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Radical changes to care for the old
Big changes to the way old age care is funded is inevitable. David Prosser looks at some of the options.
In hindsight, the row over the so-called "dementia tax" marked the moment the wheels began to come off Prime Minister Theresa May's general-election campaign in May. But this wasn't a revolutionary idea. Successive governments have tried and failed to reconcile the realities of our ageing population with the fact that most people resent the idea of giving up savings and wealth they have accumulated over a lifetime to pay for long-term care costs.
Now it seems that May's government is close to admitting defeat too. It appears to have dropped the party's previous pledge to introduce a cap on care costs that would limit the maximum amount that people are expected to pay towards their own care to £75,000. Instead, ministers hope that an ongoing consultation on care will help forge a consensus for reforms. Tellingly, however, while the consultation had been due to report at the end of this year, this may now be delayed until next summer.
Such delays may be understandable given the political sensitivities of the debate, but kicking this issue into the long grass looks irresponsible given the scale of the problem. In a country where two million elderly people in the UK already have a care-related need, some four million are expected to require daily help by 2029. A woman who reaches the age of 65 has a 35% change of having substantial care needs later in life, estimates the Institute and Faculty of Actuaries, while the same is true for 25% of men.
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One idea apparently being considered at the moment is the introduction of a scheme like the pensions auto-enrolment system. Auto-enrolment, where all employees are automatically signed up to their employer's pension scheme unless they opt out, has successfully boosted the number of people saving for old age to record levels.
However, while a care equivalent of auto-enrolment has been the preferred option of some providers for some time Legal & General first suggested the idea in 2014 introducing such a system would be fraught with difficulties. Not least, long-term care is only needed by a minority of people and most people tend to underestimate their likelihood of needing it. Opt-out rates would therefore likely be much higher than for pensions.
Financial incentives such as tax breaks might help, as with pensions, but would represent a substantial up-front cost for the Treasury. Moreover, a care system built on auto-enrolment would not be of use for the record number of Britons now in self-employment five million and growing.
Employers, too, are likely to baulk at the administrative expense of operating such schemes and potentially contributing to them in a period where compulsory pension contributions are about to increase sharply, along with a significant rise in the minimum wage.
But if not auto-enrolment, then what? In practice, it may be necessary to move toward the systems that apply in countries such as Germany, the Netherlands, Japan and Singapore, where workers pay into state-backed long-term care insurance funds or programmes via payroll and income-related contributions. These schemes then pay out as and when they are needed later in life.
Such schemes are generally mandatory, though not necessarily for the whole of people's working lives in Japan, for example, membership is only mandatory for the over-40s. Coverage, moreover, is variable in some cases, these schemes only cover care costs above a certain level, while in others coverage is closer to universal.
A tax on age
Chancellor Philip Hammond is planning a "budget raid" on older workers to pay for tax breaks for younger people, says Christopher Hope in The Daily Telegraph. One idea being considered in the bid to promote "intergenerational fairness" would be to cover the cost of a cut in national insurance contributions (NICs) for workers in their 20s and 30s by cutting pension tax relief for older wage earners.
Hammond plans to run ideas past his own MPs after the "embarrassment" of having to axe a rise in NICs weeks after March's budget. This plan has already been dubbed a "tax on age". The chancellor is also considering lowering stamp-duty rates for first-time buyers, says the Evening Standard.
How to fund long-term care
With the UK's long-term care system still in such a state of flux, it's wise to plan ahead, in much the same way as you now save for a pension. But what's the best way to do so when there is no certainty that you will need care, or how much you might need?
It is no longer possible to buy long-term care insurance in the UK the handful of providers who once serviced this market have pulled out. Insurers have so far resisted calls by the government to develop new products to help people pre-fund care, arguing that ministers haven't yet provided any clarity on how the system is likely to develop from here.
However, there are long-term-care products available at the point of need. Most obviously, several insurers offer care annuities, sometimes known as immediate care plans, which pay a guaranteed income for life to help people meet long-term care costs.
These are most often bought by older people and can offer relatively good value, as well as effectively capping the cost of long-term care; but you will need a lump sum to fund the purchase. That could come from private pension savings, family members or from the sale of a house. Equity-release plans, which allow people to access the value in their house without having to sell, are another possibility. Make sure you consult an adviser with expertise in long-term care funding.
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David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.
