Fiona Murphy looks at the perceptions surrounding long term care funding and how advisers are responding to client needs.
Myths often originate as a way to explain the unknown. Take for example, the belief that ostriches bury their heads in their sand. Ostriches actually react to danger by lying on the ground. From a distance, it appears their heads have disappeared. It has become so engrained in the popular imagination that it continues to be accepted by many as fact. Likewise 14% of people over 55 still wrongly believe the government will fully fund long term care costs for everyone, according to Aviva's seventh Real Retirement report. The view persists as the biggest myth of the retirement market, despite the recent media spotlight on care after the Dilnot Commission's work.
And while ostriches do not bury their heads in the sand, people often metaphorically do, regarding the issue of care. A further troubling finding was that a staggering 53% of over 55s have no plans in place, yet paradoxically many respondents (12%) admitted they were ‘terrified' about the prospect.
So how are IFAs stepping up to this challenge of long-term care? What can be done to help people fund long term care, and what can be done to tackle the fact that many people over fifty continue to be in the dark?
There is a real lack of clarity on the subject of funding long-term care. Members of the public often equate social care with health care, and assume the NHS will foot the bill. Others situate it solely in the hands of government or local authorities. Yet in England only those with assets below £23,250 can have their fees paid. As this figure includes the value of any house the person may own, very few people fall into this category of having their care costs paid for them.
For advisers operating in the care market, it is all about understanding how people operate. As the Society of Later life Advisers' founder and joint chairman, Tish Hanifan points out, people often do not consider the cost of care. She said people "often don't think about being old. It's hard to change that mindset. Even if they do think about it, there's always something that seems more pressing, such as student loans, homes etc."
This was confirmed by Aviva research which confirmed many people on the brink of retirement were saddled with debts ranging from credit cards to mortgages, with women owing £20,845 on average. Aviva's at-retirement director Clive Bolton identified "a hardcore set of people who are either unable or unwilling to save, who need to be encouraged and educated further." But how can the message be transmitted?
Advice is out there. It's just not being utilised. As the survey confirmed, only 11% of people would consider speaking to a financial adviser. Time and time again, IFAs and providers stress the importance of seeking advice. Retirement specialist Partnership's managing director - care, Chris Horlick identified this need saying Google has 28 million hits on the phrase ‘paying for care' as well as other related topics.
He believes the demand is generated because "nowhere is there a third sector organisation who will advise you and point you in the direction of a financial services adviser or portal, where you can seek your own advice." Partnership has set up a website, which not only provides information, but a postcode finder for specialists in care fee advice, which has now proved popular among local authorities.
To raise awareness in general, advisers advocate communicating the need as early as possible, particularly for those who potentially have ten or fifteen years left at work. As Hanifan says: "If one of our members sees someone at 75 there's no point in talking about planning ahead, if they see someone at 50 or 55, pre-retirement, they can look at how that might affect them."
Pitfalls for financial planners
While more commonly the public looks to the state for guidance (46% of Aviva respondents felt the government should be doing more), there are clear opportunities for the financial services sector to step in.However, with many people feeling they will never need long-term care, the risk presents a great challenge for IFAs and financial services. It does not seem practical that a person in their forties pay for in advance for care they might possibly need in their eighties. This was a key factor that killed off pre-funded long- term care insurance products. The market dried up, because there wasn't a sense of need from consumers. Horlick says: "|It's a difficult thing for insurers to underwrite, because you have to work out a number of things that are quite difficult, at an early stage in a person's life."
However, he is hopeful things will change. While currently financial products seem to quantify an ‘unknown quantity', the Dilnot commission is attempting to develop a ‘known quantity'by putting in place certain limits for the cost of care (under the proposals lifetime care costs will be capped at £35,000 with hotel costs capped at £10,000 per year). With concrete figures in place, IFAs would be able to provide more accurate estimates of care costs to clients.
But still, there needs to be a range of diverse products in the market. Currently there are only a handful of companies offering long-term care insurance products. This is mirrored by the fact only 2% of Aviva respondents have long-term care insurance. The others said they would rely on pension and savings (13%), releasing equity (9%), their pension fund (3%) and family assistance (3%) to fund long-term care fees if necessary. Popular options that do exist are immediate needs annuities and equity release, which is often a last resort for people to pay for astronomical fees. However, according to the Aviva research, 62% of people aged 65-74 were resistant to equity release, as they had earmarked the investments wrapped up in their estates for other obligations.
A further issue is the need for care often creeps in. It is not always in response to an immediate need, something that financial service providers are not addressing. Hanifan says: " Many people have a stroke or heart attack but for most people it is a steady progression, you don't just need care. You may need a bit of help; you may not see it as care, someone doing your gardening or a little bit of shopping. It's bit by bit and people are absorbing the issues around ageing into their budgets bit by bit. Very often when our people are advising people they're recognising that people are getting worse."
Many advisers are doing their clients a disservice by not discussing care fees as part of their clients' overall retirement strategies. Symponia's managing director Janet Davies urged: "If only financial advisers adopted a model similar to the medical profession. They know they're not an expert in long-term care. They don't want to be an expert in long-term care, so they refer it to someone who is. If only they referred all of their clients of a certain age for one consultation." It is clear that there needs to more joined up thinking and partnerships in long-term care in the market, mirroring the partnership idea between the public and the government, in Dilnot's proposals.
Likewise, advisers are limiting their own scope, by not participating in this growing market. As Horlick says, many IFAs have a rich resource "sitting in their client base, they have a whole host of people who have parents reaching that stage. There's a real opportunity for IFAs to extend their client base by using their existing client base." This will become more apparent as people continue to live longer and there is a greater need for new solutions.
Looking to the future
While dust is beginning to settle on the Dilnot report and the hype has died down, IFAs and providers are brimming with ideas for alternative funding mechanisms that could be developed.
Many IFAs discussed the possibility of adapting existing financial products. Just Retirement's head of actuarial development - care solutions, Sue Elliott cited group income protection as an example where you could have it for, ‘lifetime coverage rather than occupation based.' She also mentioned the use of long-term care insurance in USA & France, which did not have life-time coverage, but a limited benefit period, that would suit people for the three to five years they may live in a nursing home. But she added, to really grow this market, "you're going to need some type of funding mechanism across a larger pool of lives, which the pre-funded was trying to do."
Horlick discussed the possibility of changes to pension regulations or inheritance tax to bring relief, while Hanifan queried whether a mechanism similar to stop-loss insurance could revolutionise funding. The adaptation of critical illness products is another popular possibility, but it is unclear as yet how that could work.
While many advisers cite examples from Dilnot, nothing can really be developed until the government release their white paper on social care. But, in the meantime, that unknown does not negate IFAs from the duty of informing their clients about the payment mechanisms for social care, or urging them to confront the issue. People should have peace of mind regarding what the future may hold and the need for advice has never been more urgent.
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