Royal London has floated the idea of creating a new financial product that could be ‘bolted on’ to a person’s income drawdown arrangements to help pay for care.

In its paper Is it time for the care pension? the insurer called on the government to introduce policy changes that would enable the creation of a new at-retirement product that combined existing income drawdown arrangements with insurance against future care costs.

Following the introduction of pension freedom, the paper said, growing numbers of people go into retirement with a pot of money from which they draw an income through retirement.

It went on to suggest care insurance could be ‘bolted on’ to income drawdown arrangements – either in the form of a regular premium or a one-off lump sum.

To make the products more attractive, the paper suggested they could benefit from favourable tax treatment on money taken out of income drawdown to pay for care insurance, and an overall cap on a person’s lifetime care bills.

Planning for future care

According to Royal London, there are virtually no financial products that allow people coming up to retirement to plan ahead for future care costs.

At the same time, the mutual said insurers have been reluctant to offer such products – except at the “door of a care home” through the sale of so-called ‘immediate needs annuities’. It added that a key barrier for insurers was forecasting costs decades into the future, especially given the potential for major medical advances.

Finally, it pointed out care insurance had been sold as a freestanding financial product in the past, requiring advisers to acquire specialist qualifications, which many may be reluctant to do.

Royal London director of policy and author of the paper Steve Webb said a quarter of people would spend some time later in life in residential care and the bill could easily run into tens of thousands of pounds.

“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 continued. “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 also 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.”

‘Earbud to clean an elephant’

Hargreaves Lansdown senior pension analyst Nathan Long was less enthused by the idea, describing it as “like using an earbud to clean an elephant”.

“There really are no easy answers but, fundamentally, any solution must first tackle the huge public misunderstanding of the potential cost of care and the likelihood of actually needing it,” he said.

“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.”

Royal London has submitted its paper to the government and it is under consideration by the team preparing the proposed Green Paper on social care.