Bethany Joslyn, technical consultant at AJ Bell, looks at what has become a complex set of rules and a vital area of financial planning
Helping clients fund their future care needs is an important part of financial planning. Social care isn’t free, and whilst individuals can ask their local authority for help meeting the costs, not everyone is eligible for assistance.
Recently, I was asked by an adviser how pensions would be considered as part of the financial assessment for social care. This isn’t always straightforward to answer, and it depends on your client’s personal circumstances, but here are a few key points to consider for clients living in England. Rules may vary in other parts of the UK.
Assessment
Local authorities will first complete a care needs assessment to identify your client’s needs and how much they will cost. They will then complete a financial assessment (or ‘means test’) to determine how much financial assistance the local authority will provide towards that cost.
The financial assessment looks at your client’s capital and income combined as a weekly income amount. Capital between £14,250 and £23,250 is converted to income on a ratio of £1 income for every £250 capital above £14,250. Capital below £14,250 is ignored.
If your client’s capital (e.g. savings and investments) exceeds £23,250, they will be deemed to be a ‘self-funder’ and the local authority may not contribute anything towards the cost of their social care. Your client would then have to use either their own funds to pay for social care, or rely on support or unpaid care from family and friends.
The local authority will compare your client’s weekly income to the weekly social care costs. If the income is insufficient to meet these costs, the local authority will pay the difference.
Valuing pensions
Pensions are considered as income for this exercise rather than capital, and a client’s pension will be included in the financial assessment if:
- They are drawing an income from their pension, or
- They have reached state pension age and are able to draw an income from their pension.
In terms of attributing a value, if your client has purchased an annuity it is simply the income provided by the annuity which is considered. The same applies to income from a defined benefit (DB) scheme in payment.
For defined contribution (DC) schemes, there is much greater flexibility post-2015 for people accessing their pensions. Where flexible income is an option, your client’s DC pension will be valued in one of two ways:
- If your client draws an income greater than the maximum income available under an annuity, the actual income being drawn will be used.
- If your client draws less than would be provided by an annuity (or even no income at all), a notional income will be used. This will be the maximum income that could be paid under an annuity. Any income actually being taken in this circumstance will be disregarded to avoid double counting.
It’s worth noting that if funds are withdrawn and placed in another product or savings account, they will be treated according to the rules for that product. For example, income withdrawn and then held in a deposit account would be viewed as capital and therefore included in the capital assessment.
In addition, where a person is in a care home and are paying half of their pension to their spouse or civil partner, who is not living in the same home, that payment is not included in the financial assessment.
For example, your client is aged 73 and receives a weekly income of £400 from his SIPP. He pays half to his wife. The local authority conducts a care needs assessment for your client and determines that he will need to live in a care home. Your client’s wife will continue to live in the marital home.
Rather than counting the whole weekly pension payment in the financial assessment, the local authority will only count half; £200 per week instead of £400.
Mitigation
Clients may ask about reducing their assets to minimise how much they must pay towards their social care costs. Whilst there are legitimate ways to dispose of assets, it is worth being mindful of deliberate deprivation. This is where an individual intentionally deprives themselves of assets (whether capital or income) with the aim of reducing the amount they must pay towards their own social care costs.
If a local authority can demonstrate there has been deliberate deprivation, your client’s financial situation will be assessed as if they still had the assets in question, and a notional income will be included in the financial assessment to reflect this.
The rules around funding social care are complex, and bear in mind that the rules regarding healthcare needs can be different. Advice in this area in conjunction with other aspects of financial planning, such as pension provision, is invaluable in reducing the burdens on clients in their later years.
