From Ros Altmann:economist and pensions,
    investment and retirement policy expert

  • pensionsandsavings.com

    Pensions are not the best way to save for care

    Pensions are not the best way to save for care


    • Pensions are not the best way to save for care –  we all hope to need a pension but only one in four will need care
    • Most wont reach the cap and will pay for all their care – that may be socially necessary but we need to prepare for it
    • Cap won’t cover all the costs and deferred payment plans should be provided for home care too, to avoid expensive equity release

    As the Government unveils its consultation on the Dilnot reforms, here are my thoughts:

    1.  Pensions are not the best financial product for covering care costs: As regards financial products, most people do not have enough saved up for a good early retirement income, let alone having money left over for care.  The very well-off will be able to manage but for most middle income groups, pensions cannot cope with care costs.  In any event, most people will not actually need care.  Only one in three or one in four of us are expected to have later life care needs, so it could be a a waste of money for each person to save individually for something most of them will never need.

    2.  £72,000 care cap is too high, most will have to cover all their care costs:  It’s important that people realise the newly announced cap on social care costs, while welcome, is set so high that most people will still end up paying for all their care.  The £72,000 is only for basic level, local authority rate care not a higher standard and it will not include the cost of board and lodging which is likely to be an extra £12,000 a year on top of any care costs.  Therefore, most people will spend over £100,000 before getting any state help and will most likely pay for all their social care themselves.  That may be socially necessary, but it is important to be honest about the true scale of the responsibility that will fall on families or individuals.  It is, however, a positive step forward that the means-test threshold is being raised from the current £23,250 to a more reasonable £118,000 including the value of the house.

    3.  Insurance likely to be expensive as most will not reach the cap:  The cost of providing care insurance is likely to be very expensive and past products have all failed.  However, saving collectively for care makes more sense.  Not everyone will need to spend money on care at all, but families will want to have a savings pot saved up just in case one of them needs care at some time.  This could help them cover care costs even before they reach ‘substantial’ need too.

    4.  Government should introduce special tax incentives to save for care – such as Care ISAs:  I would urge the Government to introduce new incentives to help people save up for care either for themselves or a loved  one in a tax free or ISA format.

    5.  The care cap clock only starts ticking when care needs are ‘substantial’:    Only those with substantial needs will start accruing credit towards the cap, therefore those who have more moderate care needs either in their own home or a residential home, will have to pay all the costs themselves.  It is good to have national standards and end the current postcode lottery, but it is also important not to set the bar too high.  Having an assessment will also be useful to help signpost families to sources of information and advice which can be vital in preventing more severe needs, or planning for the future costs.

    6.  Government’s proposals will do nothing for the care crisis that already exists:  The reforms will not start before 2015/16, so there is nothing for families facing care costs in the next few years.  The risk of more people having to sell their homes remains.

    7. New deferred payment plans should be much better value than equity release, although councils currently provide loans without interest and fees:  It makes sense for the Government to try to reduce the costs of borrowing against one’s home, since equity release is usually a very expensive option.  Currently, around 40,000 people a year sell their home to cover care costs.  They usually are not aware that all local authorities are already obliged to offer deferred payment plans to anyone who asks for one, with no interest or charges.  Of course, most authorities fight hard to avoid having to pay for these and it is not clear why taxpayers should have to subsidise interest free loans.  The proposals for a ‘not-for-profit’ system are sensible, but it is important to recognise that the home will still need to be sold, just not while the person is alive.

    8.  Will deferred payment plans also help those needing care at home and with moderate needs?:  The deferred payment plans are only being made available to people in residential care. However those who need looking after in their own home still need to find the money and might therefore also need access to funding for care.  In addition, people with less severe needs will still need help to cover the cost of home-care and, rather than having to sell their home or take out expensive equity release plans, the Government should consider extending the deferred payment plans to others too.

    The bottom line:  The bottom line of these proposals is that it will be necessary for families to put money aside for care.  We do not know which one of us will need care in future, but we do know that many of us will have to spend huge sums before the state covers the costs.

    One thought on “Pensions are not the best way to save for care

    1. A helpful article on an area in which I am struggling to navigate on behalf of my elderly parents. There do seem to be products out there for an immediate needs care annuity. These protect the insurance company as the need for care is certain rather than 1 in 4, but also protect the individual from not knowing whether you will need one or 10 years of care. What I don’t know is whether these products represent reasonable value for money. I really like Ros’ idea of special ISA’s for this purpose.

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