PensionsAug 20 2018

Experts point to third way of funding care

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Experts point to third way of funding care

The government is publishing its delayed green paper on social care in the autumn, and several solutions are said to be on the table, including a ‘Care Isa’ – a capped savings product, exempt from inheritance tax – and a 'care pension', which mixes drawdown and care insurance.

But specialists told FTAdviser there was an easier and simpler option for the government to consider.

"A much more useful approach would be to change the rules on existing savings plans so that they can be used to fund care bills if and when they arise," said Fiona Tait, technical director at Intelligent Pensions.

She said: "Isa withdrawals are already tax-free under specified circumstances, but the majority of money withdrawn from a pension is subject to income tax."

She added: "Before her tenure as pensions minister, [Baroness] Ros Altman suggested herself that the government could introduce a rule that exempts payments made direct to authorised care providers."

Ms Tait explained if this change was made, saving into a pension would become more worthwhile for consumers, who have the comfort of knowing that if they save enough they will always receive a benefit from their fund - a retirement income if they live long, healthy lives, and pre-funded care, plus potential death benefits for their family, if they do not.

Steven Cameron, pensions director at Aegon, expressed a similar view.

He said: "For many, the most obvious solution is likely to be linked to retirement savings, particularly where individuals have defined contribution pensions.

"Here, under the pension freedoms, individuals at retirement could notionally 'ring-fence' or set aside part of their retirement fund to meet possible future care costs, taking an income from the balance."

The difference between the drawdown-linked care insurance proposed by Royal London and this one is that 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 insurance provider.

Under these proposals, however, any money not used for care costs could be used for other purposes or left in the pension or to a partner or other beneficiary, which is already typically free of inheritance tax liability.

But before considering what solution will be best to solve the UK’s later care problem, Mr Cameron said, the government must clarify "how much an individual will ever need to pay towards their own care costs, so they can plan knowing inheritance aspirations are safe".

He added: "Without this information, and longer term political certainty, it’s difficult to go into detail on specific solutions."

It is estimated a mere 12 per cent of adults aged 55 or over are currently putting aside money to pay for their future care in the UK.

Jon Ostler, chief executive at comparison website finder.com, said the "most realistic solution" to the care funding problem was to accelerate compulsory private pensions that people can't opt out of.

He said: "This has worked well in Australia and while it may cause a degree of trepidation to begin with, we can't keep sleep walking towards a care disaster."

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, which has been delayed until autumn.

Malcolm McLean, senior consultant at Barnett Waddingham, agreed a policy similar to the one proposed by the Dilnot commission should be introduced.

He said: "This would provide for a minimum level of income below which care would be free, and a maximum on charges above a specified level for others required to contribute themselves towards the cost of their own care."

Alistair McQueen, head of savings and retirement at Aviva, told FTAdviser the Dilnot report continued to be the reference point for policy thinking in this area.

He said: "It is now ancient history, yet the debate has not moved on.

"The care ball is in the government’s court. The private sector can help people save for their care needs, but we cannot force people to save."

He added: "The Office for Budget Responsibility has quantified the scale of the challenge. Our ageing population could add more than £20bn every year to the UK’s social care budget in fifty years’ time, in today’s money, if action is not taken today."

Claire Trott, head of pensions strategy at consultancy Technical Connection, is in favour of a "balanced solution".

She said: "The government needs to support those that do save towards their care costs with tax efficient options, or tax breaks for those funding care for other people such as parents.

"In addition, the government needs to ensure that care is fit for purpose and well regulated. Overpriced and poor care leaves people scared and even unwilling to seek help when they need it."

But he added: "I do believe we all have a responsibility for our own lives and so the government can’t be expected to provide for all although it needs to protect those that can’t pay for themselves for whatever reason."

maria.espadinha@ft.com