In this article, Neil A Sewell, Chartered Financial Planner, looks at the latest developments and government proposals for the future funding of long term care costs. It will be of interest to those approaching or already in retirement but it is hoped will also be of interest to those who have elderly parents and are possibly facing this issue now, as well as those who are younger and arguably have time to reflect and prepare….
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They say that the devil is always in the detail. When it comes to Long Term Care Funding provision, the government’s proposals may well prove to be no exception……
The government has confirmed the care cap £75000. Some have welcomed more certainty, but others have heavily criticised the high-level and stressed that it will not support the majority of care.
The government’s recently announced plans to cap Long-term care fees at £75,000 have indeed been met with mixed response. Jeremy Hunt the Health Secretary has announced a cap on fees for long-term health care. However Treasury has confirmed that thousands more families would be drawn into the inheritance tax net to help pay for the plan. The phrase “robbing Peter to pay Paul” comes to mind. With our growing care needs and ageing population you could be forgiven for thinking that the proposals actually represent nothing more than a drop in the ocean. It is highly likely that the proposals will not keep pace with the cost of living and they will not stand the test of time. Older people and their families will still have to sell their home to pay for care home bills whether it’s in their lifetime or after the older person has died.
The knock on effect of this is simple to see – and the alarming thing is that it is so simple to see, yet government appears not to be able to see it – over the long term, the wealth of our economy, held in the hands of individuals and families in “middle England”, in the absence of much needed government help, is leached though care and other old age related costs from those who should have been able to pass it on when they die, so removing a valuable element of monetary rejuvenation for the next generations, who then find themselves without the small but no less critical inheritance capital boost which would enable them to make some small financial improvement for themselves or their children. When they finally reach old age themselves, they find they are in the same or worse position when it becomes their turn to be leached for care and other old age related costs.
The wealthy will have taken care of their own arrangements with more than enough money to deal with the issue, the very much less well off are already reliant on some state help. But “middle England” – arguably the engine room of our economy – bears the heavy financial burden. So over time we as a country end up with an ever impoverished population who lose their heart and passion and at the same time lose interest in the idea of generating spendable wealth ( which in turn benefits everyone) for the future since they now realise that despite their best efforts, it will be leached from them anyway – so what’s the point…. And we as a nation have been down that road before…..
The plans were announced in the House of Commons on Monday, 11 February. They include provision that no one will have to pay more than £75,000 in care home fees over their lifetime. This covers the cost of expensive personal-care help with washing and dressing but not accommodation or food although it is argued that these can usually be covered by a basic state pension or other benefits but anyone with a home or assets worth less than £123,000 will have some help towards the costs. This at face value represents a significant increase in the means testing threshold, which is £23,250 at present. The changes will be introduced in 2017. From 2015 local authorities will be required to step in and foot the bill if a family decides to hold on to their parents’ property although they will charge interest and possibly levy other costs for the loan.
It is disappointing that there was nothing for families struggling with cash costs today. The most important test will be how much difference these proposals will make to older people’s lives not least whether these proposals will come into effect quickly enough to help hundreds of thousands of older people struggling to get the care they need today.
Even though it is very much hoped for, it is still doubtful as to whether or not a new range of financial products will emerge to help families insure against the costs of the care home which can run to £900 a week on average and in some areas much more.
The government suggestion, that market development around these plans would actually take place, does take some extra effort to believe without question. The cap is considered by more than a few to be so high that it is unlikely we would see typical insurance products being developed to fund care home costs. It remains the task of robust Financial Planning (most likely with a professional Financial Planner) to plan for and mitigate as much as possible against current and future care costs. Mr Hunt has said that one of the main reasons the setting of this level of cap was to allow Insurance products to be offered. Mr Hunt continued that the government did not want anyone to pay anything at all and by setting an upper limit to how much people have to pay and it makes it possible for insurance companies to offer policies for people to have options on their pensions so that anything you have to pay under the cap is covered.
The government estimates that about 100,000 people will benefit from the changes in particular those with modest homes and savings who are liable at present for all their cost care home costs.
Chancellor George Osborne has agreed to freeze the inheritance tax threshold at £325,000 until 2019 three years more than planned it has been frozen since 2009 despite the chancellor filling his party in 2007 with a promise that he would raise it to £1 million this decision has led to criticism.
So yet again we are faced with a position where more and more families will be drawn into the inheritance tax threshold trap whilst at the same time little has really been done to alleviate the problem of paying for long-term care costs.
Long-term-care should not be seen as a gamble with funding for future health issues. Instead it should be seen along the same lines as pension planning – for a situation which of course will definitely take place at some point and therefore has certainty about it for which the government should provide at least a proper provision for benefits to pay for the cost of it.
We no longer ask when is it too early to make provision for and to start saving for a pension (for is the answer is “it is never too early..”). The same comment can and should be made for long-term care provison. It is now clearly never too late to start saving for long-term-care funding.
The discussion about funding long-term-care costs in the future should be held with clients at the earliest possible stage in the process of advising them on how to plan ahead with their finances. For some clients this will be a realistic discussion yet for other clients the quest for a more meaningful solution may be a more difficult conversation.
One concern is that local authorities will see the government’s maximum level for long-term-care expenditure as being an opportunity to embark on negotiations for maximum care fee costs with individual care homes. The idea that local authorities or indeed central government will seek to restrict long-term care home fees could cause care homes themselves to look for other ways to maintain their income from residents. This could give rise to inflated non-essential service costs such as accommodation to make up for the restricted income for care services.
What is needed is a more radical solution – one which recognises the seriousness of this looming problem and how it could easily affect every single one of us at some stage. It should be dealt with in the same way as governments have sought to deal with the pension funding issue. Perhaps one solution is that in the event that individuals wished to save over the long term in order to fund specifically for long-term-care purposes then such provision should be exempt from tax both at the point of contribution and also at the point of the spending on the long-term care needs since the care homes themselves may well be taxed on income they generate from providing care services. This concept is not new. However we must wait and see what future proposals or amendments may take place.
It really is about time the politicians and government actually take a more long-term pragmatic view of how they tax, reduce and redistribute money available to individuals within the economy in the middle income and lower income brackets.
Neil A Sewell is a Chartered Financial Planner specialising in advising clients on Pensions and Retirement, Equity Release, Long Term Care and Lifestyle Financial Planning.
Photo Credit: gallery.nen.gov.uk
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