Bright idea: LTC funding via flexi-access drawdown

An ageing population brings with it the inevitable increase in demand for social care.

Paying for long-term care is a big issue – not just for the individuals and families affected but also for society as a whole.

As a firm, we welcome the government’s reforms around how much individuals in England and Wales will be expected to contribute to long-term care.

Capping personal contributions removes the threat of an open-ended liability, but the actual rules are very complex and more needs to be done to help people understand what this means in their circumstances.

The financial services industry has a long history of helping people prepare financially for uncertain futures. Social care funding can have a huge impact on an individual’s (or elderly couple’s) finances.

There is also great uncertainty over whether an individual will need care, particularly if trying to predict decades into the future.

And for couples, the considerations are more complex as one partner may take on the carer role for another.

More broadly, the whole shape of social care 30 years into the future could be hugely different from today. Medical advances could completely transform life expectancies, health status at advanced ages, available treatments and associated costs. And of course, who knows if future governments will retain the rules being put in place next year.

Best way forward…

It is against this multi-dimensional uncertainty that we need to consider how individuals might best plan ahead. The two main possible financial services solutions are based on insurance or broader retirement planning.

An insurance contract might be developed that would pay out if an individual requires long-term care in future, based on some pre-agreed medical conditions.
The pay-out could be a fixed lump sum, a fixed regular amount for the duration of care need or could depend on the actual costs incurred for care in future. As a provider, we see little demand for this type of product.

Very few people want to think ahead about possible long-term care. Of those who do, most hope they will never need it. And it is only a very small minority who would be prepared to pay what would be a substantial premium decades ahead, just in case.

With so many uncertainties, it is also very difficult to calculate a fair price for such cover, especially if pay-outs are based on costs incurred.

For these reasons, a more sensible and palatable approach is to incorporate planning ahead for social care into retirement planning. Income drawdown seems the best
fit as an approach to fund long-term care.

From April, those over 55 have greater flexibility over how to draw income from their defined contribution pension.

As part of this, income drawdown becomes fully flexible for all, giving individuals complete control over how much they withdraw each year.

Logical progression

The tax treatment of funds on death has also been changed, removing a previous disincentive to leave funds invested for later years. Planning for care through pensions and income drawdown does not require any specific decision around devoting funds to social care.

It does not involve paying upfront, just in case of a far distant possible need for long-term care. Instead, it allows people to use their pension fund flexibly without irrevocably ‘locking away’ a portion to protect against something that they may never need.

The government has expressed some concerns over the lack of an insurance-based market taking off. They should take confidence in the expected further growth of the income drawdown market from April.

People will need help when weighing up their options for retirement income and for many, retirement planning should include consideration of care funding.

Steven Cameron is regulatory strategy director at Aegon