DrawdownAug 17 2018

Govt considers drawdown-linked care insurance

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Govt considers drawdown-linked care insurance

Royal London’s proposal for the creation of a care pension, which could help solve the long-term care funding problem, is being considered by the government, the firm has said.

Sir Steve Webb, director of policy at the mutual insurer, told FTAdviser he had a meeting at the Department of Health and Social Care to discuss the new financial product, which mixes drawdown and care insurance.

He said "it is one of the solutions on the table" for the government.

However, the list of options isn’t long, he added, as there is no political will to raise taxes or other measures to fund care costs.

The Department of Health and Social Care has been approached for comment.

Back in December, the government confirmed the proposed £72,500 cap on social care would be scrapped.

Prime minister Theresa May’s predecessor, David Cameron, had promised to bring in an upper limit on the amount people must pay towards their own care, following recommendations of the Dilnot commission in 2011.

But Mrs May's government said a green paper on long-term reform would be published this summer instead.

Jeremy Hunt, secretary of state for Health and Social Care, then said in June the document won’t be published until the autumn.

Matt Hancock is now in charge of delivering this paper, as he has replaced Mr Hunt, who was appointed foreign secretary in June.

Royal London’s solution would have a structure "where the policy holder commits to pay a regular insurance premium directly from the drawdown account to the product provider".

In return for this, the product provider would guarantee to pay a certain amount into a 'care account' in the event that an individual had care needs above a certain threshold.

Money from this care account could be used to pay for approved care costs in line with the wishes of the policyholder, Royal London stated.

The provider is also calling on the government to give favourable tax treatment on money taken out of income drawdown to pay for care insurance.

At present, money taken out of pension savings is generally taxable apart from a 25 per cent tax-free lump sum.

Under Royal London's proposal, the money would leave the drawdown account but go directly to the insurer and so would not be taxed.

Money paid into the care account, and then used to pay care providers, would similarly not be taxed.

The government has also been asked to introduce 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.

Baroness Ros Altmann, former pension minister, who has been one of the most active voices calling for an urgent solution for care costs, said: "A range of solutions is needed and there is no one silver bullet.

"Allowing tax-free pension withdrawals, if spent on care, would be a sensible new incentive to encourage allocation of a portion of people’s pensions to fund later life care.

"But it is not clear how an insurance product would work for drawdown. Care insurance has been tried many times, but has not proved a success."

She explained: "Either it has been problematic for the customer – who finds they don’t get paid out as they’d expected – or it has been problematic for the insurer – who finds they make losses as future costs spiral beyond expectations."

According to Nathan Long, senior pension analyst at Hargreaves Lansdown, "the answer to the care problem is not going to be found by allowing pensions to be more efficiently raided to pay care costs".

He said: "Most retirees are battling with making sure their pension lasts as long as they do, long term care funding just isn’t a consideration for them.

"Tax efficient access to pensions could form part of a solution to the long term care problem, but they’d be putting the cart before the horse to make any short term changes before a grand plan was devised."

maria.espadinha@ft.com