PensionsMay 3 2017

Election campaign should focus on the social care crisis

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Election campaign should focus on the social care crisis

Free hand

If Mrs May does win the predicted landslide, she will have pretty much a free hand to press ahead with a new domestic agenda. Clearly, with very large fiscal and trade deficits, there will be an ongoing need to control public spending, but if the PM really wants to help "ordinary working families" who have felt abandoned by traditional policies, she could well make major changes to areas such as pensions.

I certainly hope that the Brexit agenda does not distract the government from continuing with reforms that will improve pension outcomes for more people. For example, last year, the government ducked the difficult decisions on pension saving incentives. Having consulted on radical reforms, the chancellor chose to leave the system intact. He believed he could not count on enough Tory support for abolition of higher rate relief while MPs were in a rebellious mood prior to the referendum. He thankfully backed away from turning pensions into Isas for younger people, which would have derailed auto-enrolment and been unworkable for many pension providers. But tax relief reform remains unfinished business. 

The present system is unsustainable for the long term. Moving to a flat-rate upfront top-up for everyone, more generous than basic rate tax relief and easier to understand, would give ordinary working families better pensions in future. Perhaps this could be a 30 per cent government bonus on each contribution, explicitly itemised, with a lower annual allowance to control costs. This could also pave the way to abolish the illogical and damaging lifetime allowance, which penalises good investment performance, encourages GPs to retire early just to avoid exceeding the LTA and makes it almost impossible to plan pensions properly. With a strong majority, the government could push through long overdue reform of pension incentives.

Such reforms would ensure all low earners obtain the government incentives they are due, overcoming the injustice that currently imposes a 25 per cent penalty charge on the lowest earners’ pensions if their employers use a net pay scheme instead of relief at source.

Remodelling

The way would then be clear to remodel the so-called Lifetime Isa. Mixing saving for a house deposit (usually best in cash for a shorter time horizon) with investing for retirement (usually best in long-term assets for a 20-30 year timescale) will leave many younger people worse off. A clear separation between pensions, with a more generous government bonus than basic rate relief, and other types of saving, would avoid the muddled messages and potential mis-selling risks of Lifetime Isas.

I hope the next government will take the auto-enrolment review seriously. It is important to improve pension outcomes for women and lower earners, as well as encouraging auto-escalation so that contribution levels do not stay stuck at the minimum level. Women need the behavioural benefits of auto-enrolment, but currently can be excluded if they have part-time jobs that pay below £10,000 a year. 

One of the biggest failures of domestic public policy is the social care crisis after David Cameron disappointingly kicked this into the long grass. An ageing population will inevitably need extra resources to care for increasing numbers of frail elderly citizens. This has been obvious for years, yet despite inquiries, reviews and royal commissions, there is still no pre-funding for care at either public or private sector level. 

Leaving care to cash-strapped councils has caused chaos for the NHS as cutbacks mean fewer people getting the care they need and more emergency admissions or bed-blocking. But even worse than this, because councils do not cover the actual costs of providing decent care, those who pay privately are charged extra to subsidise those paid for by the state. The means-test for social care is brutal – anyone with more than about £23,250 of savings or other assets (including their home if they need residential care and have no partner) must pay all their care costs themselves. Compounding the unfairness, those who are judged to have a health need, rather than care need, will be looked after by taxpayers. This also means most people assume the NHS will look after them or their loved ones, so nobody prepares for this in advance. 

This is partly because there are no incentives to do so. Indeed, the care means-test is a clear disincentive to save. Radical reforms could see the government cap the maximum costs individuals have to pay for their care (as Dilnot suggested) coupled with the introduction of new incentives to encourage private savings or insurance up to this maximum amount. At the moment, all retirement savings incentives revolve around pensions, with no separate allowances for social care.

Having money for later-life care is an essential part of 21st century retirement planning, but was never envisaged when our National Insurance system started in the 1940s. So, integrating health and social care into National Insurance or NHS care cover is essential, but encouragement to save privately to supplement any basic support that the state can provide will also be important. 

Later-life care

However, many babyboomers and existing pensioners have pensions and Isa savings, which could help them fund later-life care. Giving them an incentive to keep that money for their 80s (rather than spending it too soon) could be a sensible strategy to boost future care funding. Introducing a cap (the Dilnot cap would have been about £70,000) on maximum care spending beyond which the state picks up the cost could be combined with a new special care Isa allowance. This could allow up to £70,000 per person, which could be passed on free of inheritance tax. The government could also allow people to withdraw money from their pensions tax-free if spent on care, to ensure more private care funding.

Other areas of pension policy that are likely to come under scrutiny include the state pension triple lock. I believe the government is considering abolishing the commitment to the arbitrary 2.5 per cent minimum guarantee, but is fearful of losing pensioner votes. Nevertheless, given the illogicality of the policy and the upward pressure it puts on state pension age for younger people, as well as the growing intergenerational resentment when working age benefits are being cut, I would not expect the triple lock to last. A double-lock that protects against either earnings or price inflation, while also properly protecting Pension Credit for the poorest pensioners, would be fairer and more sensible.

Obviously we must wait to see the party manifestos, but I do believe more pension reforms are likely in the next couple of years. Encouraging more saving and long-term investment, reforming and simplifying the tax system, improving master trust protection, raising governance standards, while also increasing the availability of advice and guidance are other important reforms we need to see. Despite the complexities of Brexit, I do hope the government will give these issues the attention they deserve.

Baroness Ros Altmann CBE is a former pensions minister

Key points

If Theresa May does win the predicted landslide, she will have pretty much a free hand to press ahead with a new domestic agenda.

Moving to a flat-rate upfront top-up for everyone would give "ordinary working families" better pensions in future.

One of the biggest failures of domestic public policy is the social care crisis.