The UK government has pushed back the implementation of social care reforms, but this should give ministers time to address issues relating to the payment and sustainability of later-life care, said Association of British Insurers (ABI).
The reforms were supposed to come into place in October 2023, but have been delayed until after the next general election, which will take place before 24 January 2025.
The ABI is calling on the government to set up a system that would enable older people to make a withdrawal from an insurance policy or a long-term savings product to ‘top up’ the social care funds provided by local authorities.
As they currently stand, the reforms mean two-thirds of the population would receive less financial support for social care from their local authority if they have an insurance or long-term savings policy, the ABI cautioned.
That is because the government’s changes would classify any payment from such a policy as income, leading to a significant reduction or complete withdrawal of any local authority support.
The trade body said it “has warned that this poses a significant barrier to making [insurance and savings] products available, as providers would not want their customers to lose the benefits of the product. It also raises regulatory concerns as it would only partially benefit a customer and is likely to fail regulatory ‘fair value’ tests”.
Change pension taxation too
As a result, the ABI is now urging the government to exclude insurance pay-outs from local authorities’ financial assessments.
But that is not the only measure the association is looking to fundamentally change.
The ABI also suggested changing pension tax rules – either by scrapping or limiting tax on pension withdrawals if the funds are being used to pay for social care – so that more people will not be left unprepared in later life.
Yvonne Braun, director of policy, long-term savings, health and protection at the ABI, said: “The social care reforms announced by the government in 2021 could go a long way to help more people cover their care costs. Many people will want care services above and beyond what can be provided by their local authority. Insurance or pension pay-outs can help people afford top-up payments for additional services.
“However, as it stands, most people would actually lose out if they were to buy an insurance or long-term savings product to prepare in advance.
“This research has identified changes which would help more people benefit in full from an insurance or long-term savings product. The delay to the reforms presents an opportunity to ensure that the new rules work in practice and benefit as many people as possible.”
Incentives
Tom Selby, head of retirement policy at AJ Bell, added: “Reforms to the UK’s creaking long-term care funding regime have been over a decade in the making and are still yet to see the light of day.
“Proposals first set out by Andrew Dilnot in the early 2010s have been supported, tweaked and then pushed back by successive administrations, with the associated costs and surrounding controversy, particularly for [former prime minister] Theresa May, deemed too painful to bear.
“The latest version of the care funding reforms was put forward by former prime minister Boris Johnson in 2021 and would have expanded means-tested support and capped lifetime personal care costs at £86,000 ($104,000, €97,000) from 2023. The reforms are now not expected to be implemented until 2025.
“This constant kicking of the can down the road is a nightmare for those looking for certainty over how much their care might cost. It also risks putting off financial services firms who might offer long-term care products.
“However, one potential silver lining is it provides a window of opportunity to consider whether there are features of the existing system that could be improved ahead of the delayed introduction of the cost cap.
“For millions of people, and particularly younger generations saving for the future, defined contribution (DC) pensions are going to be the bedrock of their later life spending plans. It, therefore, makes sense to explore linking pensions and care funding.
“If people could access their pensions at a preferential tax rate – or even tax free – to pay for care, this could have the dual benefit of incentivising higher levels of retirement saving and making it easier for people to pay for their own care if they need it. This should also reduce the likelihood of people needing means-tested support from the state.
“In addition, it is vital that the means-testing system doesn’t create disincentives for people to fund their own care needs.
“Once we have clarity over exactly how the system will work, people need as much help and support as possible to understand the rules and enable them to make sensible decisions.
“Ensuring the boundary between advice and guidance doesn’t act as a barrier to the provision of useful information to people in this, and other areas of financial services, is therefore of paramount importance,” Selby added.
