People will be encouraged to take out insurance cover for their own long- term care at retirement age. But they will be offered a guarantee that, for every pounds 1 of cover they buy, they will be able to keep pounds 1.50 of their assets. At present, old people get free health care but, if they are chronically ill or disabled, long-term social care is means tested.
Growing numbers of old people have lost their life savings or, in some cases, their homes because they have been charged for long-term care. An estimated 40,000 homes are having to be sold to meet the costs.
Mr Dorrell's move is aimed at honouring John Major's promise to "Middle England" that under the Conservatives wealth will "cascade down the generations". Ministers also hope it will restore credibility to their claim to be the party of inheritance.
The deal will form part of a three-pronged attack on the problem. Legislation will allow occupational and personal pensions to be paid out more flexibly. Individuals could opt to take a lower pension early in retirement in return for higher payments later when they are more likely to need care.
Ministers will also consult on how best to allow those entering long- term care to buy annuities to cover costs. On average, most people spend two to three years in a home but fearthat their stay could be longer, swallowing savings and any inheritance they hope to leave to their children. A one-off payment to cover all or part of the charges would provide them with the comfort of knowing that the rest of their estate would be protected, ministers believe.
However the centrepiece of the change, on which the Government is expected to say it plans to legislate later this year, is the new public/private "partnership" it is to offer between citizens and the welfare state.
Modelled on schemes already operating in some parts of the United States, individuals who provide their own cover for long-term care will receive one-and-a-half times that protection for their assets.
For example, a one-off payment at retirement of pounds 10,000 will buy some pounds 60,000 of cover according to insurance experts, enough for an average three-year stay in a home. Those doing that would have pounds 90,000 of their assets protected from the means-test for residential and nursing care if they needed state help beyond the pounds 60,000 secured by the insurance.
Equally, those who could only afford a lower level of cover - say pounds 30,000 - would have pounds 45,000 of assets protected to pass on to their children.
Mr Dorrell is expected to argue that it will provide a fairer balance between those who take steps to provide for themselves and those who do not.
Under the present rules, individuals who have more than pounds 16,000 of assets have to pay the full cost of care homes themselves. Means-tested state aid cuts in at that point. But the full cost of care is not met until their assets, including the value of their home if they are single, have been run down to pounds 10,000. Those who have saved for old age can find themselves penalised while those who have not saved have the full bill paid.
The scheme is likely to come under fire from Labour, however. The Opposition will argue it does little or nothing to help the army of less well-off pensioners who have assets above the means-test level but cannot afford the premiums for private cover.
Ministers will counter that growing numbers should be able to afford such sums as occupational and private pensions mature, and that significant numbers of pensioners may be relatively income poor, but are relatively asset rich because they own their homes.
With an average house worth nearly pounds 60,000, equity release schemes would allow them to buy long-term care cover while protecting a significant part of their children's inheritance.Reuse content