Government mulls 'care pension' as solution to funding crisis

Laura Suter
the hands of an elderly woman - John Stillwell/PA

The Government is considering a new type of insurance plan that would cover the costs of care in old age and protect family homes from being ravaged by care fees.

The new “care insurance” would cover the costs of care should people have to go into a care home or require care at home in their old age.

Sir Steve Webb, the former pensions minister who now works for Royal London, the insurer, devised the new plan, which is included in a government green paper.

For the insurance to work the Government would need to allow retirees to pay care insurance premiums directly from their pension pot, tax free.

The Government would also need to introduce a cap on individuals' care costs over their lifetime – setting a maximum that any person would pay for their care. The remaining cost would be met by the state.

Sir Steve said: “You can insure against a car crash or your house burning down, so why can't you insure against the small risk of having huge costs of care?”

The insurance would be sold as an add-on to pension "drawdown", where a retiree keeps their pension pot invested and draws off an income to live on in retirement.

More people have opted for drawdown rather than annuities since the “pension freedoms” were introduced in 2015. This meant that individuals did not have to buy an annuity – a guaranteed income for life – and could keep their pension cash invested.

“The reason it is important for the new insurance to be a bolt-on to drawdown is that in the past you had to buy a separate product, and people didn’t want to think about it and financial advisers didn’t want to get the qualification for a separate product. If we can integrate it into a product that is available already it is more likely to work,” said Sir Steve.

“It is not about solving the problem of today’s 85-year-olds – it’s too late to solve that. This is about the next generation, people who are around the age of 60 and now making choices about their pension pot,” he said.

Sir Steve Webb of pension group Royal London has suggested the new care insurance plan Credit: Geoff Pugh for the Telegraph

Sir Steve described his new idea as a type of “inheritance insurance”, as currently the family home is often sold to raise the money needed to pay for care.

“It works as an inheritance insurance. If you take this product out you can pass your house on to the kids. We know people are motivated by that, they want to think about who gets the family home,” he said.

The former minister said the premium you would pay for the insurance would depend on the age at which you took it out and where the care cap was set. He said he expected it to cost around £100 to £150 a month.

However, individuals could choose to pay the first £10,000 or £25,000 of care costs, with the insurance coming into play only after this. Such an approach would reduce the premium.

A cap on the amount that individuals would pay for care was first suggested in 2011, following a review by the Dilnot commission, in a bid to stop families facing unlimited bills.

Former prime minister David Cameron then committed to set a cap at £72,000 in 2020. However, last year the Tories dropped plans for the cap.