Defining poverty is never easy. Defining wealth is much easier. For inheritance tax purposes, we are talking around £234,000.
Yet, for long-term care purposes, wealth currently means precisely £16,000. As an IFA, it probably means that, by this benchmark, most of their clients are “wealthy”, many of them, by this standard, obscenely so, even if all they do own is a three-bedroom semi.
So, how does owning this wealth affect an IFA's clients if it comes to the crunch?
The significance of being wealthy in the context of LTC is simple. If a client needs LTC in a residential home or a nursing home and he or she has wealth of more than £16,000, they will have to pay all the costs of their LTC until their capital has been reduced to £16,000.
It really is quite a sobering thought. A client has built up savings and investments of around £100,000.
Four years of LTC could see all this spent. At the end of that, the client has no guarantee that he or she can continue to get care in the same home in which they have spent all their savings.
Each local authority has a maximum it will pay for any care home package and that may not extend to cover care in the home the client has chosen. This is how the means test works in detail:
If a client needs care in a home and has wealth of more than £16,000, then there is no question – he or she pays in full.
If he or she has wealth of between £10,000 and £16,000, all their income (less a token £15.45 a week for personal expenses) has to be put towards the cost of care, to which they must add £52 a year out from every £250 of their savings in excess of the £10,000 threshold.
If the client has wealth of less than £10,000, then all their income (again, less the token £15.45 a week), although no capital, has to be put towards care costs.
Wealth for practical purposes includes almost all forms of savings and investments. It includes a person's share in a family business, for example, and it also includes a person's own home except when a qualifying dependant still lives in it as their home.
The rules are different when it comes to a client getting domiciliary care in his or her own home. The good news is that the person's own home is never taken into account. After all, he or she is still living there so that would be impractical.
But the rest of this means test can be even harsher. Local authorities can set their own means-test limits, which are often significantly lower than those applying to residential care, and they can apply them to couples taken together as opposed to the individuals who are means tested separately for residential care.
If you have heard that the Government is making life easier by relaxing the means tests later this year, then do not hold your breath.
It is making changes but it will not benefit clients very much. In short, the concessions will mean that:
The £16,000 limit described above goes up to around £18,500 and it will increase in future years in line with inflation.
The £10,000 limit described above goes up to around £11,500 and it will increase in future years in line with inflation.
A client's home will not be included in the meanstest calculation until he or she has been in a home for three months, even if no qualifying dependant lives in it but other savings and investments will continue to be spent on care if over the limit.
Any “nursing care” a client needs will be paid for by the National Health Service and will not included in the nursing home bill the client has to pay. At its very best, this could save the client around £100 a week. In practice, it is likely to be a lot less for most people in homes.
Even for a person in a nursing home, it is quite possible for there to be no element of “nursing care” in their care. They may require a huge amount of “personal care” – help and supervision but not nursing – which means that the full bill is still theirs to pay.
This means that those people who used to pay their own bills will still have to do so and that for the most part those bills are not going to be substantially reduced.
In blunt terms, this all means that paying care bills without planning for them can make a very substantial dent in a client's financial position and in the worst case could reduce a client from a position of comfortable wealth to one of very uncomfortable lack of wealth. This is where the opportunity for advisers to sell by adding value comes in.
After all, what else has an IFA advised a client on during the time they have been working on his or her behalf? Essentially, wealth creation and protection. An adviser has worked to build up a decent pension for their client and partner. This is money for them to spend as they think fit.
They have worked to enable a client to buy the home and make it worth owning. They have worked so that the client can build up a business which they want to stay in the family, even after they have retired.
An adviser has worked to help a client build up savings and investments to cushion their retirement and leave it to the family when the time comes.
They have worked to minimise the amount which will be lost to the client as the result of taxation in whatever form. To give the best possible income, the best possible investment growth and the least possible tax when the money is passed on.
Yet, without LTC insurance, the adviser could find that they have added virtually no benefit at all. It has all been in vain. All these other benefits could be lost.
Think about it. Once a client has succeeded in building up wealth (£16,000, remember), as soon as the client needs residential LTC, that wealth starts to be used to pay for that care.
While for most people it is most unlikely that all their wealth will be used up in care home fees, it is by no means impossible.
In any event, would an adviser want to see a gap of £50,000 or £100,000 open up in a client's finances? Would their clients? Do not let it happen.
Make sure clients know the rules, risks and consequences and, most important, make sure they know the solution.