Although the government’s ‘capped cost’ reforms to care funding in England aim to create a market for complementary financial products, most people now realize the reforms will have no real effect on financial services.
In the absence of being able to talk about products, an astonishing amount of effort has instead gone into trying to ensure local authorities in future push those needing care toward independent financial advisers.
Although seemingly innocuous, this agenda is misplaced and potentially dangerous for local authorities.
First: Consider some numbers. An estimated 1 million older people in England with care needs have no contact with their local authority. If only half this group approach their council in 2016 to have their care ‘meter’ started, the numbers involved will overwhelm not just councils, but the market’s capacity to provide relevant financial advice.
Second: Exactly what products would these thousands people be advised on? Pre-funded insurance or disability-linked annuities are clearly no longer relevant. Equity release has proved notably unpopular among those needing care, has costly charges, and is likely to find itself crowded out by the Government’s plans for all councils to offer ‘deferred payment schemes’.
The only product of note left is immediate needs annuities for residential care, of which around 8,000 are currently in force.
Now consider further numbers: Previous academic research suggests of the 125,000 ‘self-funders’ in residential care in England, only around 45,000 have an actuarial interest in purchasing an immediate needs annuity. Assuming all these individuals were nudged toward an IFA and a typical conversion rate of one-in-three, and this suggests there are a further 7,000 to 8,000 further immediate needs annuities to be sold in England.
Immediate needs annuities are an excellent way for self-funders in residential care to protect themselves from catastrophic costs. However, there are vastly more efficient ways of ensuring optimal take-up than obliging councils to direct hundreds of thousands of people with care needs to obtain independent financial advice.
Since in future local authorities will be means testing all self-funders in residential care, it would seem more sensible for councils to apply a basic assessment of suitability, and for only those likely to have an actuarial interest in an immediate needs annuity – around 300 people per council on average – to be directed to a regulated financial adviser. Indeed, given such self-funders will be a long way off receiving council support, this author would be happy to see them obliged to pay for this group to have regulated financial advice.
But this is not the end of the story. Greater usage of financial advice by those with care needs could potentially be dangerous for councils.
This arises from the increase in the ‘Upper Capital Limit’ in the means test for residential care to £118,000 from 2016. Individuals with total assets below this level will be guaranteed a full assessment and in many instances will begin receiving a financial contribution from their council toward their residential care fees.
The issue is this: Around half of older people in England with care needs have wealth at this level or below and for this group, the best financial advice would probably be to transfer wealth to family members to maximize how much they subsequently receive from the council if they move into residential care.
Advisers have long provided tacit help on asset transfer to ensure qualification for means tested support, even if few shout about this. However, the new ‘Upper Capital Limit’ will see hundreds of thousands more people with an immediate incentive to move wealth to younger family members.
Although rules against ‘deliberate deprivation’ of assets are already in place, their application and the chasing down of transgressors is a very grey area. Greater incentives to divest assets and more individuals with care needs using financial advice could risk a surge in this behavior, overwhelming the ability of already over-stretched councils to police it. Local authorities would also be left facing a much bigger bill for those qualifying for means tested financial support. For councils, that is a frankly dangerous prospect.
James Lloyd is director of the Strategic Society Centre