People are not putting enough money aside for their old age. Some form of compulsion needs to be deployed to ensure people save what they need to cover their care costs
In reconsidering implementing the recommendations of the Dilnot Commission and its proposal for a cap of £35,000 on the contribution individuals will have to make toward the cost of their care in old age, the government may have brought relief to millions of people who would otherwise have been threatened with the prospect of selling their homes to cover their care costs.
However, it is already well-known that people are not putting enough money aside for their old age. Expecting individuals to put aside money they feel they need now to cover social care costs up to the level of the cap would appear to be an extremely challenging task.
If and when the final level of the cap is revealed, the financial services industry will face the challenge of building and marketing new products which will allow people to begin planning early in life to pay for their contribution to their social care costs either via savings or insurance. It is likely that new insurance and savings products will be created to cover the gap between care costs and the government’s contribution.
But simply setting out the situation people might face when they reach their later years will not encourage action today. That is why I believe that people need to be compulsorily ‘opted-in’ to saving for their social care costs, in much the same way as already happens with auto-enrolment in workplace pension schemes.
In July 2011, the Dilnot Commission itself recommended changes to pensions legislation that would allow retirees to buy an annuity that increases its pay outs enough to cover the cost of care, but only if care becomes necessary. Calculations we have made at Mazars, lead me to believe that a contribution increase of just 0.5% to an individual’s pension contributions (post auto-enrolment) would cover the approximate doubling of income needed when social care costs begin to bite. The actual amount needed will vary depending on how early an individual takes out a pension and begins to make these extra contributions, of course. There is also a regulatory issue to be tackled here as currently such flexible retirement annuities are not allowed.
Social care costs are only going to increase as the population lives longer and healthier lives. It is vital that the government and regulators grasp the nettle and look at how society pays for its older peoples’ care from a holistic perspective and that in engages positively with the financial services community such that products can be enabled which allow people to save for their eventual care bills. However, it is also clear that saving for old age is something that very few people have the foresight or disposable income to do and that without an element of compulsion the social care funding gap will only increase further.
Peter Gatenby is an experienced life actuary and leads Mazars' actuarial work in its life, pensions and healthcare sectors
