By Fiona Tait, Technical Director, Intelligent Pensions
Who should foot the bill?
Some people believe that social care should be entirely funded by the Government, as it is a basic human right and essential to ensuring everyone has access to the support they need. Others argue that individuals should take more responsibility for their own care needs and that families should play a greater role in supporting their own loved ones.
The situation is also highly complicated. While the Government provides funding for some social care services, even financial professionals find it hard to identify which ones are covered and which aren’t, a situation that is exacerbated by differences between Local Authority areas across the U.K.
What is clear is that care is expensive, and anyone who would like an element of choice over their care will need some private savings to cover the costs. According to the Pensions Policy Institute (PPI) the average coast of Local Authority arranged residential care in England estimated to be around £683 a week, or £35,500 a year, and it would certainly seem unreasonable for the State to fund any additional ‘luxury’.
The problem is that ‘luxury’ could include being able to choose a facility which is close enough for family to visit, or simply one which doesn’t have a 3-year waiting list. Most of us would like to be able to pay for this if they could, but only 5% of the population have actually done anything about it .
How should it be funded?
The next issue is that with only 12% of over 80s currently in residential care, many people are willing to take the chance that it won’t happen to them and will have other expenses which they consider more important than funding for something that might not be needed.
There are 2 ways of dealing with this issue - provide a contingent solution, and/or make sure that those who don’t need to pay for care obtain value in some other way. Unfortunately, at the current time there are no protection-based financial products which are designed to pay for social care, possibly because of the lack of consistent data around the subject.
The only specific care funding plans currently available are immediate or deferred annuity products which provide an income in exchange for a lump sum premium. These can be useful but do not solve the problem of having to build up the initial lump sum to purchase them in the first place. What is needed is a long-term savings plan, preferably one which can provide an income in later life.
A potential solution
The Association of British Insurers (ABI) are the most recent body to call for reforms to pensions legislation which could make them the perfect solution. Saving into a pension is already incentivised, and automatic enrolment has increased participation rates from just over 40% to nearly 90%, at least for employed individuals.
The problem with this scenario is that using pension funds to pay for care is not very efficient. Although pensions are not included as a capital asset in the means-test for Local Authority funded care, pension income is, and the amounts needed to pay for care mean that the required withdrawals may also be heavily taxed.
The ABI’s solution is to create a tax break for income payments which are being directly used to pay for long term care. This fits with the primary purpose of a pension – to cover living costs in later life – and as legislation stands it also means that saver can put their money aside in the knowledge that they will be able to derive value from it, whatever happens in their future. Those who live long and healthy lives will have something to live on, those who are less healthy would either have their care costs funded or they would be able to pass their funds on to those that they care about.
Such a scenario would be ideal, but even without the suggested tax break building up substantial pension savings is still the best way to provide people with choices in retirement.
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