The UK’s long-term care system has been steadily spiralling out of control. Around 1 in 4 of us is set to spend more than £20,000 on care in later life according to the report of the Dilnot Commission.
At present there are virtually no financial products which allow people coming up to retirement to plan ahead for future care costs. Where such products have been on offer in the past, many consumers have been put off buying them. Incorrect assumptions that ‘the government will pay for my care’, limited access to specialist financial advice, lack of awareness of potential costs and a reluctance to think about needing to be cared for have all been cited as reasons to not purchase a financial product.
This reluctance works both ways. Insurers have been reluctant to offer such products, except at the ‘door of the care home’ through the sale of so-called ‘immediate needs annuities’. A key barrier for insurers is forecasting potential future care costs, decades into the future, especially given the potential for major medical advances. Care insurance has also often been sold in the past as a freestanding financial product, requiring advisers to acquire specialist qualifications, which some may be reluctant to do.
A simpler, more cost effective product for consumers to buy and insurers to provide could offer a resolution to help people cover mounting care costs.
Is it time for the care pension?
Our latest policy paper points out that, following the introduction of ‘pension freedoms’, a growing number of people go into retirement with a pot of money from which they draw an income through retirement. We suggest that care insurance could be ‘bolted on’ to these income drawdown arrangements, either in the form of a regular premium or a one-off lump sum.
To help make the product more attractive, we recommend that the government should allow tax-free withdrawals from drawdown accounts to pay for care insurance. We also believe there needs to be an overall lifetime cap on care costs to make providing these products commercially viable.
From the perspective of an adviser, they would be able to offer clients care insurance as a feature of a drawdown product rather than having to sell a completely separate financial product.
One idea would be to brand this potential product ‘inheritance insurance’, as it could ensure that those who faced large care costs in later life were no longer at risk of having to sell a family home to meet care bills.
To make this work, we need government action. As such, we have submitted the paper to the Government as an idea to feed in to the Green Paper on social care.
With these changes, millions of people could start to build up protection against the risk of facing ‘catastrophic’ care costs in later life.