A trade body representing UK insurers has said the government's proposed asset cap for social care could risk people only partially benefiting from their insurance products in the future.
Back in September 2021, former prime minister Boris Johnson proposed to raise the upper capital limit from £23,250 to £100,000, and the lower capital limit from £14,250 to £20,000.
This limit stipulates how much money a person can have whilst qualifying for financial support from their local authority for social care.
Johnson also announced a £86,000 cap on lifetime care costs, which would apply to personal care costs only and not cover things like accommodation and food - otherwise referred to as ‘hotel’ costs.
The unintended disincentive created by the new means-testing rules would affect a range of products.ABIDesigned to be implemented in October this year, the reform - which had been some 10 years in the making - was delayed until 2025 in chancellor Jeremy Hunt's Autumn Statement last year.
In a report published yesterday (February 9), the Association of British Insurers said it was worried about how these reforms could impact the overall funds some of the UK's population will receive for their social care in the future.
"The risk of customers only partially benefiting from a [insurance] product raises serious regulatory concerns," the trade body said.
"It would undermine the product’s objectives and would very likely fail regulatory tests of ‘fair value’, including under the Financial Conduct Authority’s new consumer duty.
"Detriment to customers would also be damaging to the public’s trust in the sector. The unintended disincentive created by the new means-testing rules would affect a range of products."
The ABI laid out some examples to demonstrate how the caps impact funding support, based on research by the Pensions Policy Institute.
It showed a self-funder could expect to reach the care cap after six years and eight months.
But an individual using domiciliary care and who receives means-tested support would take much longer.
For example, someone with £25,000 in assets and in £300 income per week would reach the care cap after around 13 years and seven months.
Some of the insurance payout would in effect be deducted by local authorities.ABIThe report also pointed out that if housing wealth was disregarded for people receiving domiciliary care, or for whose spouse or partner lives in the property, only 20 per cent of people would have assets over the government's proposed upper capital threshold.
The affects of these means-tests would also stretch to insurance products. The ABI looked at the impact of an insurance or long-term savings payout on people with different incomes and wealth.
It found that the government's reform would create some "unintended consequences" which impact the scope and potential for product development.
"If people receive additional income or capital from an insurance payout or from another source such as savings or inheritance, it may not leave them with more remaining income for personal expenses or extra cash to top-up for better care facilities," the ABI explained.
The more a person benefits from means-tested support, the more of their insurance payout they would lose.ABI"This is because the means-test will take this additional income or capital into account so it would merely replace some of what local authorities would have paid.
"If a hypothetical insurance product or long-term savings product pays out a stream of income or a lump sum when an individual needs care, the local authority reduces the financial support that the individual would otherwise have been eligible for. Some of the insurance payout would in effect be deducted by local authorities."
The more a person benefits from means-tested support, the more of their insurance payout they would lose, the ABI found.
The only people who would fully benefit from the insurance payout would be those who do not fall under the means-test for their entire care journey, the trade body said.
This means just over a third of retirees would see the full benefit of income or capital. For younger generations, this reduces to 28-29 per cent.
To address these challenges, the ABI has recommend that the government exclude or simply disregard from the means-test any payouts from insurance products that cover the need for long-term care.
"Our initial analysis is that excluding such payouts from the means-test is likely to have little or no impact on government expenditure," the ABI explained.
"The same proportion of people would rely on local authority support whether or not payouts are excluded from the means-test assessment."
The trade body also recommended scrapping or limiting tax on pension withdrawals if funds are used for care-related purposes, excluding payments arising from care insurance products from means-test assessments from local authorities, and reforming advice rules to allow more personalised guidance.
'Vital means-testing system doesn’t create disincentives'
Some in the industry have echoed the ABI's recommendations. Head of retirement policy at AJ Bell, Tom Selby, said it is "vital that the means-testing system doesn’t create disincentives for people to fund their own care needs", a risk he said was clearly outlined in the report.
“This constant kicking of the can down the road is a nightmare for those looking for certainty over how much their care might cost," said Selby
"It also risks putting off financial services firms who might offer long-term care products.
"However, one potential silver lining is it provides a window of opportunity to consider whether there are features of the existing system that could be improved ahead of the delayed introduction of the cost cap."
The Department of Health and Social was approached for comment.
ruby.hinchliffe@ft.com
