Funding long term care: Next steps for equity release

13 July 2012

Earlier this week Reform held a panel debate in partnership with Just Retirement to discuss “Next steps for equity release”. The speakers at the event were Heather Wheeler MP, Nigel Waterson, Chair of the Equity Release Council, Michelle Mitchell, Charity Director at Age UK, David Budworth, Deputy Personal Finance Editor at The Times and Rodney Cook, Chief Executive of Just Retirement.

It often comes as a shock to people that if they have assets above a certain amount (£23,250 in England in 2011/12) the costs of entering a care home fall entirely onto them. Many people feel that these costs should be met by the State because they have paid tax and National Insurance contributions their whole lives. But there is a need to dispel the myth that care is free at the point of use. Liam Byrne noted at the end of the last Parliament that “there is no money left”, and with population ageing the limits to what can be publicly funded are only going to grow. As Lord Warner, a Member of the recent Dilnot Commission, commented at a Reform conference in 2011, “Any fantasy about 100 per cent universal state provision – forget it.”

The question then becomes how can people be encouraged to play a greater role in providing for their own care needs? An obvious source for these contributions is the wealth people build up during their working lives, especially in property. Estimates show that homeowners aged 65 or over own nearly £750 billion worth of unmortgaged property. This can raise hard questions, especially as families have traditionally aspired to pass their housing wealth onto the next generation. But some politicians are facing up to these tough choices and considering housing wealth as a way to pay for care. The culture of passing wealth on to the next generation is also changing, with people becoming more inclined to spend their money on having a comfortable retirement.

For this approach to succeed, more awareness, financial education, transparency and innovation will be essential. Products such as care fees annuities and equity release already exist, but they make up a very small proportion of the market of self-funders. Currently 8 per cent of people who take out equity release use it to pay for their care needs. In 2011 the Dilnot Commission identified that this may reflect problems on both the demand side – poor awareness leads to low demand from individuals – and on the supply side – the uncapped potential costs of long term care prevent the financial services sector from developing products.

On improving awareness, honesty is needed about the scale of the challenge and the tough decisions that will have to be made. The precise role of government raises debate. While some argue that government may have a crucial role (along with the private sector) in raising awareness, others argue that government should not promote specific products. Mistrust of the financial services sector is also a challenge. Scandals including the mis-selling of equity release and endowments in the 1980s, the recent mis-selling of PPI and the current LIBOR investigations have tarnished the industry’s reputation. Rebuilding trust is essential. Indeed, the Financial Secretary to the Treasury, Mark Hoban, recently announced the Government’s plans “to restore honesty, integrity and stability to the sector” so that “consumers are empowered… to participate in the sector on an equal footing, both through improved regulation and greater competition.”

To encourage greater choice of products, more certainty over future funding from government is required. In this sense, the Care and Support White Paper and Progress Report released this week, which did not set a cap on an individual’s contribution to the costs of care as recommended by the Dilnot Commission, were a disappointment. Setting a cap would have given the sector the ability to innovate and develop new products as there would be a clear maximum liability. But the opportunity to build a stronger market was missed.

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