Q&A: Funding for care home fees

Fewer elderly people will be forced to sell the family home to meet the costs of care home fees under new proposals outlined this week.

Currently, adults needing to move into a residential care home must typically find £25,000 to £36,000 a year to cover care fees if they have assets valued above the threshold for state help which, in England, is currently £23,250.

But this week, the independent Dilnot Commission recommended reforms of social care in England, which would cap the costs of care at £35,000 and raise the means-tested threshold for state support.

This is how the proposed new system will work – and what you can do now to plan for care fees.

What did Dilnot recommend?

Currently, individuals in England with £23,250 or more in assets – which can include a family home – are not eligible for full state support for care home fees. According to the Dilnot report, a quarter of 65 year-olds today can expect to face care costs of more than £50,000 – and, for one in 10, these will be more than £100,000. This system has resulted in many individuals losing all their assets to meet the costs of care in later life.

Dilnot is proposing that individuals’ lifetime contributions towards their social care costs should be capped at £35,000. After this cap is reached, individuals would be eligible for full state support, subject to a means-tested threshold that will be increased from £23,250 to £100,000. Those who cannot meet the £35,000 initial contribution will still be eligible for state support.

Dilnot says that the combination of the contribution cap and a higher means tested threshold should mean that, instead of potentially losing everything, no one would lose more than 30 per cent of their assets.

Does that mean £35,000 is the most I will pay?

No, that is not quite the case. In addition to paying for the first £35,000 of care costs, individuals in residential care would be required to pay £7,000-£10,000 a year towards their food and accommodation – even if they are eligible for state funding. However, it is expected that individuals could afford these fees out of their pension income.

Also, individuals who are in a care home where fees are higher than the state contribution may have to pay the top up out of their own pockets, if they don’t want to move to a cheaper home.

When are these proposals going to come into effect?

2013 at the earliest, if the government fully accepts the proposals.

Will there be new products to help cover care fees?

Currently, there are no pre-funded plans to cover care home costs – but this could change with the introduction of the £35,000 contribution cap. In the future, funding for care fees could be offered as an additional benefit on critical illness or life insurance policies, or linked to pensions. Equity release schemes, which unlock cash from the value of a home, could also play a bigger role.

How can I fund my care costs now?

Immediate Needs Annuities (INA) are available to those moving into care now. INAs differ from conventional annuities in that the income is paid directly to the care home provider and, as a result, is tax free. An 85-year old man buying an INA now with £100,000 could cover £12,900 in annual fees if he was in average health or £16,500 if in poor health. This compares with an annual income of around £11,500 from a conventional annuity.

Some local councils also offer deferred payment schemes, where fees are paid on credit with the debt secured against a property, typically interest free.

Equity release schemes may not be an option under the current system for individuals moving into a care home, as this can trigger the sale of the property the loan is secured on. However, this is not a problem if care is delivered at home.

What are the options if I have more time?

Advisers suggest making the most of tax efficient individual savings accounts (Isas), which currently allow £5,340 in cash to be saved annually, with an overall limit of £10,680. Putting £290 aside each month for 10 years would build up a sum equal to the £35,000 contribution cap, assuming 5 per cent growth per year. Or, the £35,000 could be achieved by saving around £60 per month for 25 years, £90 a month for 20 years, or £150 per month for 15 years. “If your need is not immediate, then the sooner you get started the better,” says Andrew Dixson-Smith, managing director of Care Fees, the specialist care funding advisers.

Copyright The Financial Times Limited 2017. All rights reserved. You may share using our article tools. Please don't cut articles from FT.com and redistribute by email or post to the web.