Fiona Murphy asks whether a pensions overhaul could help encourage people to save for their long-term care needs
Throughout the passage of the Care Bill, the government has repeatedly stressed the important role that financial services could play in helping self-funders pay for their care.
It’s clear that pre-funded insurance products are a thing of the past, or “a dead duck” as Lord Lipsey put it in a speech in the House of Lords last year.
In the market currently, Partnership and Friends Life are the only two proponents of immediate needs annuities, although that could be about to change, with Just Retirement looking at entering the market imminently.
Despite this, there is a real lack of suitable products available.
It’s clear that financial products are in serious need of an overhaul if they are to encourage people to plan and save for care.
Recently, law firm Squire Sanders published a white paper entitled In Sickness and In Health: Reforming Pensions and Social Care,representing the firm’s response to how the market can innovate and its recommendations for change. So what were the key findings from the report?
The first, and perhaps most significant recommendation, is “that savers should be able to earmark part of their pension rights in advance of retirement to provide for care”.
Second, the report states that “pension savers should be able to split and defer their tax-free lump sum entitlements so that care needs can be provided for by a capital sum at the time of need.”
Unused reliefs and allowances should be portable between savings vehicles and any capital within a pension plan put aside for care should be protected if the member dies before the care need arises.
Squire Sanders leader of the pension practice group Catherine McKenna says: “If the government is serious about supporting funding for care, then it has three main options: provide extra tax incentives to save for care; compel us to save for care; or re-shape pensions and tax legislation to allow pension savers to make choices about whether they save for care, and how they do so.
“We believe only this last course of action is viable and that structural barriers can and should be overcome to make pensions flexible enough for individuals to provide for their care, both in sickness and in health.”
What do other industry players think of the ideas put forward in the report. Is there real scope for reform, or are there any alternatives they would suggest?
Friends Life long-term care marketing manager Brian Fisher believes there will be a range of potential solutions, with some having the ability to adapt in line with life changes.
“My view is that there will be a lot of ways in which people should be encouraged to prepare for needing care at some point in the future. There is going to be no one single solution, there will be a range of solutions, once the public understands what the new proposals actually mean. It could be through pensions, an extension of protection policies such as critical illness, or protection, such as life insurance, that can morph into a later life plan.”
Meanwhile, Symponia joint managing director Janet Davies says people should take ownership of their own care plans.
She says: “People should stop waiting for the government or financial services to do something, they do have to take some responsibility for their own care destiny. I do think that will happen; it will be a subtle change.”
While Davies may disagree with the compulsion to save for care as an unworkable model, she believes re-shaping pensions does have some potential.
She says: “When an individual approaches retirement maybe the pension should be structured in a certain way when they come to draw it or utilise it. They then seek the combined specialist advice of a pension expert and a care fees planning expert.
“They could say ‘Let’s look at how this pension is structured. Do you want to take the tax-free lump sum, do you want to put towards future care costs? If you don’t want to take it for care costs, we will document that.’
“You won’t get people who sell pensions wanting to talk about care, because it’s such a specialist subject and it shouldn’t be diluted. People should perhaps continue to buy pensions as they do now, and then at 65 have a review meeting with both advisers, and the care fees planning specialist can say, ‘Let’s look at what you would like to do if you did need care?’
“They could look at the difference in how they could fund it and the difference between how they would anticipate funding it and what the fees are. Then maybe say we can do this bit with my pension so I’m not drawing it straight away. That’s the only way I can see it working. It’s only the closer you get to retirement age that care should figure and pensions should have the flexibility around whether you can use that whole pot.”
Despite the scope for innovation in products, unless there is true commitment to care reforms, it may not take off. Financial services will continue to wait in the wings.
Fisher concludes: “The public needs to be engaged first of all. Until they understand what the proposals mean, I’m not sure the public are going to do anything. Therefore, I’m not sure how fast the product providers are going to move.
“We need to know what the landscape looks like first. With an election in 2015, we don’t know if these proposals are going to happen. So once we get some definition in it, further analysis will be done and we’ll see different options moving to the fore. That will be a few years yet.”
However, while the implementation of a care cap may seem far off and still may be on politically shaky ground, the onus on getting people to prepare for long-term care fees has never been greater.
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