The New Proposals on Long Term Care and what they mean for your Financial Planning

In the Spring of last year retirement specialist LV= produced a report looking at the future of long term care in the UK. With increased life expectancy, LV= predicted that the number of people needing care – either in their own home or in specialist retirement homes – would surge by the year 2025, reaching 1.1 million, an increase of 30% on the current figure of 840,000.

With the cost of care also set to increase from the current average of £26,000 per year to a predicted £33,000, the burden on the UK economy – and hence on a decreasing proportion of taxpayers – is set to be prohibitive. How can the country afford it?

And yet… Is it fair that someone who has worked and paid taxes all their life should then have to sell their home to fund the cost of long term care?

This problem – and the apparent difficulty of squaring the circle – has clearly been known about for some time, and in 2010 the Government commissioned economist Andrew Dilnot to look into the whole issue of long term care. Essentially Dilnot was asked to find a way of protecting people’s assets against the cost of long term care – whilst at the same time ensuring that the country didn’t face an impossible bill.

Dilnot recently made his recommendations, which were accepted by Health Secretary Jeremy Hunt, ‘with some slight tweaks.’ So what are the recommendations? And what implications do they have for your long term financial planning?

The three main recommendations:

Dilnot’s first recommendation was a cap on overall care costs, so there is a limit on the total amount that anyone can pay in his or her lifetime. Dilnot had recommended that the cap be between £30,000 and £50,000: in fact the Government decided that the figure should be higher, with the cost of care capped at £75,000 during an individual’s lifetime.

The cap does not include the cost of accommodation – it is the cost of care only. So if, for example, someone was paying £700 per week for long term care, made up of £400 per week residential costs and £300 per week care costs, only the £300 would count towards the cap.

The second change is an increase in the means-tested threshold. At the moment anyone with assets in excess of £23,250 must pay towards the cost of their care. Dilnot had proposed increasing this to £100,000 but the Government have moved it still further, to £123,000. However, if your assets exceed this figure then you are not eligible for any state help until you have passed the ‘cap’ of £75,000.

It is important to note that for those people needing care at home – a substantial number – the threshold will stay at £23,250.

Finally, no-one will now need to sell their home to pay for the cost of care. This has always been an unpopular piece of legislation, and Dilnot has proposed a scheme to allow fee payment to be deferred in a person’s lifetime. This ‘universal deferred payment’ will be introduced in 2015, and will allow people to borrow against the value of their home with the estate then paying back the loan (plus as yet undecided interest) on death.

When will the changes be introduced?

In the main these changes will be introduced in 2017, apart from the universal deferred payment as described above. Until then the current rules will apply to anyone going into care.

What do they mean for your financial planning?

By and large, the changes are to be welcomed. But do they remove the need for financial planning where the costs of long term care are concerned? Far from it. The cap on costs was essential: we have long felt that it is wrong for a person to face an open-ended bill at the end of their life. Likewise the rise in the threshold – but £123,000 is only equal to the cost of a very small home, so we suspect that this move may not make a lot of practical difference.

We have some reservations about the ‘universal deferred payment,’ particularly the as yet unannounced interest rate. If it is linked to inflation (as the rate of interest on student loans is) then it could see substantial amounts of interest being paid.

We would still urge anyone who feels that they may need long term care – or who has elderly relatives who may need long term care – to talk to us about financial planning. The Dilnot proposals are welcome, but for many people – particularly high net worth clients – they may make little practical difference.

If you want to choose the quality of your long term care, and want to be certain that you will pass on as much of your estate as possible to your beneficiaries, then proper financial planning remains an absolute essential. These proposals, welcome as they are, have done nothing to change that.