Updated 23 April 2020
Funding long-term care can be the biggest financial challenge of later life. Now a new pension-insurance hybrid has been proposed to help care recipients and their families meet this challenge. How would it differ from what’s already available – and will it ever appear?
Long-term care is expensive. A carer coming to your home three hours a day could cost you around £16,000 per year, while a residential care home may cost double that or even more. If you don’t want your whole estate to be whittled away in care fees, or risk running out of money and falling back on the state, what are your alternatives?
A proposed new product may help people to protect themselves against this predicament. Tentatively called the ‘care pension’, this would really be a kind of insurance that would cover most or all of the holder’s care costs. The idea was initially raised during the 2010-15 coalition government by then-pensions minister Steve Webb. Now policy director at insurer Royal London, Sir Steve has submitted the proposal to government consultation and the Treasury is said to be interested. Such a product would help to address the potential care funding crisis in the future.
The proposal is still in its early stages, but the concept would allow people near retirement to take money from their pension tax-free to pay into a special insurance policy. The premiums (estimated to be around £100-£150 a month) would insure the holder for a range of different care scenarios. The insurer would agree to pay out once the holder’s care needs passed a pre-defined threshold, the payments going into a special ‘care account’ until that person’s death.
There is however a major obstacle to overcome. For such a product to work, the government would have to introduce a cap on individual care costs (a policy that was previously planned but abandoned). The main reason why such insurance products don’t exist at present is that care costs are not yet capped, meaning that the risks to the insurer are too high to make the products affordable.
Currently, the closest thing to a ‘care pension’ today is an immediate-needs annuity or INA (also known as a care fees plan). This works in a similar way to a standard annuity, in that it guarantees to make regular payments for life in exchange for a lump sum up front. The payments from an INA go directly to your registered care provider and are tax-free, unless you leave residential care (at which point the payments go to you as income and are taxed).
You can arrange for an INA to increase its payments over time to meet rising care fees. The downsides of an INA are that it is still very costly (you may need to sell your home to purchase one of sufficient value) and it won’t automatically cover all your fees if they rise above the rate at which the INA is set to increase. The advantage of taking out an INA (as opposed to just selling your home and spending the proceeds on your care) is that you won’t ever completely run out of money if you are in care for a long time. Against that, your family may lose out if you die soon after taking it out – although some come with a ‘money back guarantee’ if the holder dies within six months.
There are various other current options for funding long-term care, which you can find out more about here.
There’s no indication yet as to when (or if) the care pension might become available, but Sir Steve is optimistic. He said, ‘It would be relatively straightforward to integrate a care insurance element. There are various ways in which this could work, but a simple model would be that the policyholder commits to pay a regular insurance premium directly from the drawdown account to the product provider.’
For now, it’s sensible for anyone even in the early stages of retirement to think about how they might meet care costs in the future, and to plan ahead for it. A financial adviser who specialises in care planning can help you make it much more affordable when the time comes.
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