Paying for Care Costs in Later Life Using the Value in People's Homes

Cass academics have sought to find a solution to the social care funding challenge.

In a paper, Paying for Care Costs in Later Life Using the Value in People’s Homes, Cass Professor of Statistics, Les Mayhew, Senior Lecturer in Actuarial Science, David Smith and Duncan O’Leary, Research Director at leading cross-party think tank Demos look at two financial arrangements that could meet this challenge.

The number of British citizens aged 75+ is expected to double to 10 million by 2040, and 1.3 million people are already receiving social care services in England alone. Social care funding is a key public policy challenge for which funding is being squeezed and local services are becoming ever more stretched. Government reforms set out a new basis to get social care funding onto a more sustainable footing by establishing a new level for what individuals and the state will pay. However, it is unlikely that delayed introduction of the reforms will be any more generous or remove the need for the individual to plan ahead.

In the paper, the authors consider two new financial arrangements designed to meet the needs of people in different financial circumstances based on releasing equity from the home: an equity-backed insurance product and an equity bank that lets a person draw down an income from their home.

The paper shows that a considerable part of personal wealth in the UK is contained in housing assets, which have increased substantially in value in recent decades, which is a decisive factor in determining how many years of care people are likely to be able to afford if they were able to release equity.

The paper finds:

• The equity-for-insurance policy has the important advantage that the premiums do not have to be paid out of current income - removing one of the key barriers to the take-up of long-term care insurance.
• While like all insurance products it means that if care is never needed, the premium will have been wasted, it is a relatively cheap way of protecting assets and should give people the peace of mind they seek without eating into their current standard of living and still enable them to leave a bequest.The equity bank focuses on allowing users to have a more comfortable retirement with fewer financial worries and enables them to stay in their own homes for longer by enabling them to pay for the extra costs of care.
• A consequence of both products is that individuals will on average pass on less to their heirs, but unless the whole value of the home is used, users will still benefit from rising house prices and the risk of a total loss of assets is removed.

Professor Mayhew said: “After the most significant reforms to social care funding in living memory, there is a temptation for policymakers to believe that the mission to reform the care funding system has been accomplished – but that is far from the case. Innovative financialsolutions are needed to enable people to live comfortably in their later years without the financial worries of not being able to pay for care or losing their homes.”

Duncan O’Leary said: “We have passed a turning point in public policy, where we must accept the need to do more with less. Tackling the issue of social care provision is one of the most important and pressing issues to securing a stable future for Government finances, while ensuring good quality of life for Britons. The innovative solutions proposed within this paper are a first step towards designing a new model for care funding, one based on making the most of assets we have today, to support our needs tomorrow."

Cass and the International Longevity Centre (ILC-UK) will be publishing a series of papers and organising joint events on social care later in the year. David Sinclair from ILC-UK said: “Sadly, Government seems to have kicked the debate on how to pay for care into the long grass. This is a disaster for older people and their loved ones. Innovation in policy and products is vital. As Professor Mayhew recognises, better use of the housing wealth of older people is likely to be a part of the solution to the care funding crisis.”