Get ready for a care-free old age

Taxpayers must be encouraged to prepare now for their long-term needs, writes Duncan Hopper

With an election to win the Government is determined to get some legislation on the statute book to win the votes of middle-class electors worried at the prospect of having to sell their own and their parents' homes to pay for long-term care.

The Government favours various forms of partnership between individuals, insurance companies and the state to make it possible for families to shelter more of their assets from being sold to pay for care which the state used to provide. Its outline proposals are only a month old. But it wants interested parties to submit their comments by the middle of June. The question then is whether the Government is willing to prime the pump sufficiently to get an effective partnership up and working.

Research shows that older people are often bitter and emotional about the state's inability to provide for them after the years during which they have contributed to National Insurance. Younger people, the studies suggest, are beginning to accept that the state will not provide for all their care needs.

But even with the young, the issue becomes one of priorities. For them - as with their elders - spending on holidays is regarded as a far more positive reward for life's toil - more important, together with other major necessities, than providing for the long-term care needs of the future.

These attitudes will take time to change, and without incentives most people will postpone decisions until retirement, or leave provision to the state. Two government proposals are designed to alleviate this by allowing individuals twho go into care to keep more assets if insurance cover is taken out to provide for long-term care.

The first would add pounds 1.50 to the means test threshold for every pounds 1 of insurance benefit that has been paid out - giving, for example, pounds 30,000 of asset protection for every pounds 20,000 of cover used (in addition to the pounds 16,000 already allowed). The total in this example would be pounds 46,000.

The other would add pounds 1 for each pounds 1 of cover used - to which a further pounds l5,000 would be added once the individual has funded his or her residential care with the help of insurance for four years. The total using the above example would be pounds 51,000.

The Government is also suggesting that, for those people about to receive long-term care, or receiving it now, the insurance industry should devise an "immediate needs annuity", as well as other schemes for those not in care now but who want to plan for the future.

Pension innovation is also to be encouraged. It could mean an individual taking a lower initial pension in return for a higher pension to cover care costs, if they were needed, at a later stage. The Government has also invited comments on investment and savings schemes that could help people to afford the single or regular premiums needed to pay for such protection policies.

In each case the Government is relying on the abilities of the financial services industry to devise schemes that will bolster state provision at a cost which is affordable.

So far the private sector has not brought much weight to bear in this market. Only a handful of companies provide long-term healthcare packages. They are expensive and the number of people in the UK who invest in them is limited - perhaps 20,000.

Moving these figures into the hundreds of thousands and ultimately the millions is not going to be easy - whatever the incentives. Fuelled by growing demand, the insurers can be stimulated to take a much more imaginative approach to the kind of policies they could provide. The issue for both government and the financial services industry is whether more people will really be prepared to take on the additional cost of paying for insurance cover.

For the industry to be fully effective it will require a suitable regime for consumer protection as well. Everyone will want to avoid the sort of mistakes which damaged the personal pension market through lack of clearly thought- out regulation. The Government and the industry have learnt from the past and it is inconceivable that the design of policies for long-term care and their sales should not be regulated.

What the industry requires is a simple but effective regime under the Financial Services Act. Too great a burden of regulation will serve to increase costs dramatically. For that reason regulation should be concerned to prescribe standards - with draconian penalties for any firms or individuals who breach them.

However, the greater challenge for any strategy is how many people will be attracted to become customers for long-term care insurance. It is here that the proposals appear far too narrow. The Government is simply not getting its targeting right .

The only way to wake up the market is to make the incentives attractive enough for people to make provision early in their tax-paying life - not just at the point of retirement.

Affordability is the key and the cost will increase with the length of time individuals leave it before taking out a policy. The challenge in long-term care provision is to stimulate an imaginative response by all members of the partnership to this consultation document. Given a fair regime of incentives, the industry will respond positively.

In the long run, government - any government - will have to face up to the need to encourage ordinary basic-rate taxpayers to provide for their own long-term care needs. Top-rate taxpayers can and would provide anyway. So far government has not proposed a real incentive package which seriously addresses the broader target. Any solution that fails to deal with this fundamental problem will eventually have an impact on each and every taxpayer. The ripples on the pond must spread further if the Government is to save money and not increase taxes generally.

Duncan Hopper is managing director of Legal & General Healthcare.