What the Health and Social Care Levy Doesn’t Cover
In November, MPs backed an amendment to the Health and Care Bill required to implement the government’s proposed cap on care costs by 272 votes to 246.
Back In September, the Chancellor, Rishi Sunak, announced that there would be widespread rises in National Insurance Contributions (NICs) to pay for a new NHS and social care levy. With the issue of paying for healthcare having been kicked down the road for decades, this represented a move to divert resources towards fixing a system straining to deliver essential services. Commentators are divided on whether the levy will prove to be sufficient, with Paul Johnson of the Institute of Fiscal Studies suggesting that the levy may need to more than double to 3.15 per cent from 1.25 per cent by the end of the decade.
What does all this mean for people approaching retirement and their financial planners? Unlike other aspects of life that can be budgeted for, we don’t know whether we will ever need care and as this interview shows, the financial liability for it can vary enormously according to individual circumstances.
Clive Barwell and Matthew Bell are both Society of Later Life Advisers (SOLLA) accredited advisers and they specialise in financial advice at the latter stages of life. Nick Moules spoke to them about the announcements, their thoughts on the likely impact, what people need to know about paying for later life care and what might come next.
Nick Moules: What was your reaction when you first saw the news?
Matthew Bell: I think there’s an acknowledgement that the Government is looking at a problem that has been around for a long time, but I’m not sure the Government can fund all of that and there is likely to be a further tax burden in future. The Government is saying that when someone’s assets drain down to £100,000 the Government will take over, but we will have to wait and see. My view is that there will not be enough funding to satisfy everyone’s needs.
Clive Barwell: What I think people are missing is the fact that at the £100,000 ‘upper threshold’, the Tariff Income of £1 a week per £250 will apply, so anyone with £100,000 will be determined to have £320 a week income and as a result of that, their capital will get eroded very quickly.
Someone with just the State Pension would have an income of just under £180 a week, meaning they would be deemed to have an income of virtually £500 a week.
Some local authorities won’t pay anything more than £500 for a care home anyway, so your income is sufficient to cover your costs, meaning the local authority won’t contribute.
MB: If you look at house values alone, most of our clients will be paying for care for a long time. I see these measures as supporting those with the lowest income and asset levels only.
CB: I’m dealing with a new client now when the person with Power of Attorney has just sold the main property for £1.4m but the care costs are currently £6,000 a month. They’ve asked whether these announcements change anything for them, and I’ve said probably not.The Activities of Daily Living
- Functional mobility, which includes the ability to walk and transfer in and out of a chair or bed. Essentially, it’s the ability to move from one place to another as a person goes through their daily routines.
- Personal hygiene, oral care and grooming, including skin and hair care
- Showering and/or bathing
- Toileting, which includes getting on/off toilet and cleaning oneself
- Dressing, which includes selecting appropriate attire and putting it on
NM: In terms of the quality of care itself, it seems to me that it is unlikely to improve. In your experience, what is the real difference between privately funded and state-provided care?
MB: Privately funded healthcare can be very expensive. It depends what you want to do though. If you bring in a live-in carer that can be expensive as they need a room and require a day off a week, for example. You can have someone come in several times a week for example, or you can do residential care, where you live in a facility.
CB: If you’re prepared to pay for it, residential care can be top quality. There are plenty of care homes out there with restaurant settings and you end up in what is effectively a suite in a hotel. It can cost several thousands of pounds a week though, so it is seriously expensive.
To contrast the difference between what you get if you pay for it versus what the council provides, a care home local to me in Leeds, the self-funders all live in lovely rooms with en-suite bathrooms and balconies overlooking the gardens. The minute you run out of money, they move you into another wing where you are sharing a bathroom and the rooms are much more basic.
The quality of the care is still there but the facilities changed remarkably.
NM: So, is there any sort of protection that people can put in place for care costs?
CB: Not really. There are some companies who have a care fees option on Whole of Life contracts, so if you fail three activities of daily living, you can claim on that to cover care costs. However, it’s very expensive and if you never go into care, you will have paid a significant amount extra in premiums, so I can’t see it being attractive. The only thing that’s available now is an Immediate Needs Annuity, which can be bought at the time when someone enters care, which caps the cost of it.
I’ve quoted for lots of these over the years but very few clients have taken it up. My rule of thumb is that whatever the income shortfall is, it will cost you about six years’ worth of that shortfall to buy that annuity. If you’ve got an income shortfall of £50,000 then it will cost you around £300,000 up front to buy the annuity. Clearly if you die two years into that contract, it is poor value for money for your estate.
MB: I find that when I get to the point where I present the numbers, the Powers of Attorney just can’t make the decision because they just don’t know how long the person is going to live and they’re concerned about money being wasted.
CB: There’s an each-way bet with a deferred annuity available where you pay the capital up front and you can defer for up to five years, so the cost of the annuity is less because the Insurer is less likely to have to pay up.
These are the only ones clients have taken up recently.
MB: You can build in capital guarantees to some policies. They look good on paper but when they say, for example, you have a 50 percent guarantee if the policy holder dies within a given time period, that means you get 50 percent of the premium back minus whatever has been paid to the care home in that period. Often that can mean the bulk of that money has been used and you pay a premium for the product in the first place, so it can be poor value.
NM: It sounds like there’s a real opportunity for businesses to innovate in the market. Do you see it going that way or do you think firms are looking at the open-endedness of the situation and thinking that there’s no way to manage their costs?
CB: At the end of the 1990s a few providers came in and created products that would pay out when clients failed three key activities of daily living. The problem with these products is that compared to life insurance for example where people know they’re going to die so they take out life insurance for their loved ones, you can’t be sure you’re going to need care – and you hope you never do.
It’s really down to the individual and their health record. For example, if someone has heart problems, there’s a chance they will die of that, rather than of old age in a care environment. That isn’t meant to sound macabre, it’s just the sort of reality that people confront at this stage.
Insurance companies have long memories and I don’t think they’re going to innovate particularly quickly. The only thing I’ve heard is that another major insurer might enter the Immediate Needs Annuity market, so that might swell the number of providers.
NM: To paraphrase then, it looks like the biggest issues are that the market is expensive, not really many suitable products and there is no guarantee on the quality of care they will receive. If you speak to clients who are a way off retiring but they say they’re concerned about paying for care in the future, what do you say to them?
MB: There’s not really a great deal people can do about this until they actually need it. However, it is possible to use trusts to protect assets upon the first death, assuming the couple is married. I know of Will writers who are doing that, but it can be expensive.
One of my clients actually said it would be cheaper to go on a cruise for the rest of his life, such is the cost of care!
CB: If married couples sever the joint tenancy on their property and put trusts in their Wills, this means that on the first death, half of the value of the property goes into trust so cannot be considered for paying the cost of care. Generally speaking, it is only after the first death that care becomes a reality anyway. The person going into care can genuinely say that they only own half the property and it ringfences those assets. Most clients feel that by doing that, they’ve done enough.
NM: So, what would you say are the biggest issues that clients might not be aware of in the care industry?
CB: I get a bit hot under the collar about Dementia. Where people say the NHS treats physical illnesses, like cancer or heart attacks, that’s true to a point but when they’ve done what they can, they return a patient to the community. Clearly that can’t be done with Dementia because it can’t be treated effectively. It requires 24-hour care in some cases then that becomes an NHS issue – it’s misleading to think of it in terms of the diagnosis, this is about the level of care required.
If someone cannot support themselves then they enter the realms of means-tested care, which can be invasive and inconsistent.
MB: The upshot is if you don’t qualify for means-tested care, you need to pay for it yourself and as we have discussed, that can be very expensive.
CB: We also haven’t discussed the care cap. The Government has stated that £86,000 is the cap, so once you’ve spent £86,000 on your care, regardless of any other means-testing considerations, they will pick up the amount of care not covered by your income. The hidden issue with this cap is only based on what the local authority would pay for care. So, if you’re paying £2,000 a week for your care and the local authority only pays £600.
Also, the part that hasn’t been clarified is the only portion that goes towards it, your £1,400 doesn’t.
When they did the original calculations ahead of the Care Act 2014 when the original cap was planned to be introduced, they worked with a national average figure of £200 as accommodation. The Government has now announced that the accommodation figure will be set initially at £200 not £230. So, in this example, only £400 a week (£600 – £200) would count towards the cap and until then, you could spend a fortune.
This will come in from 2023 and anything you’ve spent on care prior to this point will not count. Until you hit the £86,000 you pay for everything. Clearly this will impact people more in areas of the country where care is more expensive, typically the South of England.
The real issue with this is that every local authority across the country is struggling to administer clients who cannot pay for their care. So, if someone fails the means test (i.e. has more than £23,250), they can’t always easily access the care they need from their local authority.
From 2023, every single person is going to need an account with their local authority so they can keep track of the cap. That’s going to cost a fortune in administration.
MB: We also have an ageing population, so the problem is only going to get worse.
CB: It is my view that most people will die before they hit the cap to be honest, so while the cap is a backstop of sorts, the way it is constructed will not save people much money if they live for a long time in a care environment.
NM: Okay, if someone doesn’t have a financial planner and they’re concerned about the cost of care, what can they do?
MB: I find a lot of people ask if they can take their money out and move it about, so for example taking it out of Dad’s account and putting it into Mum’s. If you’re about to go into care you could breach the Deliberate Deprivation Act.
CB: If the need for care is foreseeable and you move assets around to try and avoid them being included in the means test, the local authority will deem that you still have those assets.
In a recent case, a lady had qualified for the attendance allowance at the day rate. Lots of people qualify for the day care rate and the local authority decided that the need for care was foreseeable because she had qualified. That’s the type of watershed authorities are looking at. Some of my clients are very fit and healthy but they have some care supplied, so any attempt to give money away from here would be regarded by the local authority as deliberate deprivation.
Advisers like Matthew and I can help people to understand what the rules are and what is available to them. A financial planner can sort out estate planning and work as much out as possible in advance of any care being required.
Then from that point, if and when the client goes into care, we can assist with the administration of the estate and advising on the very latest rules.
IMPORTANT: This article about later life financial planning is a discussion between experienced practitioners ahead of the planned introduction of the Health and Social Care Levy in April 2022.
Readers should NOT take action as a result of reading this article, except to speak to their adviser.