The care conundrum – how to pay for your old age

March 7, 2014 6:36 pm

The care conundrum – how to pay for your old age

By Norma Cohen, Demography Correspondent

Longer lives are perhaps the greatest achievement of the past 50 years. Lives that, on average, see men and women carried more than two decades past what has long been the benchmark age of retirement have opened up new avenues for pleasure and personal fulfilment that were once unimaginable.

But those opportunities are not completely bathed in sunshine; over the horizon lies of cloud of potential anxiety centred on what happens to us as longer lives raise the spectre of years of infirmity requiring intensive (and expensive) care.

The question of who should pay for that care has never been answered satisfactorily.

In 2010, the then-Labour government proposed a National Care Service financed by a tax of up to £20,000 to be levied on an individual’s estate upon death. Such a tax hits those who expect to inherit their parents’ estates hardest and the Conservatives immediately labelled it a “death tax”.

Once in government, they appointed Andrew Dilnot, an economist and the principal of St Hugh’s College, Oxford, to head a spending review that looked at financing long term care. His proposals form the basis for the legislation that is winding its way through parliament and due to come into force in 2016.

The two main elements are that no one should have to spend more than £72,000 of their own money on care, and those with assets of less than £118,000 should pay less towards their care until their assets run down to £17,000, after which their care is free. The upper assets threshold is currently £23,000.

But nearly a year after those optimistic announcements, it is becoming clear that what is described as a “cap” – the £72,000 – is nothing of the sort. Only care purchased for those whose needs – as determined by their local authority – are “severe” will count towards the cap. Services purchased for those with “moderate” needs do not count, and nor do the so-called “hotel costs” such as food and accommodation.

Individuals could easily spend tens of thousands of pounds before the meter calculating their supposed maximum outlay even starts running – and even when individuals spend what savings they have down to the proposed threshold of £118,000 of assets, they may still find that they do not qualify for any state aid.

James Lloyd, director of the Strategic Society think-tank, points out that even then out-of-pocket expenses may not count fully towards the “cap”. What actually counts is what the individual’s local authority believes should be spent on a particular service.

“Let’s say a residential home costs £700 per week, but the local authority believes it should be £500 per week,” he says. “For most people in residential care, they will have spent more than the cap and they may go on paying.” He likens the system to being stuck in a traffic jam in a taxi with the meter running.

The Strategic Society published a report last year stating bluntly that current reforms will fail.

There is, not surprisingly, widespread public confusion about both the current and proposed systems, as exclusive FT Money research found last year.

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The insurance solution

One key element of the Dilnot report was the assumption that – once the framework had been set – the insurance industry would step in and create products to protect people against catastrophic losses. But that is not going to happen any time soon.

Last month, the Association of British Insurers stated: “This industry report cannot give commitments that particular products will be developed.

“These are commercial considerations for individual companies who may approach government on a one-to-one basis about product development intentions.”

The insurance industry does offer some products that can cover the risk of catastrophic loss. Foremost among these is an Immediate Needs Annuity (INA). For an upfront cash lump sum – generally £100,000 or more – an individual can purchase a set amount of care per week, which is paid direct to the provider.

Jim Boyd, a spokesman for Partnership, one of the UK’s main providers of INAs, notes that the market for such products is very limited, and not just because of the need to have cash up front. “The problem is that people think long-term care is free,” he said. “It’s not.”

Les Mayhew, professor at Cass Business School, says the care system itself is an obstacle to the purchase of insurance. “It is so complex that it dissuades you from buying an insurance product,” he says. The proposed “means test” contains three “thresholds” and two “cliff edges” where state support either begins or falls away sharply. Such a system offers yet more opportunities to “game” the safety net than even the present system, and neither the present nor the proposed system offer incentives to save for care.

Another problem, says Prof Mayhew, is behavioural; people suffer from “optimism bias”, believing it unlikely that they will need care insurance. The same inertia that stops people from saving for pensions also stops them from making care provision.

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The property solution

Steve Lowe, a spokesman for specialist insurer Just Retirement, is pretty blunt about where a solution to the care problem can be found.

“For the next 20 years, the only lifeboat is the value stored in people’s property,” he says. “For the short term, this will be a housing-driven market, because that is where the wealth is.”

Government ministers say there will be a facility for individuals needing care to pay for it via a loan secured against the value of their home, along with a promise that the home will not be sold until after the person – or any resident spouse – dies. Unlike commercial “equity release” products, which can work out very expensive, it will carry an interest rate in line with government borrowing costs.

But there’s a big snag here. If a house is sold to clear care bills, it cannot be passed to heirs as an inheritance, which is a thorny political problem in a country where property is so culturally important.

Martin Weale, an economist and member of the Bank of England’s Monetary Policy Committee, puts it rather well: “A lot of the dialogue [about the Dilnot report] at the moment is about people using social care, particularly residential care, wanting other people’s children to pay for it so that they can leave legacies to their own children,” he told a House of Lords Committee on demography and ageing. “It is an understandable biological equilibrium, I suppose.”

Prof Mayhew points out that the current system of measuring an individual’s means favour those with high savings (including houses) over those with high incomes. A person with £66,667 of housing equity but only £5,000 of annual income receives state support worth £9,669 per year. A person with half the savings but income of £15,000 qualifies for £8,136 annually.

“It’s almost over-house friendly.”

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The pension solution

Another idea is to use pension savings to finance care. Last year, law firm Squire Sanders published a paper arguing that trying to finance both post-employment living and social care may be misguided. Instead, it urged government to integrate the pension system with that used to finance social care.

Among its suggestions was that pension savers should be allowed to earmark part of their pension rights in advance to provide for care, and that these earmarked savings be allowed to be charged in favour of a local authority or a suitably approved care provider. Currently, the law does not allow the assignation of pension rights.

Squire Sanders also suggested that existing rules on pension savings could be extended to a hybrid product. For example, any capital within such a plan that is earmarked for care should be protected if the member dies before the care is needed and the funds are unused. This could then form part of the inherited estate and taxed at the appropriate rate.

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The other solutions

In a recent report, Prof Mayhew and Duncan O’Leary, of think-tank Demos, suggest that individuals should be offered an online “health check” well before care is likely to become necessary, to assess their ability to afford care if needed.

They also urge the government to simplify the means test threshold. Those who can afford more years of care should receive less aid from government. Each year, people could be reassessed so that as assets are depleted, the level of state support would rise. They also suggest some incentives to set aside funds for care.

“In this way, government would know that people were setting money aside for their part of the bargain up to the level of the care cap, reducing the risk of people relying on support through the means test,” the report concludes.

Prof Mayhew has in the past also floated the idea of a premium-bond style national savings product to help fund long-term social care.

The proposal, developed with the International Longevity Centre, was outlined last June and is intended to help those of modest means save for potential care costs.

The so-called “personal care bonds” would pay interest (unlike premium bonds) and there would be tax-free cash prizes.

Other countries have forced relatives to carry the cost of long-term care. In a high-profile case in Germany last year, the country’s federal court ruled that a man who had lost touch with his father in 1971 was nevertheless liable for the €9,000 cost of the old man’s residential care.

Some charities have suggested that the government could fund more support for long-term care through general taxation, for instance by means-testing or taxing pensioner benefits.

But for all the reports, papers and debates, it is not clear that anyone – government, academics or insurers – has yet come up with a way that will allow people to pay for their long-term care and still pass an inheritance to the younger generation. And the clock is ticking.

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Dementia: science v demography

Guessing whether you will need long-term care is even harder than trying to estimate how long you will live.

But there are a few guide posts, and some of these suggest that a higher percentage of people will be living to ripe old ages without it.

For example, new research published last year in The Lancet medical journal suggests that the prevalence of dementia in older adults – a condition that frequently sends people into care – may be decreasing. The study looked at large groups of people in England and Wales in six different locations who were over the age of 65 in 1989 and in 1994.

Despite only five years of difference in age between the two groups, the study found that far fewer of the group measured in 1994 had dementia. In the first wave, analysed in 1991, 664,000 individuals were found to have the condition. By 2011, based on population changes, that should have risen to 884,000. However, the actual number was found to be 670,000, about a quarter fewer than had been predicted.

Professor Carol Jagger of the Institute for Ageing and Health at Newcastle University, who worked on the research, said that one reason for reduced incidence is that people are now increasingly approaching old age in better health and with more education. Those with high levels of “cognitive reserves” – the kind that higher levels of education produce – are less likely to develop dementia in old age. The incidence of dementia is also associated (statistically, though not necessarily medically) with measures of deprivation, so that those in poor health with low levels of income and education tend have higher incidences of it.

The decline in the relative prevalence of dementia does not necessarily mean fewer cases, because the numbers of the “oldest old” are growing faster than younger populations. In the period between the 2001 and 2011 censuses, the percentage of those over 90 rose by 26 per cent compared with a more modest 7 per cent rise in the population generally. Those with dementia will be a smaller percentage of a larger group.

But there are other signs that older people are in better shape today than they once had been; Experian, the market research group, was able to identify clusters of wealthy adult households aged 90 and over living independently in their own homes.

However, one risk of needing care is emerging on the other side of the population equation: falling fertility. Care home stays may be needed because the primary providers of non-residential care are adult children, mostly women.

But official data show that the percentage of childless women in Britain is growing. Of those born in 1965 – the group now considered statistically past child-bearing age – a fifth are childless, about double the rate of women born 20 years earlier. A further 15 per cent of women born in 1965 had only one child.

Prof Jagger says new rules raising the state pension age are likely to add to the number of those needing additional care, since the primary source of unpaid, voluntary support will still be in employment.