider must increase the perceived value no matter how much they are needed. They can achieve this by combining it with another financial product that is readily purchased where there is a natural market fit.
There are three such examples:
- The first has already been launched last quarter
- The second will be launched in Q4 this year
- The third, in all probability, in the second half of 2015
The product already out there combines inheritance tax with long-term care planning. It caters for those clients who would otherwise engage in IHT planning if it were not for their concerns about care costs. A business property relief provider, of some ingenuity, has launched a product which, under BPR rules, will be exempt from IHT but should clients require care, not only will they receive residential, nursing or domiciliary care advice but they will be able to draw monies down penalty-free to meet their care needs.
For those clients who do not have the capital or the realistic opportunity to build up sufficient capital to meet all of their later life needs, even though still in the accumulation phase of their life, a risk-based solution may be the only option. In Q4, we will see the launch of a whole-of-life policy that has pre-pay elements and ultimately the entire sum assured in the event of the life assured having a care need. Thus providing a dual benefit of life assurance and long- term care provision, both valuable in their own right but together, for a relatively marginal increase in contribution, hugely beneficial.
Then of course, we have that other massively unfunded area; pensions. Another natural fit with long-term care. With the re-characterisation of annuities we will see products capable of the annuitisation of funds to provide a retirement income that will enhance the income levels in the event of the annuitant going into care. This is arguably the biggest win of all. Most clients need to put more money into pensions to fund for a better income in retirement in any case. They will now be able to do so, safe in the knowledge that they will be able to purchase an income stream that will not only meet their desired lifestyle in retirement, but should the need arise, meet their care needs as well and get tax relief into the bargain.
I finished my previous article saying: “What we need now are financial products but I am not holding my breath”. So, given my thinly veiled criticism, should I now eat humble pie? No. As for why not, modesty forbids but I will modify my statement. “What we need now is that most important of commodities; competition”.
Tony Mudd is divisional director of tax and technical support at St James’s Place