LONG-TERM CARE
Synopsis: Final regulations and guidance which will support Part 1 of the Care Act 2014 are expected any day. The Act includes measures aimed at reducing the impact of care costs on accumulated wealth but recent research – and reading between the lines – suggests that many will still face considerable costs. The importance of planning ahead should not be underestimated.
Date posted: Tuesday, October 21, 2014
Recent research indicates that ‘the cost of care’ is the single biggest factor that people most fear will impact on their future wealth. The Care Act 2014, which includes measures which the Government hopes will alleviate some of these fears, received Royal Assent in May this year. The Act is due to be implemented in stages, with the first of the reforms taking effect from April 2015. The much publicised £72,000 cap and increased higher capital limit will be introduced under Part 2 of the Act and will not come into force until April 2016.
So what is the schedule for change?
From 6 April next year, we will see the introduction of a new national minimum eligibility threshold. The new national criteria will replace the current ‘postcode lottery’ system where eligibility for assistance with arranging and paying for care varies markedly between local authorities as a result of each authority using its own local criteria.
We will also see the introduction of a new charging framework, which while retaining most of the features of the current framework – such as the existing rules on asset deprivation – may hold a few surprises. The (now closed) consultation on the draft regulations and guidance that will support Part 1 of the Act sought, for example, views on whether the existing disregard for investment bonds should be retained where they include only a small amount of life insurance; as well as views on how the means test could be adapted to appropriately take account of the new private pensions system that will allow people freer access to their pension pots and changes could therefore be on the horizon in these two areas. It is also likely that the circumstances in which a dependant relative is deemed to ‘occupy a property as their main home’ will be clarified for the purposes of the existing permanent disregard for the main residence where there is a dependant relative in occupation, following the decision in the Walford case (see our earlier bulletin here).
Part 1 of the Act will also extend the circumstances in which third-party or self-funded top ups are allowed and introduce a universal deferred payment arrangement aimed at ensuring that no-one will (at least during their lifetime) have to sell their house to pay for care.
However, while all these reforms look great on paper, the reality may be less rosy…. Recent research from the Institute and Faculty of Actuaries claims that just 8% of men and 15% of women will benefit from the cap. There are a number of reasons for this. Firstly, although the cap will apply regardless of eligibility for financial support, the protection of the cap will only be afforded to those who are assessed as having ‘eligible needs’ and it may therefore be that the costs of those assessed as having only moderate care needs will remain uncapped until their condition deteriorates. Secondly, even if costs are eligible to be capped, only such part of the resident’s contribution that does not exceed the local authority maximum, will count towards the cap. The part of the contribution that relates to so-called ‘hotel costs’ will also be excluded when totting up progress towards the £72,000 care costs cap.
Not everyone will be able to enter into a deferred payment arrangement (DPA) either as eligibility will depend on the value of capital assets excluding the home. If, main residence and disregarded capital aside, the resident’s estate exceeds £27,000, the local authority will be under no obligation to offer a deferral arrangement. And, let’s not forget, the existence of a DPA does not in any way guarantee that the house will pass intact to the next generation – the debt (plus accrued interest at around 3.5%) will need to be repaid on death and if there are insufficient other assets, the house will ultimately need to be sold. According to data obtained by NFU Mutual under the Freedom of Information Act, local authorities have placed legal charges on more than 15,000 properties since 2009 which equates to around eight a day!
It is clear that even with the Care Act reforms, many clients will still face significant costs should long term care ultimately be required and clients should take steps to plan ahead. The Government is particularly keen to encourage planning ahead through pension provision and it may be that we ultimately see the introduction of a lower marginal rate where drawdown is used for care costs or even complete tax relief where the pension is withdrawn after a defined period specifically to fund long term care. The draft pension reforms may also pave the way for innovative annuity products in the future, allowing flexible income, longer guarantees of payment and potentially additional lump sum payments to help with care funding and one-off requirements.
An option for couples who own property jointly could be to sever the joint tenancy while they are both still alive so that the first to die can leave their tenant in common share to a third party (or a trust if greater security is required). The advantage here is that should the survivor need long-term care in future, they will be treated as owning capital to the value of a half-share in the house (as opposed to the full value had they inherited it by survivorship); and the value of that half-share will be negligible – or even nil – by virtue of the lack of a market for a half-share in a house that another person has a right to occupy.
Other planning options could include using trusts and equity release schemes although it is advisable to seek professional advice in this regard.
COMMENT
The Care Act 2014 will be implemented in two stages and will be supported by regulations and guidance which will set out how the Act should operate in practice. The final regulations and guidance to support Part 1 of the Act are due to be published any day; while the regulations and guidance to support the implementation of the cap on care costs, will be subject to a separate consultation to be published later this year. Watch this space!
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