Over 40? Why you could soon be paying for social care
Posted onOver the last few weeks, we’ve looked at a few of the ways in which the Chancellor might raise revenue to fund the coronavirus response. From reforms to pension tax relief to increases in Capital Gains Tax, there is a range of options under consideration.
A year ago, the prime minister pledged to ‘fix the crisis in social care once and for all’. With the care sector in the spotlight as a consequence of the coronavirus pandemic, speculation is rife that the UK may be set to introduce a tax on over-40s to fund social care.
Government looking to properly fund the social care sector
At present, the state spends just £25 billion a year on later life care, a fraction of the £200 billion of public money spent on health and education. Estimates suggest the value of unpaid care provided for the elderly by friends and family exceeds £100 billion.
To help fund the sector, it’s reported that the government are considering introducing a new tax on over-40s, or by mandating compulsory insurance.
Under the current system in the UK, some people qualify for free at-home social care from their local council if they have less than £23,250 in savings, excluding their primary residence. People who do not own their own home can get residential social care.
Others have to either sell their home to pay for later life care or make their own arrangements. If you don’t meet the means test for state-funded care, care home bills can easily come to more than £1,000 a week.
James Jamieson, chairman of the Local Government Association says: “For too long we have been promised a plan to fix the social care crisis but people who use and work in these vital services are still waiting. The Covid-19 crisis has proved we need a complete reset, not a restart when it comes to the future of social care.”
Japanese and German models being considered
The Guardian has reported that ministers are studying the models Germany and Japan use to fund their social care.
The Japanese system requires people to pay additional tax to fund social care from the age of 40.
In Germany, workers pay 1.5% of their salary into a fund from when they start work, with employers also matching their contributions. Pensioners also contribute, and this fund is ring-fenced for social care.
Ex-Liberal Democrat MP Paul Burstow, who was social care minister in the coalition government from 2010 to 2012, said: “Introducing an insurance contribution from the over-40s would help put social care on a firm footing for the future. This approach has already been adopted in other countries on a mandatory basis to ensure risk is fairly spread and sufficient funds are raised.”
While many charities have welcomed the news, former pensions minister Sir Steve Webb believes that the rate of tax would have to keep rising to keep pace with the ageing population and the cost of providing state care and was ultimately not sustainable.
Could a system of compulsory insurance be an option?
Instead of a tax on earnings, Sir Steve advocates encouraging or mandating people to insure themselves against the potential costs of later life care.
He says: “Those aged 55 and over could fund the purchase of the policy by dipping into their pension savings and the government would be able to incentivise the scheme by providing a tax break on the money withdrawn.”
The insurance solution is also favoured by influential think tank the Adam Smith Institute, which has said the bill for the costs of care should be picked up by the government in cases where someone needs care for many more years than they expected.
Sir Steve says: “For the first time, it would provide a financial incentive to businesses to make sure people are healthy and getting the best care, as insurers would want to limit claims payouts.”
Get in touch
With many retirements now lasting for decades, ensuring you have enough money to live the lifestyle you want in retirement needs careful planning. From drawing your income tax efficiently to planning for the cost of later life care, we can help. Email enquiries@blackswanfp.co.uk or contact your adviser on 020 3828 8100.
Production
