23 June 2014
- Budget pension reforms could help kick-start saving for social care
- New tax breaks will help savers build up care savings funds – could be with pensions or ISAs
- My Budget consultation response highlights urgency of addressing social care funding crisis
In my response to the Chancellor’s 2014 Budget on pension reforms, I have included a section explaining how the pension freedoms could be used to help kick-start a culture of care saving. This probably needs to be incentivised with further tax breaks. However 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 clearly on the horizon.
The new pension fund freedoms introduced by the 2014 Budget could pave the way for exciting new approaches to solve the crisis in social care funding – which will inevitably follow the pensions crisis. Official estimates suggest that perhaps 80% of the population over age 65 will need some care and support in later life. Half are likely to need to spend around £20,000 and one in ten will spend over £100,000.
But there is no money set aside for care: Even though the demographics and medical advances obviously point to a dramatic rise in the numbers of older people needing long-term care, as the millions of baby boomers currently reaching their 60s will be likely to need care in the coming twenty years or so, there is almost no money set aside to pay for the care they will require. The Government has not set aside any money for this huge looming cost, so no one has actually prepared for this.
Government needs to urgently design new tax rules to encourage saving for social care
People need to plan to meet such costs – guidance could help: It will be important to ensure that guidance or 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 needs 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.
Possible new approaches to paying for care – with proposed new tax incentives:
Potential new products for care funding
Using pensions for care
Tax free pension withdrawal – allow pensions to be withdrawn tax free if used for care
Care ISAs – incentivised by allowing them to pass on free of Inheritance Tax
Family Care Saving Plans – incentivised by allowing them to pass on free of Inheritance Tax
Workplace care savings plans in auto-enrolment
Using pensions for care: 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 20-45%.
Tax free pension withdrawal: 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.
Care ISAs – IHT free: 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. This could allow ISAs to be used as a care saving plan. Investment returns would be tax free and if the fund was not needed for care it could be exempt from inheritance tax as long as the funds passed on are themselves set aside for future care funding. These special ‘Care ISAs’ would help signal the need for people to save for care. Even if only those with larger amounts of saving will benefit most at first, introducing special tax allowances to encourage care saving, could help more people realise the need for this kind of saving, which is important because most are currently unaware of the issue.
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 put in money each year, 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. Again, the Government could offer tax breaks to incentivise this kind of saving. People could perhaps use the tax free lump sum from their pension, with these plans being free of all inheritance tax as long as they stay earmarked for care spending. These savings plans might also include some ‘catastrophe insurance’ that would pay out if more than the expected number in the group actually need care.
Workplace benefits for care 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. This could be set up by the employer, and perhaps offered as part of a flexible benefits package, or offered to older workers who have some pension savings, but have not yet saved for care. These could be tax advantaged savings products, offered as a workplace benefit, or ordinary savings accounts which receive an employer contribution.
Why Dilnot reforms will not solve the care crisis: The £72,000 cap, based on Dilnot’s proposals, is not a solution to the problem of inadequate social care funding. It is not an actual maximum and represents only part of the amount people may need to actually spend on their care.
- £72,000 cap excludes £12,000 a year board and lodging costs which must still be paid
- Cap only covers spending when care needs assessed as ‘substantial’, ignores moderate need care spend
- Cap only covers spending up to local authority basic rate
- Only starts from 2016, any spending before that won’t count towards the cap
- Even after cap is reached, people must still pay £12,000pa for care home accommodation
The cap is much too high to allow an insurance solution to care funding: The £72,000 cap is too high to allow insurance companies to offer insurance solutions for care funding. Because of the exclusions, someone would probably have needed care for about 5 years before they reach the cap, and even then they will need to spend thousands more. The average care home stay is 2-3 years, so most people will simply not reach the cap and never be able to claim on the insurance. Thus, insurers will be reluctant to offer such a product and the bottom line is that people will have to find money to pay for care. As there are no savings currently set aside to pay for the huge looming costs of social care for an aging population, a new source of money must be found which will need to be based on savings, not just insurance. The sooner we can start to help people save for later life care needs – for themselves or their loved ones – the better.
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.
Here is a link to my response to the Budget Consultation questions on social care funding