The Government hopes the financial services industry will develop a range of pension and insurance products to help people meet the cost of care, which will be capped at £72,000 from April 2016.
Every council in England will also be required to offer loans to cover care costs which would be repaid from the recipient's estate when they die, to prevent people being forced to sell their home to cope with crippling bills. Only around one in eight people aged 65 will face care costs greater than £72,000 and benefit from the protection offered by the cap.
But the Department of Health (DH) stressed that many more would benefit as a result of a rise in the means test threshold to £118,000, with 100,000 people set to receive some form of financial support as a result of the reforms by 2025/26.
Launching a consultation on the details of the plans, Care and Support Minister Norman Lamb said the Government's reforms were "not a panacea" but "achieving fairer funding and achieving a more rational system which creates the incentives to save and the ability for people to plan for their old age is incredibly important".
Mr Lamb said ministers and officials had been in talks with financial services firms about insurance or pension schemes which could fund the cost of a person's care. "I was hearing last week for example about the possibility of a product which you could take out long before there may be any risk of care needs, which could be at quite modest cost because you are pooling the risk, but which would pay out a sum of money to help you get to the cap, which is a very attractive proposition. Until now, no financial services organisation can offer anything of that sort of nature because there is no cap there," he said.
On the prospect of pensions being used to meet the cost of care he said: "There's something quite attractive in just having one pot of money saved for your old age, whether it's for your financial security or your care needs."
Under the current system around 40,000 people a year were forced to sell their homes to pay for their care, but the deferred payments scheme due to start in April 2015 is aimed at preventing that. Under the scheme councils would loan people the money to pay for their care, with the repayment coming from the person's estate after they die. Local authorities would be able to charge interest on the loans to cover their running costs, although officials stressed that they would not be allowed to make a profit.
Jamie Reed, shadow health minister, said: "This announcement will not help the thousands of older and disabled people who face a desperate daily struggle to get the support they need right now. Instead, ministers are offering false reassurances that older people won't have to pay more than £72,000 or sell their homes to pay for the costs of care. More than £1.8 billion has been cut from local council budgets for older people's social care since this government came to power. David Cameron has unleashed a funding crisis in social care."