Can houses and pensions solve the long term care crisis?

Chris Horlick discusses the role pensions and equity release can play in funding long term care

Andrew Dilnot's report has put the critical issue of how to fund long term care into sharp focus as the Government struggles to understand where to get the necessary funding to cover the vast costs.

The issues are significant. The ageing population is rapidly growing, with the eldest, who are most likely to need care growing in number fastest.

ONS statistics reveal that the number of people aged 65 or over will rise by 64% between 2007 and 2032. While this will take the figure from roughly eight million to 13.4 million, the oldest age group (over 85s) is anticipated to increase twice as fast (136% growth) during the same period.

The majority will rely on the state for care funding. They will have to rely on general taxation to meet these costs. However a sizeable minority (41% - Laing & Buisson 2009) will be self funders and have to meet the costs of their care.

Despite the significant number of people who are working beyond 65 - currently there are 870,000 (ONS) - for many over 65 there is limited opportunity to accumulate wealth to meet the cost of care.

This leaves pensioners with either savings, investments or wealth accumulated through pensions and housing as the important sources of funding to meet the costs of care.

Pensions are significant for this age group. Many have benefited from final salary schemes. For example the median pension fund value for people aged over 65 exceeds £100,000. (ONS, Wealth in Great Britain 2006-8).

The role of housing

Housing also provides a substantial asset base for the over 60s who have benefited from a period of housing inflation which we are unlikely to see again. It is estimated that people over the age of 60 have nearly £1 trillion in un-mortgaged equity and 80% of the wealth of the country is owned by people aged over 60.

However, many are unaware that if they have assets, including property, of over £23,350 (in England) then they will be required to meet the costs of their care. There is a chronic lack of awareness of what the state will pay for and what the individual is required to pay. The need to generate greater public awareness of care funding and to ensure that people have access to improved advice and information is a significant issue which the Government will, in our opinion, almost certainly seek to address in the Social Care White Paper, due in April 2012.

There are other important issues to address, particularly attitudinal barriers to equity release.

Many believe that pensioners having to sell their house to meet the costs of care is unacceptable. However if housing as an asset is exempt from use to fund care, then we are allowing inheritances of the wealthy to be preserved. Otherwise the weight of funding must come from general taxation, which places a financial burden on the young who are arguably the most indebted generation ever.

Changing public attitudes requires a statement from the Government at the highest levels that social care is not free and that it never has been! In addition, people who have sufficient wealth have to meet the costs of their care and all their assets - including housing - must be considered as a legitimate source of funding. This issue requires political commitment to drive behavioural change among consumers, which we have seen in successful public health campaigns such as seat belts and smoking.

Regulatory hurdles must also be overcome to enable equity release and pensions to achieve their full potential. For example the FSA must recognise that back to back transactions involving equity release and the purchase of insurance products to meet the costs of care (like immediate needs annuities) are legitimate solutions for consideration. Indeed I believe they represent one of the best ways to reduce the risk that the value of that equity is depleted when it is released.

From a pensions perspective if the Treasury is prepared to alter two pensions rules then the Government may benefit from increased pensions saving to meet the costs of care. First, to alter the circumstances under which income can increase from an annuity, enabling an event like entry into a nursing home to trigger significantly more income from the annuity, when it is most needed.

Second, to allow that income to be tax free if it is paid directly to a registered care provider (similar to the tax treatment of an immediate needs annuity). This can only benefit the individual who needs to fund a longer life in retirement and in care. In addition it benefits the Government which will hopefully be better protected from the costs associated with people falling back on the state.

Chris Horlick is managing director - Care at Partnership