PENSIONSANDSAVINGS.COM

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.