The winner of the Conservative leadership contest will find social care in the pending tray at No.10, and will know it is an issue they will eventually need to tackle. To achieve meaningful care funding reform, the next PM will need to overcome a series of challenges – not least, how to encourage individuals to plan earlier in life for care costs, rather than at crisis point. Today we publish new figures showing how unprepared people are, alongside research by the Pensions Policy Institute analysing five care funding proposals.
There has been no shortage of policy ideas from commentators in the care funding debate. Politicians have talked up the potential for financial services products to pay for care; industry has emphasised that a market needs the right conditions to grow, including incentives, better awareness and access to advice. But given how long this debate has gone on for, it's surprising that there is so little evidence about the potential impact of these ideas.
To improve the fact base, we commissioned the Pensions Policy Institute to analyse five proposed ways for Government to encourage self-funders to use their assets to pay for care:
- No income tax payable on pension income used to pay for care. This was referenced in the ABI's update on our 2014 Statement of Intent with the Department of Health.
- Tax-free pension withdrawals if used to purchase an insurance product that covers care costs. This has been put forward by Sir Steve Webb at Royal London.
- Introducing a new Care ISA with no Inheritance Tax paid on residual amounts at death. Another former Pensions Minister, Baroness Ros Altmann, has proposed this.
- Releasing equity from a property to purchase an insurance product that covers care costs. This is similar to an idea recommended by former First Secretary of State Rt Hon Damian Green in his paper for the Centre for Policy Studies.
- Pledging equity from a property to cover care costs if a care need arises, as recommended by Just Group.
The report sets out who could benefit from these proposals. The PPI defined a target market covering 37% of the population: those with assets above the means-test level of £23,250, but with less than £200,000 in savings other than pensions and housing. Many people in this target market would need to make up a substantial shortfall if they were to need care. The Government provides up to £256 a week to people with a care need, regardless of income and assets, but an average residential care place costs around £600 a week.
While we are not advocating any particular one of the five proposals, they would provide some clear benefits to this target market. The Government would also benefit if, by making their own provision, people avoid running out of money and falling back on the State.
- Today, an average pensioner couple could save £3,000 a year if guaranteed pension income was paid direct to a care provider tax-free. Pension savings could play an increasing part in the longer term: among 60 to 64-year-olds in the target market, 25% have over £230,000 in pension wealth, and this is likely to increase further in future as the auto-enrolment generation’s pensions grow.
- Many of the next generation who need care will ultimately have to use housing wealth to pay for it. Among the target group, 90% of those aged 65-79 own their home outright, and half of these have over £300,000 in housing wealth. An incentive to protect against funding care costs could harness this wealth and help people prepare.
It is also clear that there are limits to these proposals.
First, policy-makers face strong behavioural headwinds in encouraging people to prepare for an unpleasant risk decades into the distance. The figures we revealed today, that 9 in 10 people don't have any plan to pay for care, are not that surprising. Unlike pensions, there is no obvious way to automatically enrol people into a product. Instead, the proposals analysed by the PPI are incentives to nudge people to change their behaviour. That is why the ABI believes raising awareness of the costs of care is a key intervention within Government's control.
Second, there is no single solution. People’s asset holdings vary widely, as do their family and personal circumstances, and their preferences. Some people would prefer to insure for the sake of peace of mind; others would prefer to keep money aside for care in case they need it. While none is a silver bullet, these proposals can be used individually or in combination, with the help of an adviser.
Third, these are solutions for self-funders. There are other equally important questions about how the Government raises and spends its own care funding. The proposals in this report could be compatible with a cap or with free personal care. We believe that whatever the Government provides, it should be simple to communicate, with a clear division between what is State-funded and what is individually funded.
These challenges illustrate the difficult political calls to make. Who should the Government prioritise: those with funds just above the current means test, or those with the most to lose from catastrophic costs? How far should the Government go in helping people to prepare? These are big, long term questions that will need a consensus-based approach. It will take brave and honest policy-makers to guide through the changes that are needed, and for all stakeholders to work collaboratively with them when they seize that challenge.