Steep bills ahead for care

When the Royal baby is born next month, he or she will belong to a generation where one in three people is expected to become a centenarian or even a supercentenarian – aged 110 or older. Because of advances in medical technology and science, the number of us expected to reach our 100th birthdays is projected to rocket from 14,500 in 2012 to 110,000 in 2035, according to the Office for National Statistics.

Such longevity far outstrips the lifespans of their parents and grandparents, and should be a cause for celebration. But rising longevity is also a burden for both the individual and the state. Both must prepare for the costs of care in later life, because while we are living longer, we are not yet living extended healthier lives.

According to the Office of National Statistics, a man retiring in the UK today at 65 could only expect to live for a further ten years or so in very good or good general health. A woman of the same age could expect 11.6 years before her health deteriorates.

What this means for the individual is the possibility of paying care fees, amounting to tens of thousands of pounds per year, for much longer.

Earlier this year, the government has outlined landmark reforms to reduce the catastrophic effect of care costs, introducing a “cap” on how much the elderly in England will pay towards these costs during their lifetimes.

But research commissioned by the FT suggests that this care cap of £72,000 – intended to bring clarity and certainty to long-term care – is poorly understood, with many thousands of people dangerously overestimating the new state safety net.

Under the current system, if an adult needs to move into a residential or nursing home, the state will begin to help cover the costs if the individual’s assets are below a means-tested threshold.

This threshold differs throughout the UK. In England, it is £23,250 and in Scotland it’s £25,250. Until the threshold is reached, individuals have to pay their own way, through savings, investments or selling assets such as the family home.

With care home fees ranging from £25,000-£38,000 a year many people face massive and often unpredictable costs, and may need to make difficult decisions quickly and at times of great stress.

Under this system, the government estimates that a quarter of people may need to spend very little, but one in ten people will have more serious care needs, and will face care costs in excess of £100,000.

Those who pay the most and face unlimited costs are likely to be those with long-term chronic disabilities such as dementia, which mean that they need care and support for a long period.

This year, the government announced plans to scrap this “unfair” current system in England and replace it will a capped cost model, due to come into effect from April 2016.

The centrepiece of the new model will be the introduction of a care cap which would limit an individual’s lifetime contribution to their care costs to £72,000.

This reform is to be supported by a fivefold increase in the means-tested threshold to £118,000. A deferred payments scheme is to also be launched in 2015, which should ensure that no one is forced to sell their home during their lifetime to cover care costs.

But while the government said the £72,00 cap offered “certainty in old age” and “protection against catastrophic loss”, many experts are concerned that Westminster is underplaying the limitations of the new system. The reality is that people could still end up paying hundreds of thousands of pounds out of their own pockets before they eventually exhaust their care cap (see case study).

With the reforms only three years away, the FT commissioned a poll of individuals likely to need care in the next few years. The results showed a high level of confusion over what costs will be covered, leaving many at risk of a big financial shock.

Among the poll’s chief findings:

● 53 per cent did not know the level of the care cap

● 69 per cent believed “accommodation costs” such as board and food count towards the care cap, when they don’t – only care costs are covered;

● 32 per cent believed they could move into any home of their choice and all the fees would count towards the cap. But the care “meter” only starts ticking over at the rate the local authority is prepared to pay, not at the rate charged by your care home;

● 52 per cent believe the meter would start ticking as soon as the council confirmed the existence of a care need. This is also incorrect; the regime applies only when an individual is assessed as “eligible” under a set of yet-to-be announced criteria. These are likely to be substantial.

Industry experts said the poll’s findings were worrying.

“While there is good awareness of the cap, there is enormous confusion over how it works and what it covers,” says Tim Pethick, strategy director of Saga, which conducted the poll with Populus.

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“It is very worrying that more than two-thirds thought accommodation costs were covered. People are being set up for disappointment as they may have to pay more than they expect.”

Age UK, the charity which campaigns for the elderly, said it was a concern that a majority of respondents were not aware that the care cap would be based on eligibility criteria.

“Unless you have sufficient care needs, the door won’t open to the care cap,” says Age UK. “Anything spent on care before then won’t count.”

“At the moment a lot of people may be disappointed if they think their cap starts once they need help. We are concerned that the eligibility criteria will be set at a high level and this would mean people paying their own costs until they are poorly enough.”

Advisers fear that confusion over the cap will leave tens of thousands of families woefully unprepared.

“It is extremely misleading to use the phrase ‘cap’,” says Janet Davies, of Symponia, the care fee advisers.

“It would be more accurate to call it a care account. People will be going in blind if they believe all they need to save for is £72,000. In reality they could spend three times as much before they reach the ceiling of the cap. There’s too much smoke and mirrors.”

The care bill is still making its way through parliament and is likely to be subject to further change before 2016. However, concerns that the reforms are poorly understood have already been raised at Westminster.

In March, a cross-party group of MPs and peers called for the provision of independent financial advice about the different options available to pay for care, including deferred payment arrangements, coming into effect from 2015.

It also recommended that information and advice should be made available for all (including self-funders) about support, care planning and housing options.

But those dealing with misinformed families on a daily basis say the government needs to be upfront about the limitations of its reforms. “Politicians need to come clean,” says Chris Horlick, chief executive of Partnership, a provider of long-term care products.

“The key message should be that unless you meet the needs criteria, your care costs may be unlimited.”

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Options for payment

Getting old and going into a care home is something few of us like to think about. But with annual fees bigger than the cost of a university degree, it’s a good idea to give some thought as to how to deal with these expenses.

Currently, only those with assets below a means-tested threshold (£23,250) in England, for example) will get any state help. Anyone with assets above this threshold must pay their own way until their assets run down.

With no specific insurance plans available to help plan for care costs, these are the main options for paying for care fees now.

Savings and investments

Existing savings and investments are typically the first port of call for those considering ways to pay care bills. A specialist care fee adviser can assess an individual’s wider assets to see how they might be restructured to meet fees, or whether other options might be more suitable.

Immediate needs annuities (care annuities)

These plans are pensions paid directly to the care home provider and are only sold to those in care or about to receive care. Unlike a standard annuity, the income from an INA is tax-free. These products offer certainty that fees will be paid for the life of the annuitant. Capital protection can also be included to cover death soon after entering care.

Selling the family home

This is considered a drastic option for many, but in reality it is often the only way for the asset-rich but cash poor to pay for fees. It is worth nothing that the government has created “deliberate deprivation” rules to prevent homeowners deliberately giving away properties to qualify for local authority help with fees.

Local authority deferred payment schemes

Under these schemes, the local authority lends the care home resident money to pay a proportion of their care home fees. The loan is repaid when the house is sold after the death of the care home resident.

Equity release

Equity release is a way to unlock cash from a home without selling. This is arrangement made with an equity release provider who will charge interest on funds released. This option is only available to those receiving care in their own homes.

Looking ahead

In the near future, we could see equity release made available to homeowners moving into care. We could also see a new type of premium bond to fund social care costs. There are also calls for individual savings accounts (Isas) to be adapted for care costs.

“A ‘family care savings plan’ could actually be established straight away, just using existing Isa allowances for each family member, or for a husband and wife together for a couple of years,” says Ros Altmann, an independent pensions expert. “As a nation, we have simply not prepared for the costs of care. The sooner we start planning, the better.”

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Case study: how the cap works

Mrs Smith, aged 89, moves into a care home in April 2016 which charges £1,000 per week.

As Mrs Smith has assets over £118,000 she is above the threshold for state help and so must first progress towards the care cap of £72,000.

Her needs are assessed as “substantial”, which means she is eligible to open her care account – had she been assessed as having “moderate care needs” the meter would not have started ticking.

However, only £300 per week is deducted from her care cap of £72,000 as this is the local authority rate.

Mrs Smith must make up the £700 per week shortfall herself. After 240 weeks (or 4.6 years), Mrs Smith will have reached the required amount of £72,000 of her “care” fees.

But the total amount paid will be £239,200 to exhaust the cap.

This means that in October 2020 the local authority will take over payment of Mrs Smith’s care fees, but only the “care element”.

She will be responsible for meeting the gap that falls between the amount that the local authority is prepared to pay and the fees her home is charging.

Case study supplied by Symponia