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Care funding cap won’t replace savings for long-term care, warns report

People will have to fork out an average of £140,000 before reaching cap

Caroline White

Monday, 12 May 2014

Just 8% of men and 15% of women in their mid-80s entering care today are likely to reach the new social care cap, indicates a report* from the Institute and Faculty of Actuaries (IFoA) published today.

The care cap, which is set at £72,000, is being introduced in 2016. It will offer a safety net that will prevent individuals from facing catastrophic care costs.

But it won’t replace savings as the key means of paying for care, warns the report, which is the first to look at long-term care funding in the new flexible pensions regime.

Of the three types of care costs—daily living; local authority set care; and top-up care—the cap only applies to local authority set care costs.

The report found that, on average, people will be expected to spend around £140,000 on care costs before reaching the £72,000 cap. But these could rise to around £250,000, even allowing for the cap, if an individual is in long-term care for 10 years. 

And there are significant regional variations in expected care costs and the time it is expected to take for the care cap to apply, says the report.

For example, in  London: an individual entering residential care aged 85 is expected to reach the cap in around 4 years and incur a personal cost of around £117,000 before reaching the cap.  

But in the West Midlands a comparable individual would be expected to reach the cap in around 7 years and incur a personal cost of around £170,000.

The proposed new Pension Care Fund (PCF) could help people to save for long-term care, it suggests, but additionally highlights the lack of any single product that is suitable for all consumer long-term care needs.

The PCF would be a ring fenced long-term care savings fund that would sit within the framework of a defined contribution pension scheme. The savings would be treated for tax purposes like a pension and any money accumulated that was not used to fund care could be passed on, free of inheritance tax, for use as a long-term care fund by a spouse or other beneficiary.  

Simon Bottery, Director of Policy at Independent Age, an advice, befriending and campaigning charity for older people, said that most people would not benefit from the new cap.

“And the extent to which you benefit will depend a great deal on where you live. The cap helps avoid ‘catastrophic care costs’ for people who go into a care home for a long time but does not solve all the problems in the care system,” he said. 

And he added: “As the report says the care cap will not replace savings and housing equity as the key means of paying for care.” 

This message needs to be made clear by all parties involved in advising and planning for later life income needs and long-term care, including the government and the financial services industry, says the IFoA.

“Recent research data shows that 1 in 3 women and 1 in 4 men aged 65 today is likely to need care. Yet the average disposable income for retired households was £18,700 in 2011/12, which is below the level required to fund the average long-term care costs before reaching the cap,” points out Thomas Kenny, one of the report authors.  

“Anyone who is expecting that the cap will pay for care is in for a shock. The cap is there to protect against catastrophic care costs and we estimate that few people entering care aged 85 years will reach it,” he warns.

“Second to property, pensions are the largest wealth asset for most people. Pensions are largely understood, there is an existing savings framework for them and, with the right tax incentives and flexibility, there are products that could help people to meet any care needs that they may have in the future.

However, we also found that there is no silver bullet – no one product that would suit everyone’s personal circumstances to help them meet care costs,” he says.

* How pensions can help meet consumer needs under the new social care regime. Institute and Faculty of Actuaries. Products research group of the pensions and long term care working party. May 2014.

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