Courtiers Wealth Management
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Understanding and planning care costs

11 Jan 2023

A two-year delay in long-awaited reforms to funding care combined with rising inflation and interest rates could have important implications for how people fund social care.

In November, the government announced that the much-anticipated reforms recommended by the Dilnot Report as long ago as 2011, which it planned to bring in from October 2023 would be delayed for two years. Among the reforms that would have been implemented next year is a lifetime £86,000 cap on personal care costs. The government argues that the reforms when finally implemented will put an end to people having to sell their homes to pay for care.

With the existing rules remaining in place for an additional two years and who knows maybe even longer, not only might people be forced to sell a property to pay for care, but they might also be unable to pass on their property as would be the case under the reforms. In addition, they could potentially end up paying tens of thousands more in care and nursing home fees. Sir Andrew Dilnot described the delay as “inhumane” and “a tragedy”.

On top of this, rampant inflation in care and nursing home fees is only adding to the financial pressure of individuals and families, who either already pay for care out of their own pockets (self-funders) or are planning to do so.

According to research by health and social care consultancy Carterwood, care fees for self-funders are rising fast. In 2022 the average weekly fee for self-funded personal care was £983, an increase of 7.3% on 2021. The average weekly fee for self-funded nursing care rose by 9.6% to reach £1,329.

The cost of care varies greatly across the country.  According to LaingBuisson, a leading healthcare business intelligence provider, in 2021 the average annual cost of a residential care home was over £45,000 in the South-East of England, but only £28,652 in Northern Ireland. However, these figures are averages and fees paid by self-funders can be significantly higher. LaingBuisson say that self-funders pay around 40% more in fees than the fees paid to care and nursing homes by local authorities, with some care homes charging upwards of £1,500 a week.

Costs are rising because care homes are having to pay higher wages, and in addition they have seen other costs such as heating and food go up. In January, the FT reported that overall costs for care homes were expected to increase by roughly 30% this year prompting care home companies to raise fees by between 7% and 10%. As we begin 2023, it looks like those predictions were spot-on.

A combination of rising care costs, higher taxes and inflation currently running at 10.7%, are not the ideal conditions facing those who either are currently paying for care or planning to do so. The impact of these factors will affect the different arrangements for funding care in different ways, with equity release and immediate needs annuities being two examples.

Equity release

By unlocking value in a property, equity release is sometimes used to pay care fees. However, rising interest for equity release loans may make this less attractive than in the past. Research by SovereignBoss, a specialist provider of information about equity release, found that at the beginning of December, the lowest rate on an equity release loan was 6.15% (AER).

Where the loan is a lifetime mortgage, not only does this mean higher interest repayments (either monthly or more usually rolled up) – but this could also reduce the equity in the property and the value of any inheritance that can be passed on.

The potential impact of falling house prices, which some economists are predicting in 2023, should also be considered. This could reduce the value of equity in a property, making it even more important to ensure that any equity release plan includes a no negative equity guarantee. Should the value of a home when sold be less than the amount owed to the plan provider, having this guarantee means that any outstanding loan would be written off.

Immediate needs annuity

In the right circumstances an immediate needs annuity bought from an insurance company can be a useful way to fund care. Although the annuity is received tax-free if the payment goes direct to the care home, these products have a number of drawbacks, including the fact fees could eventually exceed the annuity payment. An immediate needs annuity is as its name suggests best suited for someone already in care or about to go into care.

With this type of annuity, inflation is something that needs to be borne in mind. To counter this, some providers offer escalating payments, with 5% being typical. While this could provide something of a hedge against inflationary fees, this needs to be balanced against higher premiums.

Other considerations

One way to mitigate rising care fees is to make sure you claim the benefits to which you may be entitled. Attendance allowance is payable to anyone over the age of 65, as long as they are self-funded. Funded Nursing Care may also be payable.

Conclusion

A combination of rising fees for care and the delay in introducing reforms is creating huge uncertainty for individuals and families keen to ensure that secure funding is in place to pay for their care needs.

Drawing up a plan to pay for long term care should be part of an holistic approach to financial planning and is best done with the help of a financial adviser. The adviser can review any existing plan taking into account rising care fees. They’ll be able to consider the impact of the recent Autumn Statement on household finances, and can also work with a client to put a plan together from scratch.

With the help of a financial adviser, now might be a good time to review any exiting arrangements, or to put a strategy in place.

Important information

The views expressed by Courtiers in this summary are reached from our own research. Courtiers cannot accept responsibility for any decisions taken as a result of reading this article. Investors are recommended to take independent professional advice before effecting transactions and the prices of stocks, shares and funds, and the income from them can fall. Past performance is not a guide to future returns. Tax treatment depends on individual circumstances and may be subject to change in future. We do not endorse or accept responsibility for website content on any websites other than those operated by Courtiers, which may be accessible via links in this article.

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