Long Term Care Guide

According to a major study by the CASS Business School (City of London) the demand for formal home care will rise by 60% by 2040. At present, 70% of long-term care is provided informally by relatives and friends. However, increasing longevity and the changing structure of the traditional family imply that more and more of the elderly will spend their last days in a residential care home.

The study of long-term care systems in Sweden, Japan, Germany and the UK predicts that the costs of “formal” care (domiciliary, residential home and nursing home) will rise by about 30% by 2050 to around £15bn p.a. at 2001 prices.

The average cost of a care home today is £344 p.w. for residential care and £517 p.w. for nursing care, rising at 8% p.a. The average disguises wide cost variations between the regions, with London and the South East-based homes charging the highest fees.

Who Pays?

The 1999 Royal Commission on Long-Term Care for the Elderly recommended that “the costs of long-term care should be split between living costs, housing costs and personal care. Personal care should be available after assessment, according to need and paid for from general taxation: the rest should be subject to a co-payment according to means.”

However, Scotland is the only region of the United Kingdom where the Commission's recommendations have been implemented in full.

England, Wales and Northern Ireland

The NHS is responsible for cost of providing nursing care by registered nurses in care homes. Care home residents are funded at £40, £77.50 or £125 p.w. (or somewhere between £77.50 and £125 p.w.) by the NHS – depending on their nursing needs.

Where the local authority provides a place in a residential care home, it must means-test the applicant in order to calculate a personal contribution. The local authority meets the balance of residential costs up to a standard tariff. This means that if the limit is say £350 p.w. but the home charges £400 p.w., a £50 p.w. top-up must be paid by a “third party” (e.g. a family member).

Scotland

As of 1 July 2002, residents of Scottish care homes who are aged over 65 can apply for nursing and personal care payments. The Scottish NHS pays £65 p.w. for nursing care and the local authority pays £145 p.w. (a total of up to £210 p.w.) to those judged eligible for either or both benefits after a care needs assessment.

As in England, Wales and Northern Ireland, care home residents are means-tested for their personal contributions towards their living costs.

Means Testing

Care home applicants are means-tested in terms of both income and capital:

Income

Certain categories of income are disregarded (e.g. income from savings) or partially disregarded (e.g. pension income that is paid to a spouse not living in the same residential or nursing home). Social security benefits, Attendance Allowance/Disability Living Allowance (care) and Pension Credit (less a “disregard” of up to £4.65 p.w.)

The care recipient has a weekly £18.10 Personal Expense Allowance (PEA) which is disregarded for means-testing.

Capital

Relevant assets include cash savings, stocks and shares, Premium Bonds and the family home (unless a spouse or dependent occupies the property). The family home is disregarded for 12 weeks before it is taken into account for means-testing although this is academic where liquid capital already exceeds the higher threshold.

It may also be possible to enter into a “deferred agreement” with the local authority to allow it to recoup an outstanding debt at a later date, although these are rarely granted.

The surrender values of life assurance policies trust are disregarded for means-testing which offers a promising opportunity for advance financial planning, discussed later.

Capital assets are “converted” into income at a rate of £1 p.w. for every £250 or part thereof above a “lower limit”. In England, for example, the care recipient pays £1 for every £250 capital above £12,250. If the care recipient has £15,000 capital then the equivalent income is £2,750/250 = £11 p.w. Where personal capital is £20,000 or more, the applicant pays the full cost of residential care.

Capital thresholds are slightly different in Wales, Northern Ireland and Scotland

Private Provision

The lesson is that state help for long-term residential care is only available to those of extremely limited means. Anyone who has more than around £20,000 worth of assets is expected to fund the full cost of residential care privately.

There are two main varieties of long-term care investment products on the retail market, namely pre-funded Long-term Care Insurance plans and Immediate Need Plans.

Pre-funded Insurance Plans

You pay a lump sum and/or a stream of regular premiums in exchange for future care up to an insured limit.

Benefit payments are triggered when you are judged to be incapable of performing an agreed number of “activities of daily life” like washing, dressing, feeding yourself, toileting and moving from room to room. Payment of benefits start after a “waiting period” (e.g. 13 weeks).

The cost of the policy depends on age, sex and state of health when you take out the policy, the level of benefit, the number of activities of daily life that you must be unable to perform before you can claim and the waiting period.

Most of the major providers like BUPA, PPP, Norwich Union and Scottish Widows have withdrawn from this market. Pre-funded insurance plans are still provided by Skandia, although it is thought to be reconsidering its position.

Immediate Need (Care) Plans

These are impaired life annuities suitable for those already in ill health. The provider pays you a guaranteed income for the rest of your life, which is used to pay residential care home costs. Each annuity is individually underwritten and quotations vary widely from provider to provider depending on their actuaries' views of your life expectancy. Unlike insurance-based plans there is no waiting period for benefit payment.

The payment is made up of taxable interest and a tax-free “return of capital” element. The lower your life expectancy, the higher the return-of capital element and the total level of benefit received. If the income is paid directly to the care provider, it is entirely free of tax.

A potential disadvantage of these schemes is that the capital is lost when the annuitant dies. However “capital protection” can be built into the annuity so that if total payments are less than the amount protected, the balance is repaid to the annuitant's estate on death. It is also possible to guarantee payments for a minimum period of time (6 months to 5 years) even if the annuitant dies in the interim, and to link benefits to RPI – although such safeguards reduce the income yield on the annuity.

PPP Lifetime Care (part of the AXA group), Norwich Union, GE Life and the Pension Annuity Friendly Society are the only providers of Immediate Need plans. You can apply to all four simultaneously on a single application form.

Immediate Needs Case Study (Pension Annuity Friendly Society)

An 84-year-old woman requires an annuity of £12,000 p.a. to meet the shortfall in her income to cover her nursing home fees. She requires immediate nursing home care because she has had a major stroke and suffers from dementia.

The cost of an immediate annuity to provide £12,000 p.a. (level, without guarantee and paid monthly to the care home provider) is about £40,000.00.

A variation on the theme is the Cost-Over Run Cap (CORC), which has a 1 to 5-year waiting period during which the family of the care recipient would pay the care home fees. The CORC is designed to take care of the problem of longevity (i.e. the risk that the care recipient lives longer than expected). The cost of generating £12,000 p.a. starting in 3 years would be £14,260 paid in advance.

Investment Bonds

An unexpectedly efficient funding opportunity arises from the classification of certain kinds of capital investments as “life assurance policies”. An additional advantage of the investment bond is that it functions as a normal investment and is not earmarked for long-term care.

Investment bonds confer tax advantages on those who are higher rate taxpayers at commencement and who can defer higher rate tax on annual withdrawals not exceeding 5% of the sum invested for 20 years – and possibly even legally avoid higher rate tax in later life when benefits are drawn.

However, people planning ahead for long-term care should take professional advice in order to avoid any suggestion of deliberate “asset deprivation”.