Should financial health checks and care accounts become part of the long-term care market? Fiona Murphy looks at alternative recommendations for funding.
Nudge techniques have been a real focus for financial services in recent years and a new report argues these principles should be built into long-term care (LTC) planning.
The study Unlocking the Potential, by Cass Business School professor Les Mayhew and think tank Demos' deputy director Duncan Mayhew, urges that people should be required to have a financial 'health check' before receiving their first state pension payment.
This would ensure that people were thinking about making provisions for long-term care as well as retirement income, the report argues.
O'Leary warns: "Once-in-a-generation reforms to social care risk being undermined by a lack of public awareness about how much later life care costs and who foots the bill. People should be expected to stop and think when they reach retirement age, so that more of us put money to one side for care."
The government's decision to cap care fees at £72,000, with additional ‘hotel' costs of about £12,000 a year, is due to come in during 2016.
The Care and Support Bill is currently in its final stages in Parliament, and in recent weeks policy makers have debated the role of financial advice and how to raise public awareness.
The report shows that despite the relatively high-profile passage of the bill, four in 10 people are still unaware they might need to pay for their care and support later in life. Almost two-thirds (63%) said they have hardly thought about how to pay for social care needs in the future, and 72% said they have not started to prepare.
The report also suggested less than one in ten (9%) people said they know what limit the cap has been set at.
Money Advice Service head of policy Jackie Oatway agrees: "It is very difficult to get people to engage with the issue. It's a lot more difficult to encourage people to save for events that have negative connotations. Most people are optimistic that they will not need long-term care.
"If you compare it to pension saving, that has more positive connotations – people know they will stop working and will need a retirement income."
The report advocates a simpler system, which combines a person's assets and income to calculate how many years of social care they could afford. Those able to afford fewer years would receive more government support.
It also proposes the idea of applying the pension model to social care. The offer of a ‘care account' would allow responsible savers to earmark some of their money or assets separately, a proportion of which would not count against them in their means test.
The scheme would reward savers by increasing the likelihood of the government supporting their future care costs. But what do other parties think of these proposals?
Compulsory health check
Just Retirement was also involved in the report. Its head of customer insight Stephen Lowe says: "One of the policy recommendations we identified in [a previous report] and brought to Cass was how we could encourage people to ring-fence a portion of their housing equity in order to pay for care.
"One of the consequences of that is you need to encourage people to bring forward their financial planning and you have to say at what point can you do that? In our initial recommendation, we said age 50.
"We chose to suggest a financial health check at the time you start your pension. It is early enough when people are at a good mental capacity. It is also at a changing time in their life when they can rethink things and it is probably the time they will see an adviser. We want to bring the policy much earlier. As with most policies, you would like to nudge people down the right path.
"We suggest there should be a nudge by the Department for Work and Pensions (DWP) when they engage with the citizen at the time of the state pension, and the health check could be a simple online tool.
"It could be on the DWP or Money Advice Service sites – we didn't get to that level of detail. It has to be around prompting people, and we envisage it will be a relatively simple online tool."
Symponia joint managing director Janet Davies agrees that people should plan for care and seek advice, but making it a compulsory part of a person's state retirement pension is "a step too far."
"Not everyone drawing a state pension will have any money – either to plan for or pay for their care. And who will do the health check? At what level of overall income would the line be drawn? What will happen to the pension of those people not willing to plan ahead? There is, after all, a 75% chance they won't need care.
"You can't suddenly tell people who have been paying national insurance and tax all their working lives that they now can't have a state pension because they didn't look at their care need – especially free-thinking independent adults."
Meanwhile, the Money Advice Service is looking at developing a financial capability strategy to help people engage. Oatway explains: "We are engaging with the Department of Health and local authorities.
"One of the pieces of work we are leading is developing a financial capability strategy and we are working with a range of stakeholders across industry from charities to advice providers and government.
"We have set up working groups looking at older people and how to encourage them to prepare for later life and how advice needs are changing."
So what about the care account idea – is it realistic to think that people will actually save in such vehicles for a future care need? Davies says: "This has some merits, but it will still create a much maligned two-tier approach."
Davies explains currently people cannot act as a third party to top up fees above what the local authority will provide.
She adds: "If it is not going to be counted towards the asset means test, not only will it cost local authorities more, but it will encourage the squirreling away of assets and perpetuate the myth that asset deprivation is a good thing – which it isn't."
Lowe says: "The beauty of a care account is that it doesn't require an individual, when they reach the age of 50 or 60, to start saving money. If you are in the fortunate position where you have a £300,000 property and to some extent it's paid off – as is the case with so many 65-year-olds – they are sat on about £800bn of housing equity.
"If they are the kind of person who wants to sort out their pledge to protect themselves for care and, say, their family is taken care of, they can sign an agreement where, say, £100,000 of their property is ring-fenced. It is a virtual care account, so it's a charge you put on your property; a commitment that you won't spend that money on anything else."
Lowe says for this idea to take off, there must be incentives to make the venture worthwhile: "There are incentives HM Revenue & Customs could put in place. For example, the money you put in your care account could be disregarded when it comes to the money counted in the means test for social care.
"That care account concept would not stop you moving property. It is portable. But if you sell your property, the money you have ring-fenced would be put into your care account in cash, in some kind of savings regime. If you never go into care, that money would go back into your estate."
Such recommendations do have value, but the biggest nudge should still be towards awareness and financial advice. Let's see what the industry comes up with.
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