Fiona Murphy examines what long-term care reforms mean for advisers and their clients
Long-term care reforms are finally here. Social care costs (both residential and domiciliary) will be capped at £75,000 from April 2017.
The means-tested threshold at which people receive government support has been significantly raised. Previously anyone owning assets under £23,250 in England had to pay for their own care bills. Now, anyone with assets under £123,000 will be eligible for state support.
The reforms will be funded by an inheritance tax freeze at £325,000 for individuals and £650,000 for couples until April 2019 and the end of contracted-out state pensions.
The reforms have received a mixed response. While most commentators have welcomed the government's commitment, the high level of the cap and inheritance tax changes have attracted criticism. Around 5,000 extra people will be liable for inheritance tax, as the threshold will no longer rise with inflation.
So, what will the changes to inheritance tax and long-term care mean for your clients? It may not be as straightforward as you think.
Symponia managing director Janet Davies explains: "Consumers are being misled into thinking once they have spent £75,000 on care costs, their local authority will step in and pick up the entire bill.
"The cap only relates to care costs, not accommodation, food and other ‘hotel style' services necessary to live in relative comfort."
‘Hotel' costs will be capped at £12,000 a year and it is worth reinforcing to clients they will continue to self-fund these elements after reaching £75,000.
While the reforms will alleviate financial pressures for some, means testing will hit people with modest savings and assets. After all, £123,000 is slight compared to the value of most UK homes.
Davies also warns people going into care over the next few years will not benefit from any cap so advisers must ensure this is communicated clearly to clients.
In December last year, chancellor George Osborne confirmed an IHT threshold increase after successive freezes. A U-turn within a mere matter of months was surprising.
However, Standard Life head of estate planning Julie Hutchison says: "The increase of £4,000 was coming in 2015 so it is something we never had. They are not taking money out of people's money today to fund it. The £4,000 increase, the IHT free amount that people have is £325,000. It was going to go up to £329,000 as per the December statement."
Hutchison continues: "That increase would have meant £1,600 more staying with the family as opposed to being paid in IHT. This is the wealthier end of the scale facing this tax. Only 21,000 estates are estimated to be paying IHT in the current tax year."
‘Business as usual'
However, she says it will be business as usual for advisers in terms of helping clients mitigate inheritance tax liability.
"It is business as usual in terms of monitoring whether clients are using their annual allowances and exemptions," she says.
"There are lots of ways to make gifts which can either reduce or remove IHT as an issue. The key thing is to start the clock early. The opportunity advisers have is to work with clients and start them thinking early on in their retirement planning."
Tish Hanifan, joint chair of the Society of Later life Advisers, says: "People will need to plan for their social care as part of their overall financial planning and in doing so, eliminate the worry of a potential ‘catastrophic loss' should high levels of care be needed in the future.
"Planning for the cost of care in later life will increasingly move to be a mainstream area of financial planning."
Health Secretary Jeremy Hunt hopes the reforms would encourage financial services to develop products.
Labour's shadow health secretary Andy Burnham rejected the suggestion believing that a pre-funded insurance market is obsolete.
However, there are other solutions out there and players keen to enter the market. Advisers should keep both in mind.
Just Retirement director of customer insight Stephen Lowe says: "The biggest barrier to an insurance market forming is not ability to make products, but demand in the market. We need help from government to make the detail clear to the public.
"We will then work alongside government, charities and other stakeholders to build products, but we won't build capital or invest in products unless we believe demand is there [and pool risk.]
He continues: "It is very likely we will enter the care space this year. I think the more exciting areas of care and financial product development for insurance will be how we help to provide support to people who might want to take services into the home. If you think about the insurance market today, it is about people with an immediate need."
While we shall have to watch this space for solutions, advisers have a crucial role in helping people plan against the costs of care.
We should welcome the certainty the cap brings but continue to question the detail over the coming months.
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