Is it time for the care pension? Gov't urged to combine pensions with care cost insurance

Jonathan Stapleton
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Is it time for the care pension? Gov't urged to combine pensions with care cost insurance

The government has been urged to enable the creation of a new at-retirement product which would combine existing income drawdown arrangements with insurance against future care costs.

In a report published by mutual insurer Royal London, director of policy Sir Steve Webb said there were currently virtually no financial products which allowed people coming up to retirement to plan ahead for future care costs. 

The paper identified several factors which put consumers off buying such products - including not wanting to think about a time when they may need to be looked after; an incorrect assumption that ‘the government will pay' if someone needs care; the limited supply of specialist financial advice for those wanting to plan for care needs; and a lack of awareness of the likelihood of needing care and the potential cost of care.

The paper also said that insurers have been reluctant to offer such products, except at the "door of the care home" through the sale of so-called ‘immediate needs annuities'. 

It said a key barrier for insurers is forecasting potential future care costs, decades into the future, especially given the potential for major medical advances. In addition, it noted that care insurance has often been sold in the past as a freestanding financial product, requiring advisers to acquire specialist qualifications, which many may be reluctant to do.

It said that, following the introduction of pension freedoms, a growing numbers of people go into retirement with a pot of money from which they draw an income through retirement - and suggested that care insurance could be bolted on to these income drawdown arrangements, either in the form of a regular premium or a one-off lump sum.

To make these products more attractive, the paper suggested favourable tax treatment on money taken out of income drawdown to pay for care insurance - noting if this money goes directly to an insurer and any payout from the policy goes straight to a care home, these withdrawals should be tax free - and an overall cap on people's lifetime care bills, so that insurers are not taking on an open-ended liability and can therefore offer more attractive premium levels.

The insurer has submitted its paper to government and it is now under consideration by the team preparing the proposed green paper on social care.

Webb commented: "More than 1 in 4 of us will spend some time in later life in residential care, and the total bill can easily run into tens of thousands of pounds. In extreme cases, people can be forced to sell their family home to pay for care.  It ought to be possible to take out insurance against this risk, but insurers are reluctant to offer products and consumers have been reluctant to take them up.

"A care pension could build on the increasingly popular income drawdown product by adding in care insurance.  To make this work, the government would need to make sure payments into such policies were tax-free, and would need to introduce an overall cap on lifetime care costs.  With these changes, millions of people could start to build up protection against the risk of facing catastrophic care costs in later life."

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