How to pay for care

justin schamotta
By Justin Schamotta

older person money©

AROUND three quarters of 65-year-olds will need social care at some point in their lives.

However, while medical care is provided free of charge by the NHS, social care for older people must be paid for.

The exact cost depends on the person's wealth and whether they're considered as eligible under Government criteria.

Some may be entitled to full council funding, but a large proportion of people have to make use of their own assets to pay for their care.

Why self fund long-term care?

The sad fact is that a large proportion of us have too many assets to qualify for much in the way of help with social care costs - at least not at first.

At present, anyone with more than £23,500 in the form of savings and / or property must cover all their costs themselves.

In 2014, the Government proposed that this would change from April 2016: the threshold would rise to £27,000 for those who receive care in their own homes, and to £118,000 for those who need residential care.

But in July 2015, they confirmed that they were having to delay the introduction of the new thresholds until 2020. Also delayed is the introduction of the "care cap".

This would have meant that once someone had spent £72,000 on care they wouldn't be expected to pay any more, with the local authority stepping in to cover costs.

Note though, that the cap will only cover care - so bed and board in residential homes must still be paid for, however long it's needed.

Under the Care Act 2014, there should be a cap on these "hotel costs", of £12,000 per year.

I don't have assets worth that much

Those who are below the thresholds outlined above may be able to get some help - and even if they have too much capital to qualify for help, everyone who thinks they may need care should contact their local authority for an assessment.

As well as allowing the Local Authority to determine what type of care a person needs, it triggers the meter on the Care Cap.

Prior to April 2015, applicants were assigned one of four categories: critical, substantial, moderate and low.

This made a huge difference to whether or not someone received help towards the cost of their care: in 2013 it was reported that 87% of Local Authorities would only consider offering assistance to those whose needs were "substantial" or "critical"; 2% of councils restricted their assistance to those considered "critical".

Now, however, there's only one category, set roughly at what most authorities used to consider "substantial".

Should the applicant have needs that meet this requirement, the Local Authority will then decide how much money, if any, the person must contribute to the cost of care, via a means test.

For more on how this financial assessment works and, therefore, how much self-funders are likely to have to contribute please see our full guide to help with care costs.

Options for self funding

The Money Advice Service say the average cost of a room in a residential care home - before nursing costs - is £28,500 a year. By comparison the average annual income of a UK pensioner is £16,380. It's clear to see that funding care can be a major problem.

Here are four of the main ways that people manage it.

Downsizing a home

Most people's biggest asset is their home. Downsizing can free up some much needed cash, especially if the property is relatively large.

Moving to a smaller, easier to maintain home can also reduce the day-to-day demands on aging homeowners, which can itself lessen the need for care.

But before rushing to sell up, bear in mind that moving is often costly.

Stamp Duty, estate agents' charges, legal fees and the like can easily run into tens of thousands of pounds.

It's worth carrying out some realistic calculations to gauge just how much money will be gained by moving.

Research from Prudential shows that the average amount to be gained from downsizing is £87,600 - but it's thought about 40% of people downsizing over-estimate how much money they will make.

Might be suitable for: those who live in larger homes than necessary.

Might not be suitable for: those whose homes are relatively low value.

Releasing home equity

Described as something of a last resort by consumer groups such as Which?, equity release allows people to borrow a proportion of their home's value.

This is paid back, with interest, when they sell their home or die, in what's known as a lifetime mortgage arrangement.

The other main type of equity release scheme is a home reversion plan. This involves the homeowner selling part, or all, of their home for less than its market value in return for cash.

They are then permitted to continue living at the property as a tenant, paying little or no rent.

According to Steve Wilkie, director of Responsible Equity Release, set up costs are roughly £2,000 plus the roll-up of interest on the equity release plan.

Neither scheme necessarily offers the best value for money. As such they should only be considered after seeking independent financial advice.

Might be suitable if: all other funding options have been exhausted.

Might not be suitable if: other people live at the property.

Using annuities

Another option is an "immediate need care fee payment plan", or a "care fees plan". A form of insurance policy, it provides a guaranteed regular income in return for a lump sum investment.

According to the Personal Social Services Research Unit, the average cost of an immediate need care fee payment plan in 2011 was £69,000; it's fair to assume that figure has risen since.

The exact figure depends on the level of income required, current annuity rates, as well as the person's age, health status and life expectancy.

Might be suitable for: those already receiving care and with money to invest.

Might not be suitable for: those who don't immediately require care.

Using investment bonds

Investment bonds involve paying a lump sum to a life insurance company who invest the money into a range of funds.

The investments work on a medium to long-term basis, generating returns in the process. These returns can be used to fund care, though they generally shouldn't be relied upon to provide a steady income.

Although investment bonds are considered safer than many other investment options, there is still an inherent element of risk.

It's also worth noting that the money used to invest is typically tied up for at least five years. Attempts to access it before then can result in harsh penalties.

Might be suitable for: those who are willing to accept a degree of risk.

Might not be suitable for: those who need access to the investment sum.

Deferred payment agreement

There is a fifth option which isn't that widely available at the moment, but could become much more common as a result of the Care Act, as it is expanded across England.

Under a deferred payment agreement, people who own their homes don't have to sell their home to pay for residential care.

Instead the local authority pays the costs, and claims them back at a later date - say, when the owner chooses to sell, or after they have died.

The council may choose to charge interest on the amount owed, and there may be a set-up fee. But it means couples where just one person needs residential care have another option, and, given rising property values they may find some benefit in being able to keep the house a little longer.

Might be suitable for: those who can't afford to pay upfront.

Might not be suitable for: situations where more than one person needs care.

Other options

Almost everyone reaching old age is entitled to some form of financial assistance.

Unfortunately, as much as £5.5bn of potential benefits for old people goes unclaimed every year, including everything from pension credit to various disability allowances.

Financial advice on paying for care

Freeing up, or moving around, large sums of money can be a daunting prospect, especially when the outcome determines something as important as care.

For that reason, it is always advisable to seek financial advice.

All professional advisors cost money. Since 2013 the fees for getting this advice have been much more transparent, as an expert explained for us in this article - but that can make doing the right thing seem costly.

However, those upfront costs should be weighed against the potential for large losses stemming from not taking advice.

"This is an extremely complex area," Danny Cox, an independent financial adviser from Hargreaves Lansdown said.

"Advisers have to know about state benefits and how to maximise entitlements. Equity release is also a specialist area of advice which few advisers do well and still bears the hangovers of the negative equity problems of 20 years ago."


8 October 2013

Very comprehensive article summing up the points that a person must consider if they are looking to fund long term care.

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