Why the cascade of wealth has dried up

The cost of long-term care has spoiled John Major's vision of inheritance for all. Yvette Cooper reports
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The Independent Online
It was an attractive image: "wealth cascading down the generations". Imagine the waterfalls of gold coins raining down from mother to daughter, father to son, allowing families to build up assets, gain security and independence. When John Major used the phrase in his first speech as leader to the Conservative Party Conference, rising house prices and growing home ownership may have made his rhetoric sound plausible. But the reality hasn't matched up to his fine words.

As thousands of families will be aware, expected inheritances often do not materialise. The most striking evidence lies in the number of houses being passed down through the generations. Home ownership has gone up from 50 per cent wenty years ago, to around 67 per cent today. More than half of the over-70s now own their own home. Yet the number of houses inherited each year has remained stable at about 145,000 for the last 25 years.

So where are all those nest eggs going? The problem is that the elderly are not dying quickly enough to pass any assets on. People save throughout their working lives - through pensions, houses and savings schemes - to support themselves in retirement, and to pass on a tidy sum to their children. Suddenly they are discovering that they haven't saved enough money to do both.

Old age is an increasingly expensive business. People are living longer, and the pension that sufficed at 60 may not be enough to live on 20 years later. But the biggest burden has been the cost of long-term care. Around one in 20 of the over-65s and one in five of the over-80s need residential care in their twilight years. Others may need nursing and caring support in their own homes. Anyone with assets worth more than pounds 8,000 - rising to pounds 16,000 in April - will have to pick up the entire bill themselves.

Hence the vanishing inheritances. Around 40,000 people will be forced to sell their houses this year to pay for care. A study done for the Government Economic Service estimates that a total of pounds 2.5bn in assets is currently being sold off to pay for elderly care. And that figure is likely to rise in future. The next generation of senior citizens are even more heavily endowed with housing assets - a remarkable 78 per cent of 45-59-year-olds are home owners. And as they age they may face a further decline in the provision of informal care.

It all sounds rather unfair on the hard working couple who made sacrifices all their lives in order to put a little by for the grandchildren. They paid their taxes and their National Insurance contributions all their lives, and in exchange they expected the state to provide for them in old age and ill health. Now they find at the end of their lives they are no better off than the couple who did not save at all - and there is nothing left to cascade to the kids. The contract they thought they had with the state has broken down.

But there is no easy way to answer their complaints. The families who mistakenly anticipated inheriting grandma's semi-detached may feel the burden of long-term care most keenly, but it is a problem that faces the whole of society. How do you finance the retirement and the long-term care of a growing elderly population? By the year 2041, nearly a quarter of the population will be over 65, compared to only 16 per cent in 1993. A report by the left-of-centre think tank IPPR and the economic consultancy London Economics calculates that by 2031 the total number of hours of care needed for elderly Brits each year will have risen from 6,600 today to 9,700.

One long-term option would be to introduce a funded social insurance scheme to cover elderly care so that each generation is forced to save up today for their own care in future. But the most obvious strategy for government (at least in the meantime) is to continue to expect individuals to provide for themselves if they can possibly afford it by running down their assets. Alternatively people could take out private insurance policies against chronic illness.

But the market in private care insurance is still small. Partly this is because few fit and healthy young people ever spare much thought to how they might fund the retirement home 50 years down the road. By the time they are ageing, ailing and concerned the premiums are prohibitively high.

Edward Richards, author of the IPPR/LE report, suggests an imaginative compromise: partial equity release insurance schemes (Peris). Retiring homeowners could pledge a fixed stake in their home - say 40 per cent - as an insurance premium for long term care. The remaining equity would be protected for the next generation whether long-term care was needed or not. For the risk-averse who are passionate about passing an inheritance on, a Peri is a brilliant idea.

The curious question is why no private insurance company has yet offered a Peri. Perhaps there is still very low demand. Insurance companies would be delighted if government subsidies - tax relief for example - could be used to encourage people to take out insurance policies. But if taxpayers' cash is at stake after all then we are back into the murky waters of political priorities.

In the Budget last November, Kenneth Clarke acknowledged the importance of inheritance to prospective Conservative voters. Taxes on savings are to be cut in April. Fewer people will pay inheritance tax, or for the costs of long-term care. But these measure are expected to have little immediate impact.

Mr Clarke's political priorities are clear. He gave away pounds 940m to ease the anxieties of elderly middle class voters. But he saved his big gesture - pounds 2.5bn - for tax cuts for everyone else. The grey power lobby may be growing in political importance, but they should not hold their breath. In the current climate, no political party is prepared to jeopardise tax cuts for the many to protect cascading wealth for the few.