The good news that people are living longer is offset by the bad news that many are unable to look after themselves in extreme old age and end up in long- term care. According to the Wanless report, which was published in 2006, one in four of those aged over 65 will require some form of long-term care.
Nor will the state look after the elderly any more. Since the Community Care Act came into effect in 1993, the NHS will only provide or pay for nursing care. The burden of financing long-term elderly care is now the responsibility of the individual, with or without the help of the local authority.
Local authorities have limited budgets, with the result that a “postcode lottery” has been taking place, where residents in one authority have had care home fees paid but those in another have had to pay them themselves.
Saga group head of care funding services Owain Wright says: “All too often, a person’s assessment for the eligibility of care home funding is, at best, sporadic, at worst, plain wrong and often missing completely.”
According to the Laing & Buisson UK Market Survey 2006, 32 per cent of people in care homes end up paying their own care fees, with little or no support from the state, and around 50,000 older people a year are forced to sell their homes to fund care. Little wonder, as between 1988 and 2006 the average weekly fees for residential care increased from £160 to £398 and for nursing care from £229 to £570.
However, things are supposed to be getting better. On October 1, the rules on long-term care changed in a bid to end the lottery. The new rules should make things fairer but they will oblige most people to pay at least something, meaning that some could be worse off than before.
Security in old age is one of the most pressing needs of financial planning these days and, after pension arrangements and inheritance planning, funding care in extreme old age is one of the biggest worries for older clients.
Under the new regime, hospital treatment, care and accommodation remain free but, outside a hospital, anything that is deemed care rather than medical treatment may have to be paid for in three categories.
For people who need continuing nursing in hospital or elsewhere, the NHS will pay the full cost of treatment and accommodation.
For those who need care that is not deemed medical treatment, the duty to provide it will continue to fall on the local auth-ority’s social services department, who will conduct a means test.
Few people will escape paying anything at all and those with assets or high income will have to pay in full unless they need attention from a qualified nurse, when their fees will be reduced by the amount picked up by the NHS.
The first £21,500 of a person’s assets are disregarded when assessing how much they must contribute towards care home fees and the local authority must also disregard the value of your home for the first 12 weeks of residential care if other assets are worth less than £21,500.
So, what are the options for those who need to fund their own care?
The usual resources will be income, possibly from an existing pension, existing or rearranged investments or letting a property, capital, perhaps released from the home and combined with an income generator such as a care fee annuity, and other insurance-based products.
As well as traditional equity release products, it may be possible – or indeed preferable – to take advantage of a local authority equity release scheme. Since October 1, 2001, it has been possible to take advantage of a deferred payment scheme to fund care fees by releasing capital from a former home.
The local authority takes over responsibility for paying for the care fees while, in exchange, the person in care hands over to the local authority all after-tax income less a weekly personal expenses allowance. Income in this case includes all the person’s private pensions plus most of the Social Security benefits.
The local authority recoups the money paid out from the eventual sale of the care home resident’s property.
Until this property is sold, it can be let to provide additional income or provide a home for a third party such as a former carer as long as their occupation of the property does not make it a disregarded asset for means testing purposes. Occupiers who would make the home a disregarded asset are a partner or a relative aged 60 or over or a child under 16 who is legally dependent on the person care or who is incapacitated.
The house may also be allowed to stand empty if there is expectation of capital appreciation.
When the home is eventually sold, the fees paid by the local authority are reimbursed plus interest although no interest is payable until 56 days after the person’s death.
If there is no occupier of the family home other than the care home resident, making it a disregarded asset, it may not be possible to avoid the property’s eventual sale to fund fees. However, those wanting to protect assets from the means test can opt for other strategies, including investment bonds.
The Department of Health’s Charging for Residential Accommodation guide excludes from the means test “the surrender value of any life assurance policy” and “policies that contain cashing-in rights by way of options for total or partial surrender”.
All investment bonds written by UK life insurance companies meet this requirement and would therefore be disregarded. Anyone contemplating this move therefore needs to take out bonds sufficiently far in advance to avoid coming under the rules against depriving oneself of assets, which negates the plan.
Wright says: “You can’t just take out an investment bond in order to escape paying for care as the local authority will probably consider this as deliberate deprivation.”
One increasingly popular means of funding LTC is an immediate needs annuity such as those provided by Partnership Assurance, Axa and LV=.
Partnership chairman Ian Owen says that while clients may not like the idea of an annuity, which “dies with them”, the beauty of an annuity is that it guarantees a level of fee funding for life. This is a huge benefit when families are worried that funding for care will run out and that a local authority will refuse to pay fees in the resident’s current care home and will move the relative to somewhere less expensive.”
A £20,000 annuity from Partnership, which specialises in providing enhanced rates for people with medical conditions, would cost a female aged 88 (roughly the average age for going into care) with a heart condition, dementia and who fails the activities of daily living test on several counts £80,652 with no escalation.
The cost rises to £88,795 with 5 per cent escalation, £91,306 with 5 per cent escalation and 50 per cent capital protection and £102,757 with 5 per cent escalation and 75 per cent capital protection.
An immediate care annuity can also be used for those who want to get care in their own homes rather than going into a care home.
Janet Davies, managing director of long-term care specialist Symponia, says: “Immediate care plans are just as practical for people choosing to stay in their own homes. The calculations will, of course, be slightly different but the concepts and ben- efits are exactly the same.”
Owen says another popular option for those seeking to keep costs down is the deferred needs annuity. This is can be a less expensive option than an immediate care annuity because it will only start making payments after the purchaser has been in care for a set period of time, usually three years.
“Where money needs to be saved, purchasers may split their funding between immediate care and deferred care annuities,” says Owen.
Popular in the US but failing to catch on here are insurance-based long-term care policies, which buyers take out in their late fifties.
Owen says: “The market here is tiny. This is mainly because people in the target age group are buying feelgood products and not thinking about extreme old age. It is also a relatively expensive option. People tend to think they will use their home to fund LTC or, if they have spare assets, go down a route such as buy to let to generate extra income.”