Means test rules act as a barrier to saving for long term care

• Under current system, moderate savers (those with assets between £20k and £40k) lose at least 80p in means tested benefits for every £1 saved
• Once Care Act 2014 is implemented in 2020, this drops to 50p lost in means tested benefits for every £1 saved for these savers
• Proposed new Care system is improvement on current regime but doesn’t remove disincentive to save for long term care
• Funding system is complex and makes it difficult for people to understand how much they will need to save

Today (10 December) the Institute and Faculty of Actuaries (IFoA) released its second report on the Government's proposed changes to the funding of long term care.  The report, 'How financial products can work alongside the Care Act 2014 to help people pay for care', found that current and proposed means test rules act as a barrier to saving for long term care needs.  Under the current system, for ‘moderate savers’, those with assets between £20k and £40k, lose 80p in means tested benefits for every extra £1 saved.

Once the Care Act 2014 is implemented in 2020, and the means testing thresholds increased, this will be reduced to 50p of every additional £1 saved being taken away to fund their long term care.

While this proposed change is an improvement on the existing system, the IFoA report suggests that this change could still remain a significant disincentive for people to save for their long term care.  The report also found that this deterrent applies to all types of savings, as there is currently no way to ring fence saving for long term care needs.  To address this, the IFoA report identifies a number of financial products, such as Care ISAs, that could be used alongside the Care Act to help people pay for care and address this disincentive which is inherent in the system.

The IFoA report suggests that allowing some form of saving to be exempt from means testing, up to a specified threshold, would help remove the current disincentive to save and could stimulate innovative product development in the private sector.  The report identifies that the cost for such an exemption could be met by removing existing loopholes that currently allow those who are better off to qualify for financial help whilst having significant assets saved. This is due to how these assets are accounted for in the financial means test assessment for long term care.

The new Care funding system due to come into effect in 2020 as a result of the Care Act 2014 is complex, making it difficult for people to understand their potential care costs.  Cases studies are provided in the report to demonstrate the complexities of the funding system.

Thomas Kenny, Chair of the Products Research Group of the Pensions and Long Term Care Working Party, which produced the IFoA report, comments:

“As life expectancy has been increasing, unfortunately healthy life expectancy has not kept up.  It is estimated that 25% of men and 35% of women aged 65 today are likely to need care at some point in their lives.  This is a significant portion of the population.

“Our research shows that the current system creates a significant disincentive to save as a substantial portion of any savings goes directly to pay for reductions in the Local Authority funding, with absolutely no change in quality of care.  The changes to the means testing that will come into effect in 2020 as part of the Care Act 2014 are a step in the right direction, but don’t go far enough to remove this disincentive to save.

“MPs have recently stated that the delay to the Care Cap to 2020 could leave those needing care unable to cope with unlimited expenses.  We would agree with the public accounts committee report that the Government should create a clear timetable for implementation of the Care Cap.  We would also encourage them to look again at the weaknesses in the proposed system and make adjustments so that, when implemented, there will be an incentive for people to save for their long term care.

“The IFoA suggests that the Government could look at introducing some type of ring fencing of savings from means testing to remove the current deterrent to saving for long term care. We also believe that it is in the public interest that people have access to information to enable them to understand the extent of their potential future care costs and to help them make informed choices now to avoid making funding decisions at the point of crisis.  Both Government and industry have a role to play here.”

The full report is available for download here.