A new report, “How pensions can help meet consumer needs under the new social care regime”, issued by the Institute and Faculty of Actuaries (IFoA) finds that just 8% of men and 15% of women entering care aged 85 today are likely to reach the new social care cap that is being introduced in 2016.
There are three types of care costs: daily living costs; local authority set care costs; and top-up care costs. The cap only applies in relation to local authority set care costs. The report found that, although the cap is set at £72,000, on average people are expected to spend around £140,000 on care costs before reaching it, which can increase to around £250,000, even allowing for the cap, if an individual is in long term care for 10 years. However, it also found significant regional variations in expected care costs and the time it is expected to take for the care cap to apply.
- London: an individual entering a residential care home aged 85 is expected to reach the cap in around 4 years and incur a personal cost of around £117,000 before reaching the cap.
- West Midlands: an individual entering a residential care home aged 85 is expected to reach the cap in around 7 years and incur a personal cost of around £170,000 before reaching the cap.
The cap, which is planned to be set initially at £72,000, will, the IFoA says, act as a safety net that will prevent individuals from facing catastrophic care costs. However, it will not offset or replace savings as a key means of funding care. The IFoA believe that message needs to be made clear by all parties involved in advising and planning for later life income needs and long term care, including the Government and the financial services industry.
Thomas Kenny, one of the authors of the IFoAs report said;
“Recent research data shows that 1 in 3 women and 1 in 4 men aged 65 today is likely to need care. Yet the average disposable income for retired households was £18,700 in 2011/12, which is below the level required to fund the average long term care costs before reaching the cap. Anyone who is expecting that the cap will pay for care is in for a shock. The cap is there to protect against catastrophic care costs and we estimate that few people entering care aged 85 years will reach it.
“Second to property, pensions are the largest wealth asset for most people. Pensions are largely understood, there is an existing savings framework for them and, with the right tax incentives and flexibility, there are products that could help people to meet any care needs that they may have in the future. However, we also found that there is no silver bullet – no one product that would suit everyone’s personal circumstances to help them meet care costs. In the report we consider a number of existing and new products which, with the right tax incentives, could help people plan ahead, including a new Pension Care Fund.”
The Pension Care Fund (PCF) would be a ring fenced long term care savings fund that would sit within the framework of a defined contribution pension scheme. The savings would be treated for tax purposes like a pension and any money accumulated that was not used to fund care could be passed on, free of inheritance tax*, for use as a long term care fund by a spouse or other beneficiary.