The ongoing wait for Government-funded social care means clients need a solid financial planning strategy in the meantime, says John Humphreys, Inheritance Tax Specialist, WAY Investment Services
The intractable problem of what to do about social care has been plaguing successive Governments for years. Last month, the Queen announced that “Proposals on social care reform will be brought forward.” But that was it; no detail, no dates.
There is no doubt that the financial crisis in social care is fiendishly difficult to solve. But this is no comfort nor use to those in need of care today, nor those who are concerned they might be in the future. For many families, simply waiting for reform may not be an option. So where does this leave advisers?
Anyone in England and Northern Ireland with capital over £23,250 is expected to cover the cost of their care, with some contribution required from those with between £14,250 and £23,250. In Scotland the thresholds are £18,000 and £28,750. In Wales care is covered in full for those with less than £50,000. Property is included in the means test, unless a person receives care at home or only goes into a care home on a temporary basis. Some funding may be available from the NHS (termed Continuing Health Care or CHC) – but only if a person’s needs are deemed to be primarily health-based or nursing care is required. Determining this can be a complicated and lengthy process. The implication is that unless reform arrives soon, the vast majority of clients of financial advisers are likely to have to pay for at least some of their care in the future, should they ever need it.
Deprivation of assets rules
Should a person start needing care, it is not possible to simply give away assets and leave the local authority to pick up the bill. If a person is considered to have deliberately given away assets in order to avoid paying care fees, those assets can be included in the value of the estate for the means test. A key question is whether the person knew or could reasonably expect that they would need care. Planning ahead and clear documentation are therefore crucial.
It’s reasonable to assume that those who have the means to do so may wish to have some control over their choice of care – including type, location and quality. Those that can, should consider setting some money aside. But how much will be needed? For a start, it might not be needed at all. Approximately 418,000 people live in care homes. This is 4% of the total population aged 65 years and over, rising to 15% of those aged 85 or more* (which, by definition, means that 96% and 85% respectively do not live in care homes). Residential care has been estimated to cost an average of £2,816 per month**, with nursing care higher at £3,552 – roughly equivalent to paying a mortgage of £750,000 at today’s rates***. Although the average stay in a care home is 30 months****, the actual length of time a person will need care for can be considerably longer. In short – working out how much might be needed (if any) is extremely difficult.
Will income be enough?
As people age, day-to-day spending may actually decrease. Mortgages may be paid off, dependants are likely to have left home and activity levels might also lessen. For those with low care needs – perhaps just a few hours at home a week – income alone may be sufficient to cover the cost with pensions, ISAs and other savings the most likely first port of call. If more intensive or specialised care is required though, costs can very quickly escalate.
Specialist products for care
Over the years, a number of specialist products have been launched to help people pay for care – all with advantages and disadvantages. Although many long-term care fees insurance policies have been discontinued, some immediate needs care annuities remain available and can tackle the problem of not knowing how many years care will be needed for. As with pension annuities, longevity creates better value but savings are still needed to pay for the annuity in the first place and early demise often means the capital is lost to the annuity provider.
For those relying on the value of their property, equity release products may be an option. It is crucial that the client and their family are fully aware of the possible outcomes depending on how long a person remains in care. Whereas such schemes are sometimes taken out because a person still wishes to, eventually, pass on their home to the next generation, clients need to be aware of the circumstances which would prevent this happening.
What if I have saved but don’t need care?
Balanced against the need to provide for future care costs is the question of what happens if it is not needed? Can it be passed on to family members or will it be lost to inheritance tax (IHT)? Clients can benefit from a careful assessment of the value of their estate – both today and its predicted value in the coming decades. Where the total estate exceeds the IHT threshold, clients may be concerned that if money is not needed for care, a significant proportion will be lost to IHT instead rather than passed on to family members. A strategy is therefore needed to reduce the value of the estate yet retain access to funds if needed for care.
In this situation a flexible trust with the option of reversion payments may be worth considering. Such Trust Funds can be built up by single gifts, which will be outside the estate for IHT purposes after seven years, or by regular payments which will fall outside the estate immediately. If, in the future, the settlor needs care this can be funded by reversion payments from the Trust. If not needed, in due course the assets can be passed to beneficiaries. The preferences for the Trust can be specified in a Letter of Wishes to the Trustees, giving peace of mind to both Settlor and Beneficiaries that the Trust assets will be used appropriately and as intended.
Who will make decisions?
Those planning for possible future care should consider putting in place a Lasting Power of Attorney so if they are unable to make sound financial decisions, a trusted individual or individuals can do so on their behalf. The process does not need to be particularly time-consuming nor complicated, and taken early can save a lot of heartache.
The problems of the social care system remain far from fixed. When a person starts to need care, it can be an incredibly difficult time for them and their family. Having open conversations with clients earlier rather than later, and before a crisis hits, cannot solve everything but can at least save families from some of the financial pressures at an otherwise very stressful time.
**** https://www.independentage.org/news-media/press-releases/cost-of-average-length-of-stay-a-residential-care-home-equivalent-to26 LaingBuisson, Care of older people: UK market report, May 2017
This article was first published in the July/August 2021 issue of Professional Paraplanner