Radical plan for old age as leak reveals care crisis

People likely to be urged to put money aside to cover their own costs

Radical plans to encourage people to save to meet their own social care costs in old age have been discussed in government, with a leaked memo warning of the potential significant “economic and social distress” of a looming crisis.

Senior sources said the health secretary, Jeremy Hunt, is among those who favour motivating people to put money aside for social care, as they do for pensions. A former minister with knowledge of discussions in government said the idea would be that people “should be encouraged to think again about spending money on a new car or a cruise”.

With the government having shelved a proposal from Sir Andrew Dilnot for government to limit people’s financial liability, ministers are becoming more aware of the need to offer an alternative.

Ideas include Isa-style savings accounts – known as “care Isas” – with preferential interest rates for a pot of up to £75,000, which you would be able to withdraw to fund your social care or leave, tax-free, in a will. Another plan is that tax incentives could be offered if people wished to take from their pensions to meet social care costs.

The scale of the coming disaster in social care is revealed in an internal analysis ordered by No 10 that warns that the UK is “well behind the curve on actions to avert the crisis”. The memo, written by Baroness Altmann last May, when she was pensions minister, notes a failure by government to deal with demographic change. “I’m afraid this really is a looming crisis which has been left far too long already,” she writes in a memo to No 10 and Oliver Letwin, then a cabinet minister. “This really is an issue that has the potential to cause significant social and economic distress. There has been no real planning for these demographic realities. No money has been set aside in the public or private sector to fund social care if or when the needs arise.”

The memo also warns of huge political risks of allowing the crisis to unfold. “There is no money set aside for social care spending by individuals or by local authorities – needs have to be funded as they arise, and if the money is not there the quality and availability of care is compromised, causing scandals and misery that could potentially rebound on policymakers at some point,” it says.

Reforms proposed by the present chairman of the UK Statistics Authority, Sir Andrew Dilnot, to cap any person’s liability to social care bills at £75,000 and raise the means test threshold to £123,000 in financial assets have been shelved until 2020.

However, it is now understood that they are unlikely ever to be implemented, leaving anyone with assets of more than £23,500 to meet their own costs. It had been hoped that financial products allowing people to insure costs up to £75,000 would materialise from the City, but sources in the Department of Health said Hunt had been “very disappointed” in the response from firms.

Baroness Altmann warns that no public or private money has been set aside to fund future social care. Photograph: Graham Turner for the Observer

Altmann acknowledges in her memo the problems with the Dilnot reforms, and argues that encouraging people to save for their costs may be the only solution. “It seems clear that we cannot rely on insurance companies to devise policies that will cover the costs of care for many of the population,” she writes.

“I think an alternative approach is probably required to help more people prepare for care costs over the coming years. We should consider a savings solution.

“We need to encourage people who are already in later life to earmark some of their savings to pay for care, should the need arise. We have been successful in getting people to save in pensions by using tax incentives and I would suggest we need to incentivise care saving too.”

Altmann, who resigned in July, claims that a major goal would be making people aware they will need to meet their own costs in old age, as local authorities increasingly ration what they offer. “Most savers who have a few tens of thousands of pounds in their pension funds are probably the kinds of people who are responsible with money, want to look after themselves and their family and do not want to throw themselves on the state.

“Unfortunately, if they do not realise how the social care system works and that they are likely to want a different standard of care from the basic state minimum, they may spend the money and regret it later. An important policy objective should be to help as many people as possible understand the benefits of keeping money aside for later life, rather than spending it early in retirement.”

It is understood there is interest in encouraging better equity release products, under which people can release cash from the equity in their homes in chunks. Under such policies, homeowners pay compound interest on the money they have taken out when the house is sold. However, Hunt’s own parents were forced to buy themselves out of such a product because of the high costs, and the health secretary is dubious about the current products on the market.