Richard Walsh explores the changes due to take place under the new social care cap regime.
In May, the Institute and Faculty of Actuaries published an in-depth report, How pensions can help meet consumer needs under the new social care regime.
The report is much more wide-ranging as it also covers protection products and takes account of the new pension rules. These new rules are generating lots of new products and at some point, we can expect social care costs to become part of the picture.
First, some facts about the new social care cap of £72,000 that applies from 2016. Only 8% of men and 15% of women entering care aged 85 today are likely to reach the cap, yet one in three women and one in four men aged 65 today are likely to need care.
The difference is because the cap applies only to local authority set care costs – it does not apply to daily living costs and top-up care costs. Also, it kicks in only when the local authority classes the individual’s need as severe. On average, people are expected to spend around £140,000 on care costs before reaching it.
Somewhat counterintuitively, as the cost of care in London is higher than in the West Midlands, the time taken to reach the cap in London is shorter, which reduces the total personal costs incurred.
The cap only has a limited effect, avoiding catastrophic loss. The report looks at six options for avoiding the “non-catastrophic” ones: a flexible long-term care fund (a new idea: the Pension Care Fund (PCF)); long-term care insurance; income drawdown; a disability-linked annuity; an immediate and deferred annuity; and a variable annuity. The features of each option are explored, including tax issues and pros and cons for different types of consumers, as follows:
- The PCF would be a ringfenced long-term care savings fund that would sit within the framework of a defined contribution pension scheme. The savings would be treated for tax purposes like a pension and any money accumulated not used to fund care could be passed on – free of inheritance tax – for use as a long-term care fund by a spouse or other beneficiary. Quite attractive, as it preserves value.
- Long-term care insurance is also examined. But we know policies that require regular premiums before retirement or a large singe premium at retirement and pay out at the point of care will always be a niche product. In the UK, they have died out. In those countries where they do exist (for instance, the USA), they have had problems – often driven by pricing difficulties resulting in policies that have reviewable premiums that increase with age – and they tend to lapse.
- In the UK, we also had long-term care bonds, with reviewable rates and endowment investment issues. This was a toxic mixture. It remains to be seen if any of these products make a reappearance here.
- Income drawdown is an interesting one, given the Budget changes. To make it an attractive option, income paid direct to care providers would need to be tax-exempt – as is currently the case with immediate needs annuities.
- Finally, the disability-linked annuity – a combination of a lifetime annuity and a LTC product. It provides standard lifetime annuity payments while the policyholder is in reasonable health. However, the annuity payments increase to higher levels if a policy holder needs care. The problem is that people would get a lower standard rate and annuities are likely to become less common anyway post-Budget changes.
Richard Walsh is a fellow of SAMI Consulting, www.samiconsulting.co.uk