The government’s green paper on social care funding presents an opportunity for the financial services sector to launch innovative long-term care (LTC) products and provide expert care advice, according to several industry leaders.
The green paper, entitled Shaping the Future of Care Together, aims to start a debate on how to pay for the care of the growing elderly population. At present, adults in England and Wales must undergo a means test if they move into a care home. Those with more than £23,000 in assets – which is estimated to be almost 40% of care home residents – must pay their own way. With care home fees averaging £30,000 a year, many elderly people have to sell their homes.
The green paper contains three funding options: a partnership approach which shares costs between the individual and the state; an insurance approach which would enable people to choose to take out protection against the risk of having high care and support costs; and a comprehensive approach in which everyone who could afford to would be required to pay and would get free care and support in return.
Under a partnership system, everyone who qualifies for care and support would be entitled to have a set proportion – for example, a quarter or a third – of their basic care and support costs paid for by the state. People who are less well-off would have more care paid for – for example, two-thirds – while the least well-off would continue to get all their care for free.
While a co-payment approach seems fairer than placing the care burden solely on the individual, people who own their own homes or have savings might still have to pay very high contributions if they go into a care home for a long period of time. As a result, the green paper suggests that the partnership model is expanded to include the insurance option or the comprehensive option.
In the insurance system, the government would help people to prepare for care costs through voluntary insurance. The green paper states that the government might work with the private insurance industry or set up an insurance system backed by the state, perhaps with different incentives for people to enter the scheme.
Tish Hanifan, director of SVAR fair, a consultancy which developed the Later Life Adviser Accreditation Scheme, said: “The government has recognised that it can’t ignore private finance. This is a huge opportunity for the financial services sector to innovate. This could be in equity release, domiciliary care or the pre-funded market. The fact that pre-funded products didn’t work before doesn’t mean they won’t work now.”
However, encouraging people to save for something that might never happen to them could be difficult, particularly as the government estimates that the insurance model would cost between £20,000 and £25,000 per head.
“People will only save for care if they perceive it to be a problem. Lots don’t think they will need care and, if they do, they think the government will provide for them,” said Hanifan.
In fact, the government estimates that an extra 1.7 million people will require access to social care over the next 20 years. Average life expectancy has risen from 66 years in 1946, when the welfare state was created, to 78 today. The number of people over 65 now outnumbers the under 18s for the first time.
The comprehensive model makes providing for care compulsory rather than voluntary. Under the system, the state would put in existing funding from taxes and people at or over retirement age would be required to pay a levy of between £17,000 and £20,000. Once people had paid their contribution, all nursing and social care would be free.
The paper states that the compulsory system would be cheaper than the insurance model, since a scheme where everyone is required to make a contribution would cost less to the individual than a smaller voluntary insurance scheme. However, everyone would have to pay in whether or not they actually need care in the future.
Alex Edmans, business development manager at Saga, said: “If people don’t need LTC it would be seen as an additional tax paid for the benefit of those who do. There are also questions about what level of care people would get. The chances are that if someone wants high quality care, they would need to pay extra anyway. It would also involve means-testing to work out who qualifies for care.”
Ian Owen, chairman of LTC provider Partnership, said trying to tackle the problem with a pre-funded model would not work because it is difficult to predict what proportion of the population will need care, how long they will need it for and how much it will cost.
“It is extremely difficult to come up with a figure for an inheritance levy. It would have to increase over time and I don’t see how that would work,” said Owen.
The green paper also notes the importance of people being able to access advice about the care system. However, Owen points out that the green paper primarily focuses on future provision rather than addressing the fact that every day more than 100 new people need access to care.
“At the point when an individual needs care the family must be directed to a suitably qualified and accredited financial adviser,” said Owen. “All too often people seek advice from someone who isn’t suitably qualified and who can’t advise on all the options.”
Whatever the outcome of the green paper, there is an immediate need for advisers to guide their clients through the web of LTC solutions. And with the spotlight firmly on care, we will hopefully see some innovation from financial services companies.
THE FUTURE FOR BRITAIN’S AGEING POPULATION
A recent study by Aviva, entitled The Cost of Family Care, found that 62% of over 50s worry that their pensions and savings are unlikely to see them through retirement. Almost three quarters (71%) of adults in the UK fear their parents’ shortage in retirement funding could cause severe problems for their own financial futures. Six in 10 (60%) are concerned their parents will not be able to afford to stay in their existing homes in retirement – a quarter (25%) plan for their parents to live with them.