Reflections on the Budget
For adviser use only
Social care funding and controversy over NI increases for the self employed
While the budget was considered by many to be far from revolutionary, there were some changes, or at least suggestions of change, that were of note. Here, I’ve set out what I’d like to see in the promised (and arguably long overdue) green paper on social care funding and how the controversial increase in National Insurance (NI) rates for the self-employed, now pushed back till 2020, might be turned round to offer a private pension kick-start for the self-employed.
Green paper on social care funding
With the funding of social care an increasingly urgent issue, the green paper (promised later this year), has to be a good thing. Like it or not, an increasing number of us will need social care during the course of our ‘later years’. This means that we need to find ways of building this into mainstream retirement planning, and advisers will have a key role to play in helping clients face up to this ‘taboo’ subject.
The Budget announced that local councils struggling to finance current social care bills will receive some help through additional Government funding. But, in an age of ‘intergenerational fairness’, there’s a limit to how far any Government funding of social care can stretch, particularly if funded through taxes on those of working age. The Government need to set out a fair and stable ‘deal’ between individuals and the state, making it clear who will pay for what.
I hope the forthcoming green paper will revisit the state/private ‘deal’ put forward by the Government in 2012. While this proposed a cap on the amount an individual will ever be asked to pay towards ‘eligible care costs’, not all care costs would have been eligible, creating additional complexities. Ideally, we’d be able to remove these complexities and arrive at a deal that is straightforward for savers to understand, and for advisers to factor into advice to clients.
However, as you know better than anyone, people need incentives to encourage them to ‘do the right thing’ when planning for the future.
So, what are the options?
I believe that individuals may be more prepared to build social care funding into their broader pension planning than to tackle it as a standalone initiative. Let’s face it, how many of us would be happy locking money away for something we really hope we’ll never need? While the Government seems hell bent on adding at least one new type of ISA every year, I’m not convinced we need yet another variant in terms of a Care ISA.
I’m also highly skeptical that there can ever be an insurance based approach to covering social care costs. To be attractive, these would need to guarantee to cover the full costs for however long needed, but there are so many variables. Estimating the numbers of who will need care, defining that ‘need’, allowing for improvements in life expectancy and future medical advances as well as inflation in care home costs 10, 20 and 30 years into the future would be quite some feat.
Honestly, who’d want to offer that kind of insurance?
Aegon believes that social care funding is best tackled through the existing pension regime. Pensions are well established as the best approach to retirement saving, with tax incentives and employer contributions helping people build up savings much faster than under an ISA style approach.
But for pensions to be an effective solution to social care funding, we need a relaxation of the current £1million lifetime allowance, reversing the savage cuts of recent years and focussing once more on pensions as the means of saving long term for old age needs.
As we discussed in last month’s FAMR article, just 8 per cent of people speak to a financial adviser before making a financial decision, leaving a whopping 92% of the population as potential beneficiaries from better access to advice. A renewed Government focus on personal responsibility for funding social care should stress the importance of advice to this growing sector of our population.
The self-employed – second class pension citizens
The most controversial aspect of the Chancellor’s Budget statement was undoubtedly the planned increase in Class 4 NI contribution rate for the self-employed. It didn’t last long - with a swift U-turn, deferring it until after the next general election in 2020 (assuming the Conservatives are re-elected) just a few days later.
While few self-employed individuals will be disappointed by the U-turn, an increase in NI for the self-employed could (and I believe should) be used as an opportunity to kick-start their private pension saving. While the self-employed are now entitled to the same state pension as employees, they do not benefit from automatic enrolment, leaving them as second class pension citizens.
As the Chancellor sat down, we were calling for him to ‘soften the blow’ and offer to rebate part of the increase into a private pension of the individual’s choice. While not identical to auto-enrolment, it would have meant millions of self-employed were paying something into a private pension by default. With growing numbers of self-employed, there’s a need for action to avoid huge future disparities in retirement incomes between them and their employee peers.
Whether or not there’s an appetite to take this approach, the Budget announcement and its U-turn have highlighted the challenge of delivering greater pensions for the self-employed, and that creates another opportunity for advisers.