Abstract

Long term care (LTC) has long been a topic of political debate in England and the Government has begun consulting with various stakeholders, including the financial services industry, on the anticipated changes to LTC that could result from the Care Bill (2013–14) becoming law. In particular, the Government has been seeking input from the financial services industry on what financial products may be developed to enable individuals to provide for their LTC needs in later life under the new regime.

The Institute and Faculty of Actuaries (IFoA), as an independent professional body, has sought to inform the debate by providing Government with an independent expert view, formed from its members who are specialists in both pensions and LTC. This paper has been written by the IFoA’s Pensions and Long Term Care Working Party’s Products Research Group and considers how pensions might be used to help fund LTC needs at older ages. In particular, how pension wealth and uses of pension or pension-based products could fund LTC needs in the new regime from 2016. This paper also considers the financial impact of the proposed cost cap for individuals in England.

The main conclusions are as follows:
• Pensions provide an established framework for meeting LTC cost needs
• The 2014 Budget pension reform should facilitate product innovation
• Given improvements in mortality, people are living longer and hence there will be a greater need for LTC funding in the future
• One of the key elements of the Care Bill is the proposed introduction of a care cap on the cost of care for people of State Pension Age and over. The research suggests that most people who enter LTC in England will not reach the care cap and all will have additional costs outside the cap; therefore, while the care cap will offer a safety net from catastrophic costs, it will not replace savings as the key means of paying for care
• The personal costs of care and the probability of reaching the cap vary significantly by gender and region
• There is a range of new and existing products that could support funding of LTC needs in retirement. The existing products considered include immediate and deferred needs annuities, variable annuities and income drawdown products; the new ideas include protection insurance, disabilitylinked annuities and a ring-fenced pension pot.

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