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July 8, 2011 5:24 pm
If you think having a ‘good pension’ means not needing to worry about financing your old age, think again.
Later-life income is about more than pensions – it should factor in care costs, too.
The lack of preparation for future care needs in our ageing population is another looming crisis. Unfortunately, politicians have parked social care reform in the ‘too difficult’ box for years, so Andrew Dilnot’s eagerly-awaited, widely-welcomed report – with its carefully crafted recommendations for reform of social care funding – offers a real potential for positive change. Worryingly, however, the government’s reaction has been decidedly lukewarm.
Social care is a vital part of any national strategy for ensuring decency and dignity in old age – and recent negative headlines about poor-quality care homes, homecare or even hospital neglect, highlight vividly that our current system is not fit for purpose.
Social care has always been the ‘poor relation’ in policy terms. We spend more than £100bn on social security benefits for older people and £50bn on health services, but just £8bn on social care. We even spend around £30bn a year on tax relief for private pensions which, as things stand, will not alleviate the care crisis at all.
Local authorities are in charge of most care spending and, with current cutbacks, the present inadequate services are being reduced. The extra £2bn supposedly earmarked to increase care funding has not been ringfenced, so it is being spent on other things.
It is difficult to imagine the state picking up less of the costs of care than it does now. Anyone with more than £23,250 of assets (including the value of their house if they need residential care) has to pay all their care costs themselves, so a majority could lose virtually everything in the care ‘means-test’.
Dilnot acknowledges the unfairness of this cliff-edge. Those who saved nothing and have no house get free care. Anyone else may have to pay the whole lot.
With our population of over-85s set to double by 2025, and numbers needing care potentially rising by more than 1.5m, more care spending is obviously required. But how will this be funded? Dilnot’s report aims to help people plan for such spending in advance.
The current system does not encourage or reward saving for care and there are no financial products specifically to help prepare for care. This causes considerable distress at the point of need, because people have to suddenly find significant sums at short notice.
This is the only large financial risk against which it is impossible to insure. The risks of requiring expensive medical treatment are pooled nationally via the NHS. Private insurers help people pool the risks of losing their house or their car. But when it comes to care, there is no risk-pooling mechanism. Therefore, individuals are left on their own, to cover all care costs on an ‘as-needed’ basis.
Since costs can be unlimited, insurance has just not been a realistic option – so people are denied the peace of mind of knowing that future care expenses will be covered.
Dilnot rightly identifies this social and market failure. His recommended solution is to fix a lifetime cap on care costs – £35,000 – after which state help starts. This would remove the open-ended financial liability that frightens people under the current regime.
‘Accommodation’ costs in residential homes would be capped at a further £7,000-£10,000 a year. He also recommends raising the means-testing asset threshold from £23,250 to £100,000, which would help more of those who are neither very wealthy nor very poor.
These reforms are not perfect. One can question the £35,000 cap or the means-testing thresholds. However, the recommendations would remove much of the present system’s uncertainty and help people plan for their old age. Importantly, they would also enable the financial services industry to develop insurance or savings products to cover future care bills.
Then everyone would know how to meet the costs. On average, lifetime care spending is around £35,000. Some will pay nothing and others far more – and we can't know in advance who will and who won’t. But we do know that insuring against the risk of having to pay this £35,000 for care is estimated to cost around £15,000. Insurers could also offer ‘top-up’ insurance, to provide for extra spending above the state-provided minimum, should we want to fund better-quality care.
Disability-linked annuities could also be designed to cover care costs – perhaps paying lower amounts initially relative to standard annuities, but offering the option of a much higher pay-out in the eventuality that someone needed care. Likewise, critical illness policies could be adapted to pay out a lump sum for care if required.
New types of equity release schemes or mortgages could help people draw down some of the value of their home, although Dilnot also recommends that councils could take a charge on someone’s house to pay for care and recover the costs later from their estate. Local authorities could charge interest on these ‘loans’ – unlike the current deferred payment plans which are interest-free and consequently increasingly unavailable from cash-strapped councils.
New savings products, such as care individual savings accounts (Isas) – an additional tax-free savings allowance for care plans – or care provision pensions, could generate more private funding for future care needs.
What is clear is that the current system is not working, local authority care provision is haphazard, and funding rules almost unfathomable. Living longer should be fantastic news, but fears of financing care can spoil any celebrations. The sooner we have meaningful reform, the better the future we can all look forward to.
Ros Altmann is director-general of SAGA, the over-50s organisation
Merryn Somerset Webb returns next week
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