An “age insurance” scheme to stop pensioners from having to sell their homes to pay for long-term care will be proposed by ministers next week in a radical shake-up of the care system.

The current means-tested system forces thousands of pensioners each year to sell their homes or run down their savings, which the Government will say is unfair and unsustainable given the rapidly ageing population.

Under the proposals, those who want to protect their homes or savings would pay into a scheme that would then foot the bill for all members who require long-term residential care.

A range of payment options for “age insurance” will be set out in a government Green Paper.

One option suggests that a prearranged sum is deducted from a member’s estate after death — a form of inheritance tax. Another will propose that a payment is made out of the pension pot on retirement. Other models propose that payments are made during the years of employment.

Whitehall officials say that at this stage there is no preferred model of payment and no decision will be made until all the options have been debated by the public.

However, the proposals are likely to be criticised, and Labour does not want to be accused of drawing up plans for what looks like a new tax on ageing so close to a general election.

An option for a fully privatised insurance system, similar to health insurance, to pay for old-age care will also appear in the Green Paper. However, ministers will make clear that this is not a favoured option and a system that “pools risk” is the most likely.

The poorest pensioners will continue to have their care paid for by their local authority.

Whitehall officials said that during the course of lengthy public consultation it was clear that being forced to sell a home was widely considered the biggest injustice of the current system.

Under the rules, everyone who has savings or a home worth more than £23,000 — which effectively means all homeowners — must pay for his or her own residential care.

“The greatest unfairness of the current system is for the people who have played by the rules — put a bit aside, saved for a house — having to fund their own care when they want to pass most of that on to their children,” one official said.

“The Green Paper has several options that address that particular issue. The hope is that a consensus is reached at the end of this where the bulk of their inheritance can be passed on to their children.”

Ministers will say that there is no point pretending that the current system is durable. One in four adults will be over the age of 65 within 20 years, doubling the cost of care to £24 billion. It is also clear that the public wants a higher quality of care, with staff properly trained to deal with dementia patients in particular.

The new payment system would be some years off. There is unlikely to be enough time even for a White Paper to set out detailed proposals to MPs before the next election, although both main parties will be under pressure to include a commitment in their manifestos.

In addition to the payment options, in future local authorities will no longer be able to refuse to advise so-called self-funders on how to find good residential care. The Green Paper will end the division between self-funders and those paid for by their local authorities.

Everyone will be entitled to an assessment of their needs and some basic level of support under a new system.

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