The at-retirement product would combine existing income drawdown arrangements with insurance against future care costs, and is being considered by the government as it prepares a green paper on social care.

Royal London director of policy, and former pensions minister, Steve Webb, said a quarter of people in the UK will spend time in residential care, and that some would be forced to sell their homes to foot the bill.

“It ought to be possible to take out insurance against this risk, but insurers are reluctant to offer products and consumers have been reluctant to take them up,” he said.

“A care pension could build on the increasingly popular income drawdown product by adding in care insurance.”

The report states that forecasting potential future care costs has been a key barrier to insurers offering such products in the past, particularly given major medical advances.

However, it highlights how a growing number of people are going into retirement with a pot of money from which they draw an income through, and that care insurance could be “bolted on” to drawdown arrangements.

This could either be in the form of a regular premium or a one-off lump sum, with Royal London suggesting the new product be branded as ‘inheritance insurance’.

The firm argues that any payout going straight to a care home should be tax-free, and that an overall cap on lifetime care bills be introduced so insurers are not taking on an open-ended liability.

“With these changes, millions of people could start to build up protection against the risk of facing catastrophic care costs in later life,” Webb added.

However, today’s proposals have been criticised for failing to deal with the complexities of social care funding.

Hargreaves Lansdown senior pension analyst, Nathan Long, said any solution would first need to tackle the “huge public misunderstanding” of the potential cost of care and the likelihood of actually needing it.

“A single product solution to solve the problems of long-term care funding is like using an earbud to clean an elephant,” he said. 

“Tax-free pension pay-outs to fund care costs has potential as a long-term solution, but there are far bigger challenges that need to be met first.”

Source: TheActuary