Nine in 10 pensioners face a “financial time bomb” because they have not planned for future social care costs, a new report suggests.
This could mean millions of people could end up having to sell their homes or use their life savings to fund their care, leaving little or nothing to pass on to their children.
According to a survey by the Association of British Insurers (ABI), 51% of people see the state pension as the most likely source of funding to pay for their care, with only 17% saying insurance would pay and 26% saying they would sell their home.
Yvonne Braun, director of policy at the ABI, says: “The social care system and how it is funded desperately needs an overhaul. People simply aren’t preparing to pay for their care costs and this needs to change. With only one in ten over-65s making provision to pay for care, the size of the financial time bomb is clear for everyone to see.
“A major public awareness campaign is essential if we are ever going to get more people making financial plans for care.”
Solving the crisis
The ABI is calling on the government to urgently publish the social care green paper and consider how to target interventions for self-funders to help solve the social care funding crisis.
It says a massive new campaign is needed to raise awareness of social care funding and new incentives should be considered to encourage people to make provision to pay for care in the future.
The social care green paper was originally due to be published last year but it has faced numerous delays.
The ABI says that incentives for social care should be targeted at those who have savings of more than the means test threshold (£23,250), but less than £200,000. This target group makes up approximately 37% of people in England aged over 50.
Among the target group, 90% of those aged 65 to 79 own their home outright and half of these have over £300,000 in housing wealth.
Among 60 to 64-year-olds in the target market, 25% have over £230,000 in pension wealth, which is likely to increase in future.
Therefore, many of the next generation who need care will ultimately have to use housing wealth to pay for it, but pension savings can play an increasing part in the longer term, the ABI says.
Self-funding options for care
The report analyses five options for self-funding of social care:
- No income tax payable on pension income used to pay for care.
- Tax-free pension withdrawals if used to purchase an insurance product that covers care costs.
- Introducing a new Care Isa with no inheritance tax paid on residual amounts at death.
- Releasing equity from a property to purchase an insurance product that covers care costs.
- Pledging equity from a property to cover care costs.
Rachael Griffin, tax and financial planning expert at Quilter, says: “It is likely there will need to be some kind of combination to ensure it is a system that works for the largest part of the population.
“What is also clear is that while the state needs to be making a provision and needs to be clear on what they are providing, there also needs to be a substantial boost in self-funding and the government need to be carefully considering what kind of incentives they use to drive the right behaviours and encourage people to save.
“In some respects something akin to the pension system would be sensible. A flat state provision for all, topped up by self-funding, which is encouraged by the state and workplace.”