Can pensions prevent the social care system’s collapse?
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A new report is calling for a step change in individuals’ pension saving and wider reform as many councils and elderly people are unprepared for the potential cost of care. Can it be achieved?
The UK will face a shortage of elderly care accommodation by 2029 if the current nursing and care home capacity of 460,000 beds is not increased, the report, ‘Elderly care crisis: A tipping point’ by the Centre for Economics and Business Research and law firm Irwin Mitchell predicts, blaming a lack of funding and insufficient planning by councils.
According to Age UK, 1.2m people will need care or support by 2040, as an ageing population is pushing up demand, but spending per head of the adult population fell by 17.5 per cent in real terms between 2010/11 and 2017/18, while the cost of providing care is rising. The Local Government Assocation estimated that the social care funding gap could be as much as £3.5bn in 2024-25.
The government has previously admitted that social care has not received sufficient attention but has repeatedly delayed a promised green paper on reform, ever since a proposal to change the system derailed Theresa May’s election campaign in 2017.
Awareness is also poor in the general population. Provider Just Group found that eight out of 10 over 45s said they have not thought about care, planned for it or spoken to family about it. Even among the over 75s the figure was nearly seven in 10. Of those confronted with the cost of care, 88% were shocked at how expensive long-term care is and 75% were surprised at how little financial support the state provides.
Awareness is also poor in the general population. Provider Just Group found that eight out of 10 over 45s said they have not thought about care, planned for it or spoken to family about it. Even among the over 75s the figure was nearly seven in 10. Of those confronted with the cost of care, 88% were shocked at how expensive long-term care is and 75% were surprised at how little financial support the state provides.
How can you change people’s attitudes to care planning?
Given the challenges, a massive change is needed from individuals towards planning for the risk that they will need care, says Kelly Greig, head of later life planning at Irwin Mitchell, meaning people would have to save considerably more than they do at the moment. “We want to educate individuals to take ownership for their own future,” she said.
Currently, there is little awareness among people of either the likelihood of needing care or its cost, but people who do not have, or retain, sufficient assets may need to fall back on a local authority funded home.
“One of the things I say to clients who are wanting to give away assets is, ‘Why don’t you go and look at a local authority home and at a private one and decide which one you want’. Most come back and say, ‘Actually I’m not giving away those assets’,” said Greig.
The report estimates that an average worker would have to save an extra £575 a month to fund even a moderate retirement, so it remains unclear how they could afford or be incentivised to also save for potential care needs.
Greig still thinks that people’s pension savings are what is most likely to fund care, but this would require the lifetime allowance to increase, “because the maximum amount is not going to be sufficient to fund your care”, she argued.
She would also welcome a return of prepaid care annuities. Currently, there are only three providers offering care annuities, which are however not prepaid but intended for people who already know that they need care.
Stephen Lowe, group communications director at Just, one of the three that offer immediate needs annuities, said prepaid care annuities have not been on the market for about 10 years because a lack of awareness around social care meant that take-up was too low.
Affordability was also a problem; people were often surprised at the price of such an annuity, he said, which was due to the likelihood of needing care.
Stephen Lowe, group communications director at Just, one of the three that offer immediate needs annuities, said prepaid care annuities have not been on the market for about 10 years because a lack of awareness around social care meant that take-up was too low.
Affordability was also a problem; people were often surprised at the price of such an annuity, he said, which was due to the likelihood of needing care.
Means-testing, pension allowances and planning laws
Not just individuals and industry, the government too has role to play, believes Greig. Currently, care homes are classed as residential properties for developing purposes, meaning developers need to also invest in affordable housing where they decide to build a care home, making it less attractive to do so. This needs to change, said Greig.
There is also unfairness in the system regarding means-testing, she said: currently, people’s home is disregarded as an asset against the £23,250 threshold if people receive care in their own home – it can be passed on when the person dies – but is included in the assets if they move to a care home, meaning they have to sell it and use up the proceeds to fund their care.
Others pointed out that the unfairness goes further. Dementia patients will need to use up their assets while those with other medical conditions do not, receiving care through the NHS rather than the local authority, observed Baroness Ros Altmann. “The idea that the state pays nothing towards dementia care for elderly citizens but looks after those with cancer and other illnesses defies logic and fairness,” she said.
While she admitted there is “no silver bullet”, earmarking a part of pension savings for care could help younger generations and would be “an excellent signal that everyone needs to think about care funding in old age”.
However, “the most urgent problem facing our country is who is going to pay for the care of the current baby boomer generations who are now reaching their 70s and are already, or soon to be, retired". She pointed out that many older people have ISA savings and is in favour of a care ISA, which could be passed on tax-free if it remains unspent.
An increase in national insurance contributions should also be on the cards in her view. “One could imagine some national insurance being earmarked for care, an extra 1% contribution that is designed to cover care costs,” she said. This could also be levied on people’s pensions, but “there would be difficult political decisions to face”, she noted.
Would social care saving be compatible with AE?
Using part of people’s pensions for social care is an obvious means of funding it, but there is a risk that it would incentivise people to opt out, warned Steven Cameron, pensions director at provider Aegon.
Auto-enrolment “works as a default as it is in virtually everyone’s interest to be saving for retirement through a workplace pension in this way. However, while a significant minority will need social care, not everyone will, so the case for it being a default, albeit with opt out, is much weaker,” he argued. “There is a risk that as a result, many more people will opt out.”
Instead, people should be “encouraged” to save more into their pension and notionally ringfence part of their fund when they retire for possible social care needs, aiming to live off the balance during their ‘normal’ retirement. “This notionally ringfenced amount would not be physically separate and if needed could be used for retirement income instead,” he said.
