The Conservative Party’s recent suggestion of means-testing all elderly care so that pensioners are left with a floor of £100,000, including their family home, has not been well received in all quarters. It replaces David Cameron’s planned £72,000 cap on how much people will pay towards social care and, for the first time, those needing care at home might have to pay for it using equity from their property. If the policy comes into force, the financial services industry will need to come up with some innovative solutions.
As we now have a minority Conservative government, this policy may be dropped or watered down, but as it created such high levels of interest, we need to understand it fully.
The 2017 Conservative Party Manifesto outlines how the costs of caring for older generations are rising and that they are borne by working people via taxes. As the ratio of working people to older generations falls, this situation, according to the manifesto, is becoming unsustainable and unfair. There is a three-part proposed solution to tackle rising social care needs: residential and domiciliary care will be aligned and means-tested; there will be a "single capital floor" set at £100,000, which will take into account the family home as well as other assets and income; and payment for care can be deferred for residential and domiciliary care so people will not have to sell their home in their lifetime.
The social care announcements have got a mixed reception. The proposals would mean wealthier pensioners could incur huge costs, particularly if they had a long-term illness such as dementia or Parkinson’s. Subsequent to the publication of the manifesto, it was announced there would be an as yet unspecified cap on the amount the elderly would have to pay towards their care.
The Conservatives have also promised a Green Paper on the subject.
There are many uncertainties, not least, if the proposals do become policies, what would the industry’s reaction be?
There seem to be two broad approaches that consumers could take in tackling this situation: avoiding it or insuring against it.
Before talking about avoidance it should be noted that if the council that conducts the means-testing thinks people have reduced their assets to avoid paying care fees ("deprivation of assets"), then it might assess the individual as if that person still had the money or property that had been given away.
A £100,000 floor is likely to affect consumer behaviour and might encourage people to seek ways to avoid potentially large losses. For example, as the means-testing currently assesses property value minus any mortgage or loan – and we might assume that it will continue – homeowners might be in less of a hurry to pay off their mortgages. Alternatively, they might choose to downsize earlier than they had previously planned and pass on money. As long as the latter is well ahead of the incurrence of any care costs, it would be unlikely to be viewed as avoidance. However, passing on assets to children ahead of time comes with risks.
There might be an increased use of current financial solutions to support a reduction in assets, such as inheritance tax (IHT) planning and equity release mortgages (ERMs). Traditional IHT planning might be conducted earlier than usual as a result of this policy. This is likely to appeal mostly to the very wealthy. The average house price in the UK is about £210,000 and older people living in a property of this size who are on a low income would be hard hit by this policy. They may be tempted to take out an ERM early to either pass money to their children or to spend the money themselves.
The lower the potential cap on care costs is, the less likely people are to go down an avoidance route. The Treasury would also be likely to seek to quickly close any loop holes that would facilitate avoidance.
An alternative to avoiding care costs is to insure against them. However, if persuading people to save adequately for retirement is difficult, persuading them to insure for care costs is likely to be even harder.
There is a general expectation that the state will pay for care costs in old age and there is also a tendency to underestimate the cost of care and the chance of needing it. The reality is that a 65-year-old woman has an 85 per cent chance of needing some kind of care in her life. The difficulty of this sale is evidenced by the fact that currently there is no mainstream long-term care insurance (LTCI) on the market.
However, if this policy goes ahead there is likely to be an increased awareness and interest in providing for future care costs, particularly with the Green Paper and likely wide media coverage. Existing products might experience an uplift in sales and new products might be developed. The right solution for an individual will depend on personal circumstances and each solution carries its own risks.
Possible future changes
The Immediate Needs Annuity (INA) might become more popular. If this product is taken for the purpose of paying for care and is paid straight to a care home (a registered care provider), the income can be paid tax free, which can make it an attractive option. The payments are also guaranteed for life and can be on an increasing basis to help cover potential rises in care costs. If there are insufficient savings to buy the INA, a product extension could be to release some equity from the home via an ERM to pay for it. One of the main benefits of the INA is that it is not pre-funded so people buying the product know that they definitely have a need for it, which should make the sale more straightforward.
Critical illness insurance (CII) could be evolved to specifically address this policy. For example, if people continue to focus on the policy as a "dementia tax", then CII "lite" could be introduced to just cover dementia. It could also be wrapped in with life cover to produce a life-and-dementia insurance. The level of cover would need to be tight enough to protect the provider and broad enough to cover the customer for all forms of dementia. The advantages of both of these product ideas is that they are very specific and so should be more affordable.
If care needs are domiciliary then ERM could be used to release money to adapt the property (for example, adding a stairlift) or to provide money for care costs.
If people are looking holistically at their cash flows through retirement, with care costs being a potential feature, then deferred annuities might become an option. The costs are lower if they are bought early with a view to paying out when the individual is 80 years old, for example. They could form part of an insurance against care costs.
We could even see a resurrection of LTCI.
Colette Dunn is head of strategy at global actuarial and management consultancy Milliman
Key points
The Conservative Party’s recent suggestion of means testing all elderly care has not been well received in all quarters.
There seem to be two broad approaches to paying for social care: avoiding it or insuring against it.
The immediate needs annuity (INA) might become more popular.