Chris Horlick takes a look at the latest issues in the long term care market
The future of long term care funding continues to be high on the political agenda. After the government published a green paper on adult social care in July, the Labour and Conservative parties laid out their stalls on this highly topical issue during their respective conferences. Sadly absent from the heated debate was any mention that solutions already exist and are provided by the private sector.
The adult social care green paper sets out three options for how care could be paid for: by a partnership between the individual and the state, through a voluntary insurance which sits on top of this or by a comprehensive insurance system which everyone over retirement age needs to contribute to. Buried away in the detail is the alarming fact that the green paper only looks at the care element - and does not answer how accommodation costs are to be financed.
In his speech to the Labour party conference, Gordon Brown laid out the Government's plans for elderly care by announcing the introduction of a National Care Service with £670 million funding over two years. This money would be used to pay for free personal care for the most needy at home. £400 million would come from savings in other areas of the health budget and local authorities would have to contribute £270 million.
The Conservatives responded by claiming that this would only amount to a marginal increase in the care services available to individuals. They said that 350,000 people are eligible for the service, meaning that additional funding would only amount to £2,000 per person. This is the equivalent of £36 a week which would pay for only two and a half additional hours of home care.
The Conservatives in turn offered their own solution, proposing a home protection scheme that would act as a voluntary insurance policy which would prevent older people having to sell their homes to pay for residential care. Those at retirement age would have to pay a one-off £8,000 fee to join this insurance scheme, which would pay for all residential costs if and when it is required. Labour responded by saying there was no way that this scheme could be self-financing given the small amount of capital that people would have to invest. The following day it emerged that the plans would not cover the cost of a stay in all care homes, making it apparent that more work needs to be done before the final proposals emerge before the coming election.
All parties agree that it will be some time before any new system comes into operation. While the political debate about funding rumbles on, hundreds of people continue to enter into care every month. Under the Community Care Act 1990, local authorities are only legally obliged to help with the care fees for elderly people who do not have the money to pay for themselves. The current situation in England is that people with assets over £23,000 have to pay for their own stay in a care home. Those with assets valued at between £14,000 and £23,000 pay to make a small contribution. Many councils offer people the opportunity to defer payment of the fees until after death so that assets such as the family home do not have to be sold right away. However, this option is increasingly unaffordable for councils as few of them have the cash to fund the stay upfront.
A year's stay in a care home costs on average £25,000. The cost also varies according to where you are in the country, with residents in the South East facing significantly higher fees. Some pay in excess of £50,000 a year for their stay in a care home. This cost is not static and goes up annually. Care fees inflation last year was 5.1%, much higher than RPI. The average stay in a care home is four years but one in 10 will stay for at least seven years.
Given the limited pot of money that local authorities have, private residents regularly end up having to subsidise those who are being funded by the state. Councils often have the clout to negotiate down the amount they pay in fees to below the market rate - meaning self-funders have to pick up the slack, inflating the amount they are charged.
Value of assets
Council support is only given to those with assets beneath £23,000 - or people whose assets fall to beneath this level while they are in care. A number of people enter into care with assets over the threshold but over time these are whittled down and they come to rely on the state to pay for their care.
For many of those in this situation, this means that a stay in care can be a traumatic experience from day one. Anyone who does not meet specific exclusion criteria, such as having a spouse who continues to live in the property, will be assessed as having to pay their own way. If you live in an area where deferred payment is not possible, and have been assessed as having to pay, you will almost certainly have to sell your home to do so. As your funds decrease to below the state support level, after moving from your family home to a care home, you may even have to move again to a cheaper home that the council is willing to fund.
The existing situation is unsatisfactory and it is clear that political parties are struggling to find answers to the problems caused by our ageing population. This does not mean, however, that innovative solutions do not exist.
A number of private providers offer products that ensure elderly people do not have to use up all their capital to pay for care. These kinds of products offer security as they protect assets. They work along the same lines as all annuities, in that a capital amount is invested in exchange for an income which will continue for as long as the person lives, regardless of how long this is. The income from the annuity is paid direct to the care provider, meaning that it is not subject to tax.* The average cost of Partnership's Immediate Care Plan is around £85,000, which means that the majority of people who sell their homes to pay for care will be left with a capital sum that can be left as an inheritance. This is also a much smaller investment than the equivalent sum that would be spent over the course of the average four year stay in care.
The capital sum to be invested in the annuity will depend on life expectancy, which in turn is dependent on a number of factors. For example, age and gender, as the older a person is the better the annuity rate they will receive. Men receive slightly more than women as they generally don't live as long. The state of a person's health will also be a factor as someone in poor health will pay less capital to fund care fees than those in better health.
This type of product can be tailored to the requirements of each individual. For example, as care home fees are rising every year, many need a product that will protect against this by paying out on an annually escalating basis. There is also a money back guaranteee in the event of an early death.
Given the UK's ageing population, concerns about how to pay for care will only increase in the coming years, opening up a market with exciting new opportunities for IFAs.
Despite the ongoing political debate about how long-term care should be financed, it is important that everyone entering into care over the coming months is aware of the options that are available to them now so that they can ensure financial security for the future. IFAs play a central role in ensuring that people know how to do this.
Partnership Assurance recently held a series of symposia across the country to help advisers capitalise on the opportunities presented by upcoming shifts in UK demographics.
*The rules governing taxation are subject to review and change in the future and depend on individual circumstances.
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