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‘Pension insurance’ floated to tackle long-term care challenge

Paloma Kubiak
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Paloma Kubiak

A mutual insurer has come up with an innovative potential solution to the puzzle of how to pay for long-term care.

The ‘Care pension’ idea would combine a pension drawdown option with a care insurance product which means that people’s family homes would no longer be at risk of being sold to pay for care, according to Royal London.

Following the introduction of ‘pension freedoms’, growing numbers of people go into retirement with a pot of money from which they draw an income through retirement. Royal London suggested that care insurance could be ‘bolted on’ to these income drawdown arrangements, either in the form of a regular premium or a one-off lump sum.

The paper’s author, Royal London’s director of policy, Steve Webb, said more than a quarter of the population will spend some time in later life in residential care, and the total bill can easily run into tens of thousands of pounds. But many people don’t want to think about whether they will need to be looked after, while others incorrectly assume the government will pay if someone needs care.

“In extreme cases,  people can be forced to sell their family home to pay for care. It ought to be possible to take out insurance against this risk, but insurers are reluctant to offer products and consumers have been reluctant to take them up,” he said.

He added: “A ‘care pension’ could build on the increasingly popular ‘income drawdown’ product by adding in care insurance. To make this work, the government would need to make sure payments into such policies were tax-free, and would need to introduce an overall cap on lifetime care costs. With these changes, millions of people could start to build up protection against the risk of facing ‘catastrophic’ care costs in later life.”

It also suggested favourable tax treatment on money taken out of income drawdown to pay for care insurance; if this money goes directly to an insurer and any payout from the policy goes straight to a care home, these withdrawals should be tax-free.

‘Single solution like using an earbud to clean an elephant’

Nathan Long, senior pension analyst at Hargreaves Lansdown, said there are really no easy answers, but any solution must tackle the huge public misunderstanding of the potential cost of care and the likelihood of actually needing it.

He said: “A single product solution to solve the problems of long-term care funding is like using an earbud to clean an elephant. Successive governments have continually kicked the can down the road, rather than go toe-to-toe with the complexities of the problem.

“While people’s awareness may increase over time as more and more of us experience our parents paying for care, the reality is a major intervention is needed. Tax free pension pay-outs to fund care costs has potential as a long-term solution, but there are far bigger challenges that need to be met first.”