LIKE it or not, we need to help people prepare for social care spending. The state cannot and will not pick up the cost, millions will need care in coming years and no money has been set aside – either publicly or privately – to fund this.
I am calling for urgent action, with new tax breaks to help people plan and save up for possible social care costs. This year’s Budget changes could help pension savings to be kept back for care and pensions.
The cost to society of failing to ensure money is set aside for future social care needs could be unaffordable and there are already signs that the pressure is proving damaging to the NHS. The real crisis is still some years away, but as baby boomers reach later life, the numbers needing care will soar. Something must urgently happen to head off a disaster that is looming large on the horizon.
Official estimates suggest that perhaps 80 per cent of the population over 65 will need some care and support in later life. Half are likely to need to spend around £20,000 and one in 10 will spend over £100,000.
People need to plan to meet such costs. Guidance could help – it will be important to ensure that advice on retirement planning includes consideration of having to pay for care. Materials that help people understand the risks of facing very high costs if they or a loved one need care, can help educate people who are currently totally unaware of this issue.
Current products to help people cover care costs are expensive and poorly understood. There are various products on offer to help people pay for care, each of which has advantages and disadvantages. These include Immediate Needs Annuities, Equity Release and local authority deferred payment plans (which are often unavailable in most cases nowadays), other savings such as ISAs or insurance bonds and perhaps some health or illness insurance. New products and approaches, together with new Government incentives, are likely to be required.
Until the latest Budget changes, pension savings could not be easily accessed to help pay for care. Many people reaching retirement will have some tens of thousands of pounds in their pension funds but once they buy an annuity, this capital could not be directed to pay for care. Now that the annuity requirement is removed, pension funds could potentially be used for care.
Those who do not require extra income from all of their pension savings might be interested in a savings or investment product that would be specifically earmarked to pay for care, perhaps for themselves or for a member of the family.
Each couple may have a one in two chance of needing long-term care, although they do not know which one of them or when. The Government could use the new pension reforms to kick-start a culture of saving for long-term care. Even without new incentives, people may benefit from the opportunity to use their pension savings to pay for care. However, if any money withdrawn is taxed, the amount available will be reduced by 20 to 45 per cent.
Given the social importance of funding social care, it makes sense for the Government to consider tax-exempting pension withdrawals that are used to pay for care needs. A specified sum of money might be allowed to be taken out of a pension fund tax-free if spent on care.
This might encourage people to leave money in their pension funds for later life, closer to the point when they might need it, in the knowledge that there are tax advantages if they do spend it on care. While the money stays in a pension wrapper, it does not incur tax on investment returns, and then allowing it to be withdrawn tax-free if paying for care, might encourage more people to leave it there unless they really have an important reason to spend it.
Another possibility is for the Government to introduce a specific annual allowance for any ISAs that are earmarked to pay for care. This could be to pay for care for oneself, or for another family member, but as long as the money is used for care, people might be offered a special tax concession.
One other possibility is for families to save collectively for the care needs of their loved ones. For example, parents, siblings or children might join together to put in money each year, to build up a fund in case one of them needs care. The probability is that one person in four will need care, but nobody knows in advance which one. Again, the Government could offer tax breaks to incentivise this kind of saving.
Alongside auto-enrolment, it might also be helpful to ensure that employers consider offering the option for people to save in a workplace savings plan that is set aside specifically for care.
Pension reforms are a start, but more tax incentives are required. The Chancellor’s pension reforms could help to raise awareness of the issue and, if coupled with further tax incentives, could form the basis for starting care saving that is so urgently needed.
• Dr Ros Altmann is a pensions expert.