Long term care can be costly and it helps if clients prepare in advance. Graham Duffy looks at the situation
There are several different types of long term care, including sheltered accommodation, respite care and domiciliary care (i.e. care at home), through to care in a residential setting, with or without nursing. Most people however will associate care with domiciliary care, either delivered in their own home or in a residential home.
If asked, most people would rather receive care in their own home but it is not always possible to provide this at a reasonable cost. When receiving care at home the value of one's property is not taken into account, but in broad terms all other assets are included in means testing. Allowance is made for normal expenditure and for any additional costs as a result of disability.
Size of the market
It is estimated that 3.2 million people aged over 65 are receiving some form of care, but only about 1 million are doing so on a formal basis:
- 426,000 in domiciliary care
- 250,000 in residential care
- 160,000 in nursing care
- 116,000 receiving some form of community care service
Of the above, it is estimated that 190,000 are self-funding their own care, with the rest receiving some kind of support from their local authority, the NHS or both. It is also estimated that there are five million informal carers.*
This demonstrates the potential size and scope of the market, as yet largely untapped by providers: only 3,000 applications were received for immediate need annuities in 2006.
How long term care is funded
According to the Wanless Social Care Review (April 2006), local authorities spent £8 billion on personal care services in 2004/5, of which £1.6 billion was recouped from service users through means tested charges. £3 billion was spent by the NHS on long term care of older people and £3.7 billion was paid out in non-means tested charges such as attendance allowance.
Those with assets have several ways to fund their care. They can fund it out of their income, but few have the required level of pension income to do this, and care home fees tend to go up by more than the general rate of inflation - if nursing care is required, this becomes even more expensive.
Fees can be funded out of income and savings but this often involves erosion of your capital. Investments may also be used; however, with ever increasing life expectancy these sums may not be enough. You can purchase a pre-funded LTCI policy when younger and in good health to protect against the possibility of needing care in the future or you can purchase an immediate or point of need annuity at the time that care is required.
The central role of local authorities
The role of the local authority goes back to the National Assistance Act in 1948, which set out the basis for the NHS. At that time a framework for the welfare state was established and this separated local responsibilities for welfare from national responsibility for social security. Section 21 of the Act stated that it was every local authority's duty "... to provide residential accommodation for persons who by reason of age, infirmity or any other circumstances are in need of care and attention that is not otherwise available to them."
The NHS and Community Care Act 1990 made local authorities responsible for organising community care, putting the emphasis on caring for people in their own homes. This established local authorities' duty to carry out an assessment (section 47) where there appears to be a need, regardless of funding status.
How the ability to pay for care is calculated
When it comes to paying for care in a residential setting local authorities use the Charging for Residential Accommodation Guide (CRAG). A resident's resources - in the form of capital or income - will be considered when assessing the ability to pay. All types of capital are taken into account other than, currently, investment bonds written as one or more life policies that contain cashing in rights.
[A resident with capital of more than the current level of £21,500 will, in broad terms, be liable for the cost of their care. Residents with capital of less than £13,000 will be funded by the local authority. There is a tariff income of £1, taken into account as weekly income, for every £250 over £13,000. The resident's property is taken into account within these capital limits but will be disregarded for the first 12 weeks of a permanent stay in a care home. The property is also disregarded if and when a resident's partner remains in the property, or if a relative of the resident or member of the family is:
- Aged 60 or over,
- Is aged under 16 and is a child whom the resident is liable to maintain, or
- Is incapacitated
As with capital most income is taken into account, however attendance allowance and the care component of the disability living allowance is a non-means tested benefit.
This can be a complex area and referral to CRAG is required for full details. It is important for any adviser in the care market to have a full knowledge of CRAG.
Additional funding: new legislation
The Registered Nursing Care Contribution (RNCC) is payable to those residents that are in privately funded nursing care. On the 1 October 2007 a single band of £101 per week replaced the current three nursing bands.
Care homes will continue to receive funding equivalent to the high band for residents in that band until the primary care trust (PCT) has been able to review each case individually.
For residents in a nursing care home on 1 October 2007 their nursing needs will be in a low, medium or high band. The current rate for these bands is:
- Low Band - £40 per week
- Medium Band - £87 per week
- High Band - £139 per week
For residents on the low or medium bands, since 1 October, nursing care homes receive the flat rate of £101 per week for each resident. For residents on the high band, PCTs continue to pay £139 per week from 1 October unless on reassessment:
- The resident is eligible for NHS continuing healthcare (the full cost of care paid);
- The nursing needs have diminished to the extent that if the old guidance relating to nursing bands were applied, the resident would only be eligible for either the low or medium bands (the PCT will then pay the single rate of £101 from 14 days following notification of the outcome of the reassessment); or
- The resident no longer has nursing care needs.
For residents entering a home after 1 October 2007, nursing care homes receive a flat rate of £101 per week, regardless of the level of nursing care required. Nursing needs will be established as part of the needs assessment and included in the care plan.
Planning for care: when and how to do it
Like most things in life the sooner clients plan, the better. According to Laing and Buisson, average care home costs in 2006 were running around £30,000 per annum for nursing care and just over £22,000 per annum for care without nursing. This is an average and a recent CSCI study reports that some care home costs are quoted at £78,000 per annum!
The keys to proper financial planning are around wealth accumulation. These include:
- Wealth protection - avoiding losing assets and income to unfunded medical expenses; i.e. care
- Wealth distribution - accessing and utilising money in the most efficient way possible
- Wealth transfer - leaving assets to loved ones effectively
Long term care affects not only the person needing care but many others - such as family and friends. Could long term care be considered a hidden inheritance tax as the cost of it can dramatically reduce the size of an estate?
While many people do arrange their later life affairs, not many take into account the possibility and long term costs of care.
However, it is never too late to do something about it: the immediate care annuity for example brings peace of mind and ring fences care costs in a tax efficient way both from an income and inheritance tax perspective. The immediate care annuity transfers the longevity and investment risk to a third party insurer. In broad terms, unlike other forms of life assurance, old age and any health impairments will work to the individual's advantage when it comes to terms for an immediate care annuity. It must always be considered when seeking to fund care costs and all good long term care advisers should do this.
*Source: OFT: Care home for Older People in England: Market study, May 2005.
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