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Category — Paying for Care

Pension freedoms mean pension transfers make more sense

21 June 2017

Good news: Regulator wakes up to new landscape for pension transfers

  • Advisers encouraged to recognise that transferring out of a final salary scheme could be the right thing to do
  • Pension freedoms have radically improved attractions of Defined Contribution pensions
  • Vital to understand both risks and benefits, rather than assume transfers always wrong

The new world of pension freedom and choice paves the way for fresh thinking on transferring out of Defined Benefit pension schemes. Here’s a summary.

Strong reasons not to transfer will include:

  • If you are frightened that this decision is irreversible and you might regret it
  • If the DB scheme is your only pension
  • If you value the peace of mind of a guaranteed regular income
  • If you are concerned about inflation and have an inflation-linked DB pension
  • If you do not want to take investment risk
  • If you don’t want to pay someone to manage a pension fund for you
  • If you might exceed the Lifetime Allowance and face a hefty tax charge
  • If you might lose enhanced protection

And there are some strong reasons why DB transfers make sense:

  • If you have several DB pensions, could transfer some and still retain guaranteed income
  • If you’re in poor health and fear dying young
  • If you are single and have no use for spouse pension
  • If you want to pass any unused pension fund on tax-free to anyone you choose free of inheritance tax (and free of all tax if you die before age 75)
  • If you are happy to take some risk and want the chance to benefit from future tax-free investment returns
  • If you are comfortable with managing money or finding someone to do that for you
  • If you want a fund to help pay for care if needed (£20 a week DB pension could be worth £30,000-£40,000
  • In some cases, if you have large debts, the money could help you to pay them off

FCA recognises case against DB transfers has radically changed: The FCA has just launched a consultation which could change the way people wanting to transfer out of a final salary-type (DB) pension schemes are treated. https://www.fca.org.uk/news/press-releases/fca-proposes-changes-advice-pension-transfers Two years after the pension freedoms were introduced, making Defined Contribution (DC) pension schemes far more user-friendly, the Regulator is rightly recognising that the case against transferring out of guaranteed employer schemes has radically changed. Each case should be considered individually to assess the benefits and risks for that person.

Can be strong reasons to transfer out but must understand risks first: In the new pensions world, there are some compelling arguments in favour of DB transfers but the decision must not be taken lightly, particularly because it is irrevocable. Anyone whose transfer is worth over £30,000 must get independent financial advice.

Advisers have been under regulatory pressure to assume transferring out is wrong: In the old regime, the regulators rightly warned strongly against advising anyone to transfer. Indeed, financial advisers often refused to do the transfer for clients still wanting to after being advised against it. But the pension freedom reforms mean this attitude is outdated.

DC much more attractive now: Defined Contribution pensions, which build up your own individual pot of money for your retirement, are much more user-friendly now.

End of mandatory mass-annuitisation: In the past, someone who wanted to take their tax-free cash from a DC pension would usually have to buy an annuity with the rest, unless it was a very large fund. These annuities were inflexible and might not suit their needs. Now you can take out some money if you want to and leave the rest invested for later life. Some people can even get more tax free cash from a DC scheme than from DB.

No 55% death tax, can pass on IHT-free: People can now pass their pensions on in full to loved ones free of inheritance tax, whereas in the past they would face a 55% death tax charge on their unused fund. A DB scheme will only provide a fraction of the pension income for a partner and perhaps nothing for other relatives.

Those in poor health could benefit from transferring: Someone in poor health, who dies relatively young, will not have had much money from the scheme, but could pass on a fund to their loved ones instead. If they are single, the partner’s pension in their employer DB scheme will have no value to them.

Transfer values have risen enormously as interest rates have plummeted: Low interest rates have increased transfer values, which makes them more attractive. Capital sums worth 30 to 40 times the annual pension could provide good alternative financial security for some. There are those who think the period of low interest rates will end soon and, therefore, feel today’s transfer values are likely to fall in future, so want to take the money now. There is no certainty that rates will rise, but there are other reasons to consider transferring.

Some people have large debts: If you have no other way to pay off debts, it may be worth considering transferring a small pension to help you out. It is vital to get advice, perhaps from PensionWise first though.

Many have several DB pensions – could transfer some and keep others: Many people have a few past pensions from previous employers, often some small deferred pensions of only a few pounds a week. But these could be worth thousands of pounds. A £10 a week DB pension could be worth £15,000 – £20,000. People with a good base of guaranteed pension income from other past schemes could cash-in some while retaining others.

Could use DC transfer to provide money for care: People could also use the funds from a transfer to provide a pot of money for long-term care. A £20 a week pension would not pay for care, but £30,000 – £40,000 in a DC pension could help enormously. This alone is a powerful reason for those with several pensions to consider transferring, as nobody has set money aside to cover care costs. In fact, the Government should think about allowing tax-free DC withdrawals if used for care.

But beware of Lifetime Allowance rules: Given the sharp rise in transfer values, people need to be careful of hitting the lifetime allowance, or losing enhanced protection. DB pensions are treated much more favourably than DC under the illogical Lifetime Limit rules.  The DB lifetime allowance test of 20 times starting pension means a £40,000 DB income is worth well below £1m but could generate a £1.5m transfer value with a hefty tax charge.

Of course, many people will still be best-advised to stay with their employer’s guaranteed pension: Especially if they have no other pension, the certainty of the employer promise (even with the risk of reduction in the PPF) is very valuable. Those who value guaranteed income with inflation and partner protection, and do not want to worry about investment risk, should not transfer. The decision is irrevocable, so it is vital to get good advice first.

FCA recognises that DC pensions are more attractive now: Transferring out will not be right for everyone, but there are now some compelling arguments in favour of DB to DC transfers and the Regulator is recognising this reality with its consultation. That’s welcome news.

June 21, 2017   1 Comment

Manifesto cost May the election

11 June 2017

  • Tory Manifesto cost May the election
  • Social care proposals alienated core voters AND would have made care crisis even worse
  • There is no silver bullet – care crisis needs a range of solutions

The Tory Manifesto was a turning point in the election campaign.  To say the policy announcements on pensions and care were badly thought through would be an understatement. They don’t really seem to have been thought through at all.

The combination of means-testing Winter Fuel Payments for pensioners, with the draconian social care changes, suddenly saw the Tories’ traditional support among older voters waver.

Mass means-testing of pensioners has already been discredited due to the disincentives it poses to private pension saving. To extend means-testing in this arbitrary manner, without consultation and without proper understanding of how the policy would impact on pensioners, was a mistake of monumental proportions. To combine the two, looked like a punishment to families with loved ones who were ill, not just to older people.

This policy proposal is not only politically poisonous, because it hits the very people who are most likely to vote Tory – those who own their own home, or who have built up a nest-egg or some assets to pass on to their loved ones; it also would not solve the social care crisis anyway. All the political pain, for no policy gain. To suggest that the cost of social care could be met by means-testing Winter Fuel Payments is fantasy. And almost immediately, the Scottish Tories announced that all pensioners in Scotland would still get the money, so this was clearly not going to work.

Of course there were multiple issues that played a part in this debacle. Some were due to Labour’s promises of free tuition fees, school meals and higher minimum wages, but others were own goals such as foxhunting, grammar schools and ultra-hard Brexit. Such unforced errors played into the hands of the Opposition parties. But the real killer was social care.

The care crisis has been worsening for years and is in danger of bankrupting the NHS. The Tories are right to say this crisis must be addressed. Clearly, more funding is needed urgently, and the burden will fall on younger generations unless radical reforms are introduced. There is no one silver bullet that will solve this massive problem, but some elements of the solution were already in place. The Manifesto tore those down, rather than building on them.

Legislation was passed in 2014, with cross-party consensus, for a £72,000 cap on lifetime spending on ‘eligible care needs’ for home care or care home costs. This did not include the costs of board and lodging, which would be up to an extra £12,000 a year.

The legislation also increased the means-test threshold from £23,250 up to £118,000 of savings. At the moment, if you have more than £23,250 of savings or assets, you fund all of your own social care. Crucially, though, the value of your home was not taken into account in the means-test if you received home care or if you were in a care home but still had a relative living in your house. Then along comes the Tory Manifesto and proposes something altogether more draconian – suddenly opening up the social care funding crisis as a national political issue.

Instead of a £118,000 means-test floor, the Tories cut this to £100,000.

And this was to include the value of your home in all circumstances. So if you needed homecare, or you were in a care home and still had a partner living in your house, the value of your property would still count against you for council funding. Suddenly, millions more people would be hit by social care costs – most particularly those families whose loved ones had dementia or other conditions that did not count as ‘health’ needs. A millionaire with cancer could have all their care costs paid by the NHS and their house was safe. But an older person with dementia, and a home worth £250,000, would have to pay for all their care until most of their house value was gone.

There are so many reasons why the Tory Manifesto Care reforms were disastrous, not only because they were politically poisonous, but they would also actually make the care crisis worse. Here are some of the major flaws in the proposals.

They would actually worsen NHS bed-blocking:  Effectively, older people who owned their own home would have to pay for leaving hospital. Current bed-blocking often happens when older people stay in hospital until homecare is arranged for them. But if they know the costs will come out of their house as soon as they leave hospital, they and their children will have an incentive to stay in hospital for longer where care is free.

Proposals don’t give councils any extra funding to pay for care: The lack of social care funding, either at state or private sector level, is at the heart of this crisis. No money has been set aside by local authorities, or individual families, to cover elderly care costs. Councils will still need the funding to pay for elderly care and will not know when they will recoup the outlay from people’s homes. Repayment will depend on how long the person lives, and may also involve legal costs to enforce payment from an estate. This leaves current underfunding unaddressed and fails to help councils plan for long-term care.

Will disincentivise saving for care instead of incentivising it: A sensible social care funding policy would ideally encourage people to save to fund their care, similarly to incentives to save for an old age pension. But these proposals will discourage people from bothering to save for care costs as they will lose so much in the means-test.

Would increase strain on NHS: Older people may try to do without the help they require in order to avoid having to borrow against their house. More may then end up in hospital after struggling to manage without the care they need.

Would probably increase numbers of elderly people needing state support: The proposals would increase incentives for people to give their assets away earlier. Many may decide not to bother paying off their mortgages, or sell their home and give money to their children, or move into rented accommodation or take out more debt in later life. With £100,000 being all they can leave, perhaps to three children, the proposed system would have powerful incentives to spend or give money away early on in retirement, and then get state-funded care.

Savings incentives for Care ISAs or using pensions to help fund care are also vital: Just changing the means-test threshold or introducing a cap on total care costs such as proposed by Dilnot was only ever part of the solution to the care crisis. Today’s baby-boomers are already retiring and many of them do have ISAs and even pension funds, which they may not need to cover all their living costs in their 60s and 70s. Therefore, there is time to introduce incentives for older people to build up or use existing assets to pay for care.  Currently, there are no such incentives and nobody has savings earmarked for this. Encouraging people to save up to a maximum care cap, say £72,000 per person in a Care ISA that can be passed on free of inheritance tax, or withdraw up to £72,000 tax-free from their pension to pay for care, could help people protect themselves, without fearing they will lose almost everything if they get an illness such as dementia.

Proposals do not address the artificial distinction between social care and health care:  The social care system needs a radical overhaul as the public will increasingly reject the unfairness for dementia sufferers. A 90 year-old millionaire with cancer could have all their care paid for by taxpayers but if they get dementia they must pay for themselves. The Manifesto proposals worsened the unfairness, rather than addressing it. A solution to the care crisis will require rethinking the artificial differentiation between elderly health and care needs.

Those unlucky enough to need elderly care will still suffer double disadvantage – must pay for their own care and cross subsidise council underpayments for others: The Manifesto proposals did not address the stark unfairness that people who are unlucky enough to need care which doesn’t qualify for NHS funding, are hit by a double whammy.  They currently pay not only for their own care but also pay towards council-funded patients too as their care home recoups the underpayments by local authorities. Without more funding, councils will continue to pay too little and without sharing the burden across more than just those who need care, the social inequity will worsen.

People may not even be able to keep their last £100,000 as the floor may not be a proper floor:  The means-test threshold of £100,000 may not even be the floor because of the way the care system works.  Local authorities only fund what they consider to be the appropriate care cost for their area. Someone in a more expensive care home (perhaps because it is nearer to their family) or who wants more than 15-minute visits, will have to cover the extra costs themselves even when they are down to their last £100,000. Unless they move to a cheaper care home (which can be very distressing for frail elderly people) or accept less homecare they would eat into the remaining £100,000.

Social care is a life events which seems an obvious candidate for national insurance:  National insurance only covers what is classed as health care, but not social care needs. Surely, social care for elderly people would automatically have been included in Beveridge’s welfare state, had the reality of today’s elderly population been evident at the time.  A basic level of minimum care (like we have with a basic state pension or NHS) which people can then pay more to top up on their own, would be a fairer and more sustainable way forward. A sustainable longer-term solution could see everyone having to pay something into the system. If they don’t need care they are lucky, but if they do need it, then some money will be provided. Forcing old people to pay until almost all their accumulated assets are used up will mean more elderly people having no assets, ending up in poverty and falling back on state support. A recipe for failure.

Conclusion:

The Tory Manifesto proposals for social care would be a disaster and are never likely to be implemented. The Labour and LibDem Manifestos talked of a National Care Service and increasing taxes. However, rather than using care as a political football, a national solution is needed. This could consider extra National Insurance payments, or a charge on all people’s estates, plus new savings incentives alongside pensions and ISAs, and integration of health and social care systems. The care crisis cannot be left any longer, the need for radical action is urgent and a combination of reforms is needed. The sooner politicians wake up to this and work together to find solutions, the better.

June 11, 2017   2 Comments

Budget Comments

8 March 2017

Another missed opportunity to start addressing social care

  • No new incentives for social care savings and radical reform proposals pushed into Green Paper later this year
  • No proper help for savers – new NS&I bond pays interest rate lower than inflation, so savers lose money
  • Costs of public sector pensions will rise sharply, by nearly 40% between 2015 and 2020
  • Self employed bearing brunt of tax rises to pay for other measures

Addressing Social care crisis:

  • Extra £2billion for social care will help councils but may not be enough to ensure NHS pressures really relieved.
  • No new help or incentives for families to save for social care or use their ISAs and pensions.
  • More money for councils to cover costs of social care is good, but proper reform delayed – more money is just a sticking plaster on a weeping wound.
  • Will be a Green Paper later this year on radical structural long-term reform. That’s good but needs to be followed by urgent action as care system is breaking the NHS. Integration of health and care, helping families prepare for care costs, finding ways to recover extra money to pay for care – all these are essential as our population ages. The number of people over age 75 will increase by 2million in next 10 years.
  • No help for families to start saving for care – no incentives to help them save even though ‘death tax’ ruled out so can’t take money from their homes or estates.

 

Measures for savers

  • No new help for savers even as savings ratio reaches such low levels
  • New NS&I bond pays only 2.2% interest while inflation forecast to be 2.4% this year and 2.3% next year, so savers lose money in real terms each year

 

Helping people extend working lives

  • The Chancellor has announced £5million extra money for returnships for adults trying to get back into work. This is potentially good news for older people and other adults trying to return to work, especially helping many older women and carers who want to work after taking time out for caring. Of course, more is needed but this is a start. For example, if each returnship costs £250, this can help 20,000 people.

 

Pension matters

Pensions flexibility is raising far more money for Treasury than originally forecast.

  • Treasury expected pension flexibility to raise £0.3bn in 2015-16 and £0.6bn in 2016-17, but people have taken higher amounts out than previously forecast, so actual tax receipts were £1.5bn in 2015-16 and £1.1bn in 2016017. One cannot draw many conclusions from this as we do not know what the people who withdrew money will be doing with it – whether they have other pensions elsewhere and are repaying debts and so on. The Government needs to conduct some proper research into what people are doing when withdrawing pension money. Expected revenues from pension flexibility rules are expected to be £1.6bn in 2017-18 and £0.9bn in 2018-19. Again, we cannot draw firm conclusions without further information.

 

Costs of public sector pensions set to rise sharply.

  • The Budget figures list the costs of public sector pensions as follows. In 2015-16 the cost was £11.3bn but by next year that will have risen by over 20% to £13.7bn. By 2021-22, the cost is forecast to rise to £15.7bn, which is an increase of 39% over the 2015-16 level.
  • 2015-16 £11.3bn
  • 2016-17 £11.5b
  • 2017-18 £12.1bn
  • 2018-19 £13.7bn

 

Overseas pensions:

  • The Government is continuing its clampdown on overseas pensions. Anyone who wants to move their UK pension offshore into a ‘Qualifying Registered Overseas Pension Scheme’ (QROPS) will have to pay a 25% tax charge on the funds transferred, and also any payments made from the QROPS in the first five years after the money is transferred will be taxable in the UK.

March 8, 2017   1 Comment

Help people use pensions and savings to fund social care

8 February 2017

  • Care crisis is worse than pensions crisis – but pensions and savings could help fund social care
  • Many baby boomers have pensions and ISAs but no incentive to retain money for care
  • Chancellor’s Budget could consider tax-free pension withdrawals and IHT-free ISAs for care savings
  • Such incentives would let people know they need to prepare for care costs  
  • Have to get real about the scale of care challenge – need combination of public funding, national insurance, private savings and integration with healthcare

The UK crisis in social care is potentially far worse than the pensions crisis:  Both issues are a function of our aging population, which is a good news story.  But, because successive Governments have failed to properly prepare, it is turning into a disaster.

No money aside to cover the inevitable costs of aging:  There is no money at Government level – it’s all left to cash-strapped councils who cannot cope.  There is no money at private level either, because most people have not seriously considered this issue, wrongly assuming the NHS will look after them or their loved ones.  This is short-sighted policymaking at its worst.

Advanced old age usually entails extra spending: With increasing numbers of much older people in this country, it is inevitable that more money will be needed to look after them in later life.  This should be no surprise.  An aging population is bound to need money for this but so far all the Government incentives and preparation for later life income have revolved around pensions, with nothing to pay for care.

Current cohort of older people is small, but will rise sharply in coming years:  The fact that the social care system is so poorly understood and that there are no incentives to help people plan for such costs just in case it is needed, has led to a complete lack of preparedness.  The cohort of older people needing care now is actually relatively small, but in 20 years or so the huge demographic bulge of baby boomers will increasingly need looking after as they reach their 80s.

Pensions could be adapted to help fund care:  However, pension income is not designed to cover the extra costs of care.  Nevertheless, pensions could be adapted to provide some help, as could other savings products, with a little extra incentive from the Treasury.   There is an opportunity to encourage baby boomers to set money aside in advance, in case they need care.

Millions of older people do have pensions and savings but they may spend them soon:  Of course, the majority of older people are not hugely wealthy but millions do have savings and pensions built up over the years.  The pensions crisis for future retirees is being addressed, belatedly, with a reformed state pension and auto-enrolment.  But for today’s sixty-somethings there is much more to be done.  With the new flexible pensions landscape, there is an opportunity to encourage them to keep some capital sums for later life, rather than planning to spend them straight away – and indeed for those who have ISAs, it is important to encourage them to consider keeping some of those funds unspent as a ‘Care Fund’ in case they need it.

New incentives in the Budget urgently needed to help fund care:  But an important part of the mix should be new incentives to encourage people to use their pensions and savings for care.  Here are some suggestions for the Chancellor.

Allow people to take money out of their pension funds tax-free if they use it for care:  Doing this would give people a further incentive not to spend all their pension fund too soon.  If they have money in their pension, but don’t think about using it for care, then by the time they need care the money may all be gone.  Signalling the importance of not exhausting pension funds too quickly would give an additional behavioural incentive for people to leave money aside in their tax-free pension wrapper as a potential ‘care fund’.  If they don’t actually need it, then the fund passes to their loved ones tax free, so it could form a care fund for a partner too.  Care costs are much higher for women than for men, because they live longer.  With a traditional pension, widows do not receive a capital sum to help them fund care and, under the old pension rules, once their husband had bought an annuity (the vast majority of which were single life) the pension died when they did.  Even if they had a joint life annuity, the widow only inherited a part of the income and no capital sum.  With the new freedoms, if the husband keeps money in his pension fund and does not spend it all on care for himself, the money will be available to his widow for her care if needed.

Relax the regulatory attitudes to transferring money out of Defined Benefit pensions: The current regulatory attitude strongly discourages transferring money out of Defined Benefit final salary-type pensions into a Defined Contribution (DC) arrangement.  This should be relaxed.  With the new freedoms for DC pensions, there could be many people who would benefit from such transfers.  Giving up a relatively small, guaranteed pension income might be the optimal decision for a family, particularly if they have other pension income and this is just one smaller deferred pension that will not make a dramatic difference to their lifestyle.  As an example, a £50 a week final salary-type pension could be worth around £100,000 as a transfer value.  If a husband and wife were to take a transfer of this size into a Defined Contribution pension, they may not miss the £50 a week, but they could hugely benefit from the £100,000 fund in coming years to help pay for care.  Transferring small deferred pensions can both help pre-fund care costs -and the surviving partner can inherit that sum in full, rather than just receiving a fraction of their deceased partner’s pension if it were still in the DB scheme.

Introduce special ISA rules for Care ISA funds – free of Inheritance tax:  Many older people already have ISA savings, but they do not think of retaining that money until much later life, as a potential ‘care fund’ to help them pay for care.  Some will spend the money on holidays, new cars, house refurbishment or for other needs but if there was a clear reason not to spend it, then there could be more money set aside for care within families.  Earmarking some of their ISAs for care, in a newly-created ‘Care ISA’ environment, could benefit many people in years to come.  The Chancellor could consider allowing people to transfer some of their existing ISAs into a ‘Care ISA’, or could allow an additional ISA allowance for care.  Indeed, the money currently spent on the Lifetime ISA as a 25% bonus would be much better spent on incentivising saving for later life care.

There is no one silver bullet that will solve the care crisis: A crisis is already upon us and there is no one magic solution.  However, a range of measures, when added together, can at least make a start in preparing the nation for care.  Savings incentives need to be part of the mix.  In addition, broader reforms could include a national insurance system to improve publicly available funding.  Better integration of health care and social care is also urgently needed, so that older people’s needs are specifically addressed in the most cost-effective way, instead of being artificially separated between wholly inadequate council funding and hugely expensive NHS care.  This could include keeping small local hospitals open as ‘convalescent homes’ where older people can be safely discharged and encouraging GPs to ‘prescribe’ preventive measures such as homecare, handrails, telehealth or personal alarms.  Funding for meals-on-wheels could be restored and better information and advice for families whose loved ones need looking after could alleviate some of the pressures too.

Government must get real about the scale of the challenge:  I urge the Government to act swiftly on this issue.  The system is already in crisis and is much more difficult to solve than the pensions crisis.  With pensions, ultimately, the Government has decided to make people wait longer and to pay them less.  Such options are not realistic for care.  Once people need care, you cannot make them wait longer without causing harm.  And we are already forcing people to accept less care, which is part of the crisis.  Now is the time for action, no more waiting and hoping.  One mark of a decent society is how it treats its older, vulnerable people.  We must not fail our aging population.

February 8, 2017   2 Comments

Is Government going to introduce saving incentives for social care?

14 December 2016

Jeremy Hunt is right we need for private savings to help fund care crisis

  • There’s no one solution but private savings must be part of the mix
  • Care costs much higher for older women than older men
  • Government can introduce tax incentives to help families save for care costs
  • Care ISAs, Workplace Saving Plans, Eldercare vouchers, Family Care Saving Plans free of Inheritance Tax
  • Consider using auto-enrolment and free Guidance to kick-start care savings as part of 2017 auto-enrolment review

Jeremy Hunt is right – people will need private savings to help fund later life care: Politicians have talked about social care for years, but have ducked the difficult decisions required to address this time and again.  Despite knowing that numbers needing care will rise inexorably, policymakers have not set aside public money, or encouraged private provision to pay for care.  The quality of care has suffered, many companies cannot afford to deliver decent care within the council budgets, and the screaming headlines from recent days continue to highlight that this crisis is just getting worse.

There is no money set aside for care:  There is almost no money earmarked to pay for the care people will require – not at public or private level.  Estimates suggest that around half the population over age 65 will need to spend at least £20,000 on later life care, and one in ten will spend over £100,000.

Problem is worse for older women than for men:  The CII Report released yesterday on Risks in women’s lives found that this is a much worse problem for women.  The median man over age 65 will need to spend around £37,000 on later life care, but the median woman will need around £70,000.  Where will this money come from?  It either has to come from councils on a draconian means-tested basis, or the NHS (when early intervention or prevention is not funded), or individuals and their families who suddenly find themselves faced with huge spending they had not prepared for.  And of course older women are less able to save for their future needs because they are more likely to have to cut down or stop working to provide care for loved ones – society takes this free female caring for granted.

Families will need to prepare for some costs, but they need help.  Local authority care funding is subject to one of the strictest means-tests.  Most people will receive no help from the state until they have used up the bulk of their assets (down to £23,250) and until their needs are considered ‘substantial’, causing significant distress to many families and leaving the majority of families without the care their loved ones or they need.  Many suddenly have to find significant sums at short notice.  Ideally, money is needed for prevention and early intervention, so that people can have a little help or pay for measures that will ensure they are safer and less likely to fall.  But they need to know what to do.

Products for care funding are inadequate.  There are some products already on the market to help people pay for care but they are expensive and will not help with prevention.  These include Immediate Needs Annuities, Equity Release and local authority deferred payment plans, but each has advantages and disadvantages and they only help at the point of need, rather than allowing people to make plans in advance.

Encouraging saving for care could help.  It seems that Jeremy Hunt may be signalling that at last the Government recognises the importance of helping families prepare for social care costs in advance.  People don’t know they will need such sums, but if they spend all their pensions or ISAs before they reach their 70s and 80s, they may really regret not being able to pay for the help they need.  I believe Jeremy Hunt is correct, some private savings will have to be part of the mix.  21st Century retirement income is about more than just pensions.

Extra tax breaks to encourage long-term care saving.  We spend around £40billion on incentives for pension saving and not a penny on incentives for social care saving.  21st Century retirement needs more than a conventional pension to help fund later life.  Providing taxpayer incentives and employer incentives is important because the cost to society of failing to ensure money is set aside for future social care needs will put intolerable burdens on the NHS and on younger generations as well as on older people.  Urgent action is needed to head off a disaster that is clearly on the horizon.

Care ISAs – IHT free: The Government could introduce a separate annual allowance for ISAs that are specifically earmarked to pay for care or allow people to transfer existing ISAs.  Launching such ‘Care ISAs’ would itself help people realise the need to save for care.  It could allow up to, say, £50,000 or £100,000 per person to be earmarked for care spending and such Care ISAs could be passed on free of inheritance tax to fund Care Savings for the next generation too.

2017 review of Auto-enrolment could consider encouraging workplace care saving plans:  Alongside auto-enrolment, it might also be helpful to ensure that employers are encouraged to offer the option for people to save in a workplace savings plan that is set aside specifically for care.

Workplace Saving Plans and flexible benefits packages to include eldercare:  The Government needs to incentivise employers to help staff prepare for care costs.  This can include savings plans to build up a fund to cover care costs, and also such ideas as eldercare vouchers, along similar principles to childcare vouchers.  Employers can help their staff pay for someone to look after elderly loved ones, rather than having to leave work or suffer stress when such help is not available.  This could be part of a flexible benefits package, which receive an employer contribution.

Family Care Savings Plans – IHT free:  Another 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 build up a fund in case one of them needs care.  The probability is that one in four people will need care, but nobody knows in advance which one.  Tax breaks to incentivise this kind of saving, perhaps allowing them to be passed on free of inheritance tax, would help.  There is a role for insurance with such savings plans – which might also include some ‘catastrophe insurance’ to pay out if more than the expected number in any family or group actually need care.

Tax free pension withdrawal if used for care:  The new pension freedoms could encourage people to set aside money for later life care.  Now that the annuity requirement has been removed, and there is no 55% death tax, pension funds could help cover care costs.  Many people reaching retirement have tens of thousands of pounds in their pension funds but if they use this to buy an annuity, they will have no money to pay for care.  Allowing people to withdraw money from their pension fund without paying income tax, if it is to pay for care, would encourage them to retain some funds in the tax free pension wrapper for longer, just in case it is needed.

Demographics show numbers needing care set to soar:  The cohort needing care at the moment is a relatively small proportion of the population, but millions of baby boomers are currently reaching their 60s and will need care in the coming twenty years or so. The numbers needing care are, therefore, set to soar.

Long-term care funding is one of the least understood parts of the health and care system.  Unfortunately, many people mistakenly believe the Government will pay their care costs.  But social care is the responsibility of local authorities, not the free NHS.  This system dates back to the Poor Laws of the 1800s and was completely omitted when Beveridge developed our National Insurance system and welfare state.  The difference between social care and healthcare is not easy to define, but as an example, someone with cancer is likely to qualify for healthcare funding with care provided at taxpayers’ expense, while someone with dementia may not be considered to have a ‘health’ need and gets no public money at all.

Public need to be informed about preparing for care:  We could extend the PensionWise Guidance service to provide information and education for people about preparing for care needs.  This could come from their pension savings or additional savings but because people don’t understand the system, they will definitely need help in planning for care.

The time to address this crisis is now:  It cannot wait longer without causing more misery.  Social care in this country is failing and radical action is long overdue.  This is not just about elderly people, it’s about families and loved ones who are being denied a decent standard of living in modern-day Britain.  Introducing incentives to help people save for later life care, as well as earmarking more funds from council and healthcare budgets, in an integrated fashion, will be vital parts of any solution.

December 14, 2016   1 Comment

Care ISAs and incentives for care saving

2 February 2015

  • Government considering savings incentives for social care
  • Possible ways to incentivise care saving schemes:  1. Care ISA   2. Tax free pension withdrawal   3. Care saving in auto-enrolment
  • Could help millions of middle income families not just the well-off

Government must tackle lack of care funding: Are Ministers finally waking up to the need to help people save to pay for social care? I do hope so. It seems they may be considering savings incentives, to help people prepare for potential care bills for themselves or their loved ones. Estimates suggest that around half the population over age 65 will need to spend at least £20,000 on later life care, and one in ten will spend over £100,000.

Insurance unlikely, need to encourage savings: Insurance companies cannot offer an insurance solution to cover care costs, so private savings must form part of the solution. With an aging population and rising longevity, it has long been clear that increasing numbers of older people will need care. Yet there is no money set aside by the state or in private savings to cover care costs. Obviously, using a family home is a possibility, but many would prefer other means.

Care ISAs and tax free pension withdrawal could help kick-start care savings culture: How can we help families start to plan care savings? Tax-free ISAs are a simple and popular form, but most people do not have specific spending plans for their ISAs. A ‘CareISA’ in the Chancellor’s final Budget would not involve upfront tax relief as with pensions. Launching a CareISA specifically earmarked to pay for care would itself help people realise the need to save for care and help kick-start a care saving culture that currently does not exist. In addition, allowing people to spend their pension money on care without paying tax first would also encourage more to keep money for later life as well as signalling the need for care saving plans.

Making a CareISA work – IHT free? A separate annual allowance for a ‘Care ISA’ of perhaps £10,000 a year, maybe with a lifetime maximum of £100,000 contributions would be an excellent measure for the Chancellor’s Budget. Transferring money from other ISAs into a CareISA could also be allowed. The money could only be spent on approved care provision (but it could cover care for a loved one as well as paying for moderate or preventive needs because such early intervention might help save money for the NHS). To increase the attraction of CareISAs they could be exempt from inheritance tax. Just as with pensions, they could then be passed on to future generations as a Care Savings plan. This could finally begin the process of planning in advance for care funding. Within any one couple, there is a 50/50 chance that one will need care, in a family of four, one is likely to need care but no money is set aside. Saving among family members would make sense if they wanted to, rather than each individual.

Tax free pension withdrawal to pay for care: Alongside a new Care ISA, the new pension freedoms could also be used to encourage people to save money for later life care by allowing any money taken out of the fund for care needs to be withdrawn tax-free. Removing the annuity requirement and 55% death tax could encourage pension funds to be kept to cover family care costs. Allowing some pension fund withdrawal to be tax free if it is used to pay for care, would encourage more people to retain some funds in the tax-free pension for longer, just in case it is needed. If they don’t spend it on care, it will pass free of inheritance tax to the next generation.

Auto-enrolment to encourage workplace care saving plans: Ultimately, there is another route to help care funding, especially for those without large savings. We certainly need a range of options to solve a crisis on this scale. With auto-enrolment potentially bringing every worker into pensions for the first time, there is an opportunity to use this to start funding social care too. The Government could eventually adjust auto-enrolment to cover more than pensions, or even build a national care insurance contribution into auto-enrolment too.

Bringing Care Savings into workplace flexible benefits packages: In the meantime, there would be merit in encouraging employers to offer workplace savings plans specifically for care, such as the CareISAs. This could be part of a flexible benefits package, with an employer contribution to help workers of all ages and income levels save up for care costs.

No magic bullet – urgently need range of options so public know they need to save: The cost to society of failing to ensure money is set aside for future social care needs will put intolerable burdens on the NHS, on younger generations and on older people. There is no magic bullet to solve this crisis – we’ve left it so late. The best we can do is start to tell people that the state won’t pay, help them realise just how little the state covers and that they are likely to need their own funding as well. Whether it’s ISAs, pensions or auto-enrolment, the Government must incentivise saving for social care and this can ultimately help millions of middle-income families, not just those who are well off.

February 2, 2015   2 Comments

Social care crisis – urgent action needed

20 January 2015

  • Action to address care crisis cannot wait any longer
  • Elderly people are suffering due to council and care company cost-cutting
  • All parts of the system are failing and Government has not yet offered solutions
  • Tax incentives to help families save for care costs are needed as £72,000 cap is too high for affordable insurance
  • Care ISAs, Family Care Plans and Workplace Savings free of Inheritance Tax
  • Use auto-enrolment and new free Guidance to kick-start care savings

There is no money set aside for care:  Even though demographic trends clearly signal a dramatic rise in the numbers of older people needing long-term care, there is almost no money set aside to pay for the care they will require.  Millions of baby boomers are currently reaching their 60s and will need care in the coming twenty years or so, yet the Government has not planned for this huge looming cost. Estimates suggest that around half the population over age 65 will need to spend at least £20,000 on later life care, and one in ten will spend over £100,000.

Long-term care funding is one of the least understood parts of the health and care system.  In fact, many people mistakenly believe that the Government will pay their care costs.  But social care is the responsibility of local authorities, not the free NHS.  The difference between social care and healthcare is not easy to define, but as an example, someone with cancer is likely to qualify for healthcare funding with care provided at taxpayers’ expense, while someone with dementia may not be considered to have a ‘health’ need and gets no help from public funds at all.

Cash-strapped councils and indebted care companies are desperate to cut costs but this cuts quality too.  Local authority budgets have been squeezed and councils have slashed their social care spending by 26% in the past four years.  This affects all aspects of the care system.  Whether it is funding for care homes, where local authorities are not paying the full costs of care and are forcing private payers to subsidise publicly funded residents, or homecare, where councils have cut the time for home visits to only 15 minutes in many cases, the system is not being funded properly.  Private care companies are often highly indebted, both care home operators and homecare providers, so there is constant cost-cutting pressure.  This affects the quality of care provided and also the conditions in which staff must operate.  Zero hours contracts and low pay are endemic, often with no pay for travel time or training, which leads to a transient workforce and lack of adequate care.

Healthcare and social care must be integrated.  Until the Government properly integrates social care with healthcare and insists on higher standards across the industry, the current crisis will only worsen.  This should be a major political issue, but it is not receiving sufficient attention.  The public is not being adequately informed of the problems and possible solutions, leaving families struggling to cope and elderly people at risk in a system that is failing on all fronts.

Families will need to prepare for some costs, but they need help.  In Scotland some social care is provided free by the government.  Elsewhere local authority care funding is subject to one of the strictest means-tests.  Most people will receive no help from the state until they have used up the bulk of their assets, causing significant distress to many families and leaving the majority of families to find huge sums at short notice.

Politicians have talked about this problem for years, but there is still no solution in sight.  Despite knowing that numbers needing care will rise inexorably, policymakers have not set aside public money, or encouraged private provision to pay for care.  The quality of care has suffered, many companies offering care are highly indebted and there is a crisis in the sector.

Products for care funding are inadequate.  There are some products already on the market to help people pay for care.  These include Immediate Needs Annuities, Equity Release and local authority deferred payment plans, but each has advantages and disadvantages and they only help at the point of need, rather than allowing people to make plans in advance.

The £72,000 cap is not a solution. The latest proposal designed to stop people losing their life savings or their home to pay for care is the £72,000 cap to be introduced from April 2016.  The state is supposed to step in once the cap is reached, to ensure nobody has to face catastrophic care costs, but most people will actually have to spend more like £140,000 on care before they receive any state help because the cap excludes.

  • £12,000 a year board and lodging costs for a care home
  • Any money spent on care before your council assesses your needs as severe
  • Money spent on a higher-fee care home or more homecare in excess of the local authority basic minimum
  • Any spending before April 2016
  • Even after state funding begins, the £12,000pa for board and lodging elements of care home accommodation will not be paid by the council.

Insurance up to the cap is not a viable solution.  Insurance companies have told the Government that they can’t develop an insurance solution to cover care costs up to the cap.  If insurance is not a realistic option, then other avenues must be urgently explored.  New products and approaches, together with new Government incentives, are urgently needed.

Encouraging saving for care and integrating health with social care could help.  In addition to a better integration of health and social care (the current distinction seems arbitrary and manifestly unfair) it is also important to help people prepare in advance for care spending if it is needed. I believe a savings solution will have to be part of the mix.

How could a savings solution work?

Extra tax breaks are needed to encourage long-term care saving.  This is justifiable because the cost to society of failing to ensure money is set aside for future social care needs will put intolerable burdens on the NHS, on younger generations and on older people.  Urgent action is needed to head off a disaster that is clearly on the horizon.

Tax free pension withdrawal if used for care:  The new pension freedoms could encourage people to set aside money for later life care.  Now that the annuity requirement has been removed, and there is no 55% death tax, pension funds could help cover care costs.  Many people reaching retirement have tens of thousands of pounds in their pension funds but if they use this to buy an annuity, they will have no money to pay for care.  Allowing people to withdraw money from their pension fund without paying income tax, if it is to pay for care, would encourage them to retain some funds in the tax free pension wrapper for longer, just in case it is needed.  If they don’t spend it on care, it will pass free of inheritance tax to the next generation as the 55% pensions death tax has been abolished.

Care ISAs – IHT free: The Government could introduce a separate annual allowance for ISAs that are specifically earmarked to pay for care.  Launching such ‘Care ISAs’ would itself help people realise the need to save for care.

Family Care Savings Plans – IHT free:  Another 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 build up a fund in case one of them needs care.  The probability is that one in four people will need care, but nobody knows in advance which one.  Tax breaks to incentivise this kind of saving, perhaps allowing them to be passed on free of inheritance tax, would help.  There is a role for insurance with such savings plans – which might also include some ‘catastrophe insurance’ to pay out if more than the expected number in any family or group actually need care.

Auto-enrolment to encouraged workplace care saving plans: Alongside auto-enrolment, it might also be helpful to ensure that employers are encouraged to offer the option for people to save in a workplace savings plan that is set aside specifically for care.  This could be part of a flexible benefits package, which receive an employer contribution.

Use Pensions Guidance to provide information and education:  It will be important to ensure that the Government’s ‘Pension wise’ guidance tells people about planning for care.

So, the message to the Government is that our care system is in crisis, there is no money set aside either publicly or privately to fund later life care adequately, and the time to address this crisis is now.  Social care in this country is failing, radical action is long overdue.

January 20, 2015   1 Comment

We need tax breaks for care saving, not more means-testing

4 September 2014

  • More means-testing and tax increases will disincentivise private income and could worsen looming care crisis
  • We need incentives to encourage people to save for care – Care ISAs and tax-free pension withdrawals, plus inheritance tax exemption for care savings
  • Health and social care budgets must be integrated to provide fairer system

Radical reform of social care is required: I welcome the report released today by the King’s Fund, which highlights yet again the flaws in our system of social care.  It is absolutely clear that radical reform of the care system is necessary to address the need for dignified care as the numbers needing care are set to soar in coming years.

Need fair partnership between state and individual:  The King’s Fund report is right to raise the debate about how to fund social care fairly in future, but the proposed solutions could make the situation worse, rather than better, in the longer term.  We need a fair partnership between the individual and the State. A proper review of how to integrate health and care spending is needed, to identify the priorities for public spending and how to fund this fairly. This would allow for an increase in early intervention and more at home care, which can reduce the numbers needing more costly NHS interventions as a result of avoidable falls.

Reform state pension and increase age of eligibility for benefits rather than more means-testing:  However, the King’s Fund proposal to take away pensioner benefits and limit them only to Pension Credit claimants is not a solution.  Indeed it could increase the taxpayer costs of care as it is like cutting the state pensions of those who have saved and penalising those who try to be self-reliant.  Increasing the age of eligibility is an issue to consider, and integrating the free benefits into the state pension would also make sense, so that they become taxable, but extending means-testing is dangerous.  Trying to provide free social care and funding this by more means-testing within the current health and care framework is like sticking a plaster on a wound that is getting worse underneath. Covering up the issue will not really solve it.

Need savings incentives urgently:  It is really important to help people save for later life care needs – there are absolutely no incentives in place for this at the moment and no specific products either.  By extending means testing, those who save for care are simply going to be penalised further which will result in fewer people saving and more  needing taxpayer support.  Nobody is saving to cover care needs and no new products are available – by offering tax incentives such as more ISA allowances, or inheritance tax breaks, savings for care could be kick-started.

Care ISAs and tax-free pension withdrawals:  I have been calling for the Government to introduce a new Care Savings Allowance for the over 50s to allow tax free savings towards care for themselves or their relatives. A ‘Care ISA’ allowance, or tax-free pension withdrawals to pay for care.  Even if care funding is radically reformed, individuals will still have to fund a portion of their care costs themselves so it is vital that we help families put money aside just in case.

NHS cannot cope with the costs of care:  This issue is not just about looking after older or disabled people. It will affect families up and down country and ultimately all of us, because the NHS will be unable to keep picking up the pieces of our broken social care system. Getting social care right, helping people plan and prepare properly and look after themselves will ultimately save money and resources in the NHS. Failure to reform care will end up costing us all far more when the NHS safety nets break down.

Need to integrate health and care budgets and ensure tax incentives for private saving:  Without the additional funding that would come from proper integration of our health and social care systems, plus incentives for people to save for their own care, our increasingly ageing population will still be at risk. Inheritance tax breaks, ISA incentives and encouraging people to use the new pension freedoms in ways that ensure they leave some money in their pension wrappers in case they need to pay for care, would finally start a savings culture for care that is long overdue.

September 4, 2014   1 Comment

Budget ISA moves – ISA savings for care

21 March 2014

  • Nicer ISA savings – what could be NISA!
  • And how about a Care ISA?

As the dust starts to settle a little following the sudden Budget improvements to Individual Savings Accounts (ISA) rules, I thought it might be helpful to note down some more thoughts.  Wouldn’t it be great if the new found freedoms could be used to help fund social care.

An ISA tax free savings account, designated to pay for care costs, could help with the coming social care crisis and also give families some peace of mind about covering the expense of infirmity in old age.  An added incentive to encourage more people to pre-fund possible care needs – whether for themselves or a loved one – would be to allow any designated care funds to be passed on free of inheritance tax, if not needed for care and kept in a fund that will still be used to fund care needs for other family  members.

This would enable the savings industry to design longer term products to help people save for the possibility of needing care in later life, rather than suddenly finding they need large sums of money which have not been budgeted for.

Three or four years’ worth of ISA savings, of £15,000 a year, would result in a fund that could cover most people’s care costs in later life.  Once care is needed, the fund could then be drawn down slowly, or switched to cash.  I do hope the industry will rise to this challenge now that the Government has opened the door to more flexible savings.

Now that ISAs will be more flexible, with people being allowed to shelter much more income from tax and also free to choose whether they want cash or stocks and shares in their savings fund, the position of savers has been significantly improved.  Whether you have larger or more modest sums to set aside, or perhaps if you receive an inheritance or bonus payment, you will be able to build up more savings over the long-term in a tax-free account.  Young people saving for a house can keep the money in cash, those in retirement who need to live on their savings likewise, but those who have savings for the longer-term will be able to put the money in stocks and shares and then switch into cash as and when they feel it is appropriate for them.   There is not yet any funding vehicle to prepare for care costs, using the new ISA flexibility might just spur the industry to develop some.

March 21, 2014   2 Comments

15-minute care visits are an affront to decency

7 October 2013

  • Care staff earn less than £1.50 for each 15-minute care visit
  •  Each visit earns less than a cup of coffee as private care firms and councils cut costs
  •  Such social care cutbacks are an affront to decent standards of care
  •  Social Care crisis is deepening

 15-minute care visits are putting patients and careworkers in an impossible position:  The Leonard Cheshire charity report (see link here http://www.lcdisability.org/?lid=8843 ) highlights the degrading impact of 15-minute social care visits on lonely, frail elderly people.  But the social care crisis is not just impacting those on the receiving end of such ‘care’.  The private sector careworkers are themselves being put in an almost impossible position.

Staff paid less than a cup of coffee!  A careworker earning £10 an hour will often earn just over £1 for each 15-minute visit.  Those dedicated social care staff in the private sector, who are employed on or near minimum wages, with zero hours contracts, are being expected to try to cope with such unreasonable demands, without even earning enough for a cup of coffee.  Is this really what Britain believes is appropriate?

Low wage work will pay £2-00-£2-50 per visit:  How can this be?  Care staff are often paid only the minimum wage, but let’s assume a careworker is paid £10 an hour.  They will be paid £2-50 for a 15-minute visit – perhaps to get a client out of bed, washed, on the toilet and into a chair.  However, most of these dedicated workers are not paid for their travel time and not even reimbursed for the cost of their travel.  So, if they make four 15 minute visits, they do not actually earn £10 for an hour of work.

Not paid for travel time so they earn less than £1.50 for each visit:  For example, if it takes ten minutes to go from one house to another, they will have spent one hour and 40 minutes of time for the four 15-minute appointments, but will receive just £10.  That works out at £6 per hour – or just £1.50 each visit.

Not reimbursed for travel costs either:  But if they are travelling by car, they must also pay their own petrol and motoring costs.  That means much less than £1.50 a time.

Puts those in need and those trying to help them in almost impossible situation:  So, 15-minute visits are not only putting the person needing care at risk of being poorly served, the staff trying to cope with this penny-pinching system are being expected to cope in almost impossible conditions too.

Pitiful choices for pitiful pay:  This is another wake-up call highlighting the extent of the crisis in our social care system.  For an older housebound member of society to be forced to choose whether to go thirsty or go to the toilet is a hallmark of failure.  To put dedicated staff in a position where they have to cope with such choices too, for pitiful pay, is an affront to decency.

Careworkers need better working conditions:  We need to properly address the inadequacies of leaving social care to cash-strapped councils, instead of promoting proper standards, we will be failing millions of the most needy members of society.

Social care is vital just as healthcare is:  Social care should be valued as the vital service that it is.  Healthcare is funded far better.  It is time for us all to wake up to these challenges.

October 7, 2013   No Comments