Extend the uncertainty?

triathlon

LHW99 wrote: »

I think there could be a case for allowing tax-free use of pension pots for this purpose. It already happens with immediate care needs annuities provided the funds go direct to the care home.

I 100% agree, it actually could be the only hope now for a small minority of these HPC.com types who have now burnt their bridges. Some might even have pots to pay outright for a property and then be able to use their last remaining years to save on rent and load up again on a pension, if needed they could even work into their 70's, I would without a doubt do this if my situation were as dire as theirs.

lisyloo

Malthusian wrote: »

There is no moral case for subsidising somebody's inheritance by making withdrawals from pensions tax-free if they are used to pay for care,

This is not what I was suggesting.
I was suggesting giving tax relief from earned income during someone’s working life for care insurance premiums as we do for pension contributions.

The moral case is encouraging people to save for their own long term care (similar to encouraging people to save for their own retirement) rather than have them fall on the state.

I don’t understand your point about subsiding inheritances.
If I had bought an immediate care needs annuity then there would be no inheritance because as you yourself have pointed out insurance usually leaves you worse off (on average) but that’s the price you pay for covering the risk.

The moral case is to encourage people to fund themselves and not fall onto the mercy of state funds which is exactly the purpose of pension tax relief.

Yes sure there are rich and poor people to whom this will make no difference (as with pension tax relief) but there’s a lot of people in the middle who might make better provision if given a bit of carrot (as with pensions).

At the moment there won’t be a huge take up because as you suggest premiums will be high, but it needs to be spread over a lifetime and become one of the benefits that gets tax relief and employers offer as part of their benefits package. Then it can become more mainstream. At the extreme end it could be auto enrolled with an opt out. I agree that’s extreme right now, but I think people views will change as more people require this care.

Malthusian

lisyloo wrote: »

This is not what I was suggesting.
I was suggesting giving tax relief from earned income during someone’s working life for care insurance premiums as we do for pension contributions.

Why?

Either the person with the pension fund eventually spends it all, in which case the State has spent money on tax relief that it would have eventually spent anyway on their care, or they don't, in which case the State has handed their heirs a bung via the amount left over.

If the aim is to reduce the amount the State spends on the care of people who run out of money it achieves the exact opposite. In the best case the State spends exactly what it would anyway (on tax relief + care) and in the worst it spends more (on tax relief for someone who would have otherwise required little or nothing from the State).

Let's say I have £150,000 in a pension taxable at 20%, my care costs are a relatively low £24,000 per year (whether self-funded or LA to keep it simple) and I will live 7 years. Either I draw £30,000 a year from my pension and run out in 5 years, after which the Government spends £48,000. Or I draw £24,000 a year, in which case my pension fund lasts 6.25 years, and after 7 years the Government has bunged me £30,000 in tax relief and then spent £18,000 on my care after I ran out of money. Exactly the same. Not a penny has been saved by the State.

Alternatively I live only 2 years. With no tax relief my heirs get £90,000. With tax relief I leave a £102,000 pension fund to my heirs which includes £12,000 that has been bunged them courtesy of the taxpayer.

I don’t understand your point about subsiding inheritances.
If I had bought an immediate care needs annuity then there would be no inheritance because as you yourself have pointed out insurance usually leaves you worse off (on average) but that’s the price you pay for covering the risk.

Most people who buy immediate care needs annuities do leave an inheritance because they don't spend every penny of their remaining capital on the annuity. It would be very bad advice to tell someone to spend every penny of their money on a care annuity because they would have no cushion against the care home increasing their fees by more than the annuity indexation.

Then when you approached the local authority, assuming you couldn't find a cheaper home that the annuity could still sustain, they would say buying the annuity was deliberate deprivation.

The moral case is to encourage people to fund themselves and not fall onto the mercy of state funds which is exactly the purpose of pension tax relief.

Except you are proposing the state should immediately take them into its tender mercy by mercifully giving them tax relief, and then not taking the tax back if they withdraw money to pay care fees.

With pension tax relief the State does not give you money it would have spent on you anyway. It is not tax free, it is tax deferred.

Yes sure there are rich and poor people to whom this will make no difference (as with pension tax relief) but there’s a lot of people in the middle who might make better provision if given a bit of carrot (as with pensions).

They already have a massive carrot to make pension contributions, or accumulate other assets such as their own house, which is being able to afford their current lifestyle after they stop working. Getting a 20%+ subsidy towards future care costs adds very little to the existing incentive.

Nobody who is not currently making pension contributions will start making pension contributions if care fees become tax-relievable. If they don't value the active stage of their future retirement they won't value their future care provision either.

At the moment there won’t be a huge take up because as you suggest premiums will be high, but it needs to be spread over a lifetime

It doesn't. Anyone who has spare income in their working life that they could use to pay care insurance premiums should be putting it towards pensions or getting on the housing ladder. Anyone who has done that and has pensions and a house is sorted. They can self-fund either by drawing down from those resources or buying a care annuity.

Anyone who has no spare income cannot afford care premiums and will not join an employer that garnishes a gigantic part of their wages for a care insurance policy, or will opt out.

Faced with this reality, advocates of care insurance invariably resort to saying "well then they shouldn't be able to opt out" and we already have an insurance scheme that works that way called tax.

Insurance is a bad investment. Insurance is only good as insurance. If someone has spare income that they should be saving up for a need that will arise in the distant future and only in the distant future, it should be invested.

Which is exactly what people with spare income that will eventually be used to pay for future care do, via their houses and pension funds. Nobody saves for house purchase or pensions via an insurance policy (not any more; retirement annuities became unviable decades ago) and saving for future care costs via an insurance policy is poor value for exactly the same reason.

What insurance is good for is saving for an event that might occur in the future or might occur tomorrow, long before you have had any realistic chance of accumulating enough money to pay for it. If you are in your 30s this applies to things like income protection or home insurance. It does not apply to dementia, unless you are extraordinarily genetically unlucky, in which case you are uninsurable.

LHW99

There is no moral case for subsidising somebody's inheritance by making withdrawals from pensions tax-free

There is perhaps even less of a moral case for allowing (DC) pensions to be inherited tax-free if you die before 75. But that is perhaps a different question.

Let's say I have £150,000 in a pension taxable at 20%, my care costs are a relatively low £24,000 per year (whether self-funded or LA to keep it simple) and I will live 7 years. Either I draw £30,000 a year from my pension and run out in 5 years, after which the Government spends £48,000. Or I draw £24,000 a year, in which case my pension fund lasts 6.25 years, and after 7 years the Government has bunged me £30,000 in tax relief and then spent £18,000 on my care after I ran out of money. Exactly the same. Not a penny has been saved by the State.

Alternatively I live only 2 years. With no tax relief my heirs get £90,000. With tax relief I leave a £102,000 pension fund to my heirs which includes £12,000 that has been bunged them courtesy of the taxpayer.

You have not included the state pension and attendance allowance income here. Additionally, half of people going into care are like to pass in around 18 months, and only around 1/4 live more than 3 years.
http://eprints.lse.ac.uk/33895/1/dp2769.pdf
For those living 18 months, with a £150k pot, the TFLS would cover the majority of the fees, assuming assuming no additional income. It would last longer in the example you give if you assume a full SP and attendance allowance. While being self-funded, the Government would have no expenses to pay, so I cannot see there being an issue in allowing long stayers to be able to pay the care home from any residual pension tax-free. It could always be made an option for when the house value had been used up.

Malthusian

LHW99 wrote: »

You have not included the state pension and attendance allowance income here.

No, because it was a simplified model to illustrate that the State paying somebody tax relief today instead of paying care fees when they run out of money in the future does not save the State a penny, and will cost the State if they were never going to run out of money.

The various other factors going into people's budgets do not change that equation. The State Pension and AA aren't means-tested so whether the individual runs out of money or not does not matter in that regard.

Additionally, half of people going into care are like to pass in around 18 months, and only around 1/4 live more than 3 years.

Very true, which is why it makes even less sense for the Government to hand people tax relief now in order to pay less in care fees later (which doesn't work as the net effect is nil in the absolute best case scenario). Many people with private pensions to pay tax on will never need money from the Government, and for them tax relief is a straightforward bung to their heirs.

While being self-funded, the Government would have no expenses to pay, so I cannot see there being an issue in allowing long stayers to be able to pay the care home from any residual pension tax-free.

Except the proposal is that the Government should pay expenses while the individual is "self-funded" - namely by permanently waiving the tax that was deferred when the individual saved part of their earnings into a pension.

lisyloo

Malthusian wrote: »

No, because it was a simplified model to illustrate that the State paying somebody tax relief today instead of paying care fees when they run out of money in the future does not save the State a penny, and will cost the State if they were never going to run out of money.

The idea behind tax relief is that it incentivises saving, which does work for pensions.
So paying tax relief today at 20% could save the state 100% in future if that person would otherwise have run out of money.

The intention/suggestion was that people could save additionally for long term care if incentivised.

I get your point that it puts money into the purses of people who would not otherwise run out of money.
Clearly with pensions the state thinks this is worthwhile, so the solution is simple - If you want to save for your long term care then stick it in a pension and get tax relief (and possibly NI relief via salary sacrifice).
One issue is LTA which is arguably not high enough for retirement and care fees.
The trouble is at the moment is that people are thinking pension = retirement savings and most people (unless they have elderly relatives in care) are not considering long term care.

Except the proposal is that the Government should pay expenses while the individual is "self-funded" - namely by permanently waiving the tax that was deferred when the individual saved part of their earnings into a pension.

Nope, my proposal was that they got tax relief on earned income during their working life, not tax relief on pension income.
They can do this now via a pension (great) trouble is most people are not consciously catering for their long term care and are using their pensions as retirement investment vehicles as intended.
The only people who are thinking about it are those who have dealt with it in their families.

So the vehicle is already there for tax relief (pension) but as it’s not part of normal financial planning or employment benefits then hardly anyone is doing it.

People with a pension and a house are not “sorted”.
If their spouse is living in the home (which could already be small if they downsized say in their 70s) and their pension income is insufficient which even generous DB pension incomes could be insufficient to pay long term care fees certainly in the south of England.

AG47

lisyloo wrote: »

Yes I have, but by then some equity has been paid off and incomes have risen so you are in a better position.
Mortgages are nominal which means they decrease in real terms.
Ironically in the high inflation environment you talk about they decrease faster in real terms (although that’s a fantasy as we have a lot of people working to keep inflation within range and they are doing a really good job).

Or she inflation hasn’t gone up as much as cost of living and when invest rates not lose many people will struggle so much that they will be repossessed

westernpromise

AG47 wrote: »

Or she inflation hasn’t gone up as much as cost of living and when invest rates not lose many people will struggle so much that they will be repossessed

What? :T:T:T

Malthusian

lisyloo wrote: »

The idea behind tax relief is that it incentivises saving, which does work for pensions.

The idea behind tax relief is that it avoids punishing people for saving into pensions by taxing them twice, whereas if they just spend it they get taxed once.

If I get taxed at 20% for working and then put it into a pension with no tax relief and then get taxed at 20% again when I take it out, I may as well just spend it and pay 20% once.

So paying tax relief today at 20% could save the state 100% in future if that person would otherwise have run out of money.

It saves the state absolutely nothing. Sorry, I don't know how I can make the maths any more clear. If the person is going to run out of money then 100% of every penny that the state "saves" on their care costs has already been paid out to them in waived tax.

At best the state saves nothing. That is the best case scenario where the person lives long enough that the state gets back all the money it advanced as tax relief. If they don't their heirs get some of it.

I get your point that it puts money into the purses of people who would not otherwise run out of money.
Clearly with pensions the state thinks this is worthwhile, so the solution is simple - If you want to save for your long term care then stick it in a pension and get tax relief (and possibly NI relief via salary sacrifice).

Pension tax relief doesn't add any money into people's purses. It avoids taking money out of their purses twice if they save into a pension vs once if they spend it.

If you give people tax relief and then don't claim the deferred tax because they spent the money on care costs, now you have taken money out of their purse zero times, unless they live long enough that you get the money back via money saved on state care provision. This will only happen in a small minority of cases and for the rest it is a bung to their heirs.

So the vehicle is already there for tax relief (pension) but as it’s not part of normal financial planning or employment benefits then hardly anyone is doing it.

Millions of people are saving via pensions and thanks to auto-enrolment it is now a near-universal part of employment benefits (the gig economy aside).

People with a pension and a house are not “sorted”.
If their spouse is living in the home (which could already be small if they downsized say in their 70s) and their pension income is insufficient which even generous DB pension incomes could be insufficient certainly in the south of England.

They already had the chance and sufficient incentive to accumulate more assets than they have - i.e. a better lifestyle during retirement. The fact that they didn't means either their income was too low or they didn't wish to make further sacrifices during working life. Offering a potential bung to their heirs will not change that.

lisyloo

AG47 wrote: »

Or she inflation hasn’t gone up as much as cost of living and when invest rates not lose many people will struggle so much that they will be repossessed

Not at all clear what you’re on about here.
Mortgage affordability criteria do make sure people can afford their mortgages if things get worse. There is some contingency already built in.
In general the inflationary environment helps people as mortgages are nominal.
The high inflation environment you are hoping for helps people even more as their debts go down in real terms more quickly.

But your spelling/typing is now so bad that we don’t know what you’re going on about.

Personally I think the uncertainty will be extended (unfortunately).
Boris can say it as many times as he likes, I don’t believe it.
The maths in parliament is that a no deal won’t go through.
He can’t prorogue as some (John major) will seek a judicial review of the PMs advice to the queen to cut parliament out of the loop.
The delay is very damaging to business but it will continue.