The Institute and Faculty of Actuaries is proposing the government should allow some financial products to be exempt from social care means testing, claiming the current system disincentivises savings.
In its second paper of the social care policy briefing series, the professional body stated people would be more likely to save if there was a social care category of products that allowed them to save money without it being included in the means test.
At the moment people who have capital of less than £14,250 are eligible for funding from the council to pay for their care.
For those with capital of between £14,250 and £23,250 the council will pay for some of their care, with the individual expected to pay £1 per week for every £250 of savings or eligible assets.
However, according to the IFoA, individuals with between £20,000 and £40,000 in capital who save an additional £10,000, can expect to see their personal care costs increase by between £8,000 and £10,000.
This means they will lose means tested support worth up to the entire value of their extra savings, and at least 80p for every extra £1 saved by the time they have been in care for three years (the average length of stay in residential care), the professional body stated.
Allowing new savings products to be exempt from the means test would solve this issue, and it would "also raise awareness among the public of how care is funded," the IFoA stated.
Nevertheless, the actuaries said that a limit should be placed on the amount that can be set aside in these products, in order to prevent them being used as a "mechanism for deliberately subverting the means testing rules".
The cost of introducing such a policy could be met by removing existing loopholes for investment bonds and life assurance products in the financial assessment, as these products can allow a person to qualify for financial help while having significant assets saved, the professional body stated.
These exemptions could lead to wealthier individuals qualifying for financial help under the means test, even when they have significant assets saved in insurance and savings products that could be used to pay for care, the IFoA stated.
It added: "New exempt products could fund care needs more fairly than the current rules allow."
The IFoA has also urged the government to implement the second phase of the Care Act 2014, which determined that from April 2020, the current means testing limits would rise to £17,000 and £27,000 - or £118,000 if a person’s property is included as part of their assets because they require care at home.
The government, which is working on a green paper on social care, has already said the future model of social care won’t be solely funded by taxpayers.
It is estimated just 12 per cent of adults aged 55 or over are currently putting aside money to pay for social care later in life.
Former prime minister David Cameron had promised to implement a cap on the cost of care of £72,500, which was supposed to come into effect in April 2016.
But in 2015 the government pushed this back to 2020, because it would have added £6bn to public sector spending at a "time of consolidation".
In December the government confirmed the proposed cap would be scrapped while a green paper on long-term reform was put together.
The publication of this paper was originally expected in the summer but has since been pushed back to the autumn, and the government has since hinted the publication could be delayed further due to "unforeseen circumstances".
Several solutions for the care funding problem are said to be on the table, including the ‘Care Isa’ – a capped savings product, exempt from inheritance tax – and a 'care pension', which mixes drawdown and care insurance.
Steven Cameron, pensions director at Aegon, said the IFoA was right to highlight the current disincentives to save towards the cost of care.
He said: "As part of the long overdue green paper on social care funding, the government needs to set out a new deal on what it will pay and what individuals will be expected to pay, based on their wealth. Individuals should be positively incentivised to set aside their share of possible future care costs.
"We believe a fundamental part of any new deal must be an overall cap on how much an individual will ever have to pay towards their care costs. This may be separate from any ‘room and board’ charge. This will allow individuals to plan ahead for care costs while protecting inheritance aspirations."
maria.espadinha@ft.com
