Is it time for the care pension?
A new report by mutual insurer Royal London is proposing a care pension as a potential solution to the vexed issue of how to pay for long-term care.
The paper, ‘Is it time for the care pension?’, has called on the government to introduce policy changes which would enable the creation of a new at-retirement product which would combine existing income drawdown arrangements with insurance against future care costs.
The paper has been submitted to the Government and is under consideration by the team preparing the proposed Green Paper on social care.
The paper’s author is Steve Webb, Director of Policy at Royal London.
Commenting on his report, Steve said:
More than 1 in 4 of us will spend some time in later life in residential care, and the total bill can easily run into tens of thousands of pounds. In extreme cases, people can be forced to sell their family home to pay for care.
It ought to be possible to take out insurance against this risk, but insurers are reluctant to offer products and consumers have been reluctant to take them up.
A ‘care pension’ could build on the increasingly popular ‘income drawdown’ product by adding in care insurance.
To make this work, the government would need to make sure payments into such policies were tax-free, and would need to introduce an overall cap on lifetime care costs.
With these changes, millions of people could start to build up protection against the risk of facing ‘catastrophic’ care costs in later life.
As things stand, virtually no financial products exist which allow people to plan ahead for future care costs in later life.
The Royal London report has identified a range of factors which deter consumers from buying such products.
These factors include:
- Not wanting to think about a time when they may need to be looked after
- An (incorrect) assumption that ‘the government will pay’ if someone needs care
- The limited supply of specialist financial advice for those wanting to plan for care needs
- A lack of awareness of the likelihood of needing care and the potential cost of care
At the same time, 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’.
According to Royal London, a key barrier for insurers is forecasting potential future care costs, decades into the future, especially given the potential for major medical advances. This risk of insurers is particularly topical to hear today, given the topic of our latest podcast episode.
Care insurance has also often been sold in the past as a freestanding financial product, requiring financial advisers to acquire specialist qualifications, which many may be reluctant to do.
However, here at Informed Choice we have several financial planners who hold the specialist care fees planning qualification CF8, allowing us to provide advice in this specialist area.
The Royal London paper points out that, following the introduction of ‘pension freedoms’ in April 2015, a growing number of people enter retirement with a pot of money from which they draw an income; an arrangement known as ‘income drawdown’.
Royal London suggests 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 make these products more attractive, the paper suggests:
- Favourable tax treatment on money taken out of income drawdown to pay for care insurance; if this money goes directly to an insurer and any payout from the policy goes straight to a care home, these withdrawals should be tax free;
- An overall cap on people’s lifetime care bills, so that insurers are not taking on an open-ended liability and can therefore offer more attractive premium levels;
The paper suggests that this product could be branded as ‘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.
These are interesting proposals and we await the government’s green paper on social care, which is expected to be published in the summer.