Long Term Care Planning
Over the next 12 months, 62,000 families will have to find typically between £35,000 and £40,000 in fees, according to the Government’s own figures, because the individual entering into care has savings and property worth more than £27 000 and so will receive no support from the state.
Fees can range from £20,000 to £60,000 per year depending on location, quality of care, and who is paying the bill. It’s no secret in the care world that private funders – or “self-payers” as the care homes call them – subsidise those paid for by local authorities.
It makes sense to plan in advance.
One option is to have a Property Trust written into your will. You will, of course have split ownership of the family home, to ‘tenants in common’, so each of you owns 50%. If you use a property trust and your partner dies before you, as the surviving spouse you retain a right to live in the house. The part owned by the trust is not counted. In this way it is protected from care home costs. Government rules (Charging for Residential Accommodation Guide) suggest that this arrangement will not be contested as ‘deliberate deprivation’, meaning that you have deliberately split your assets to avoid paying high care home fees.
Here’s another reason why a property trust is worth considering:
Sideways disinheritance? This occurs when the first partner dies, leaving children from the marriage who might reasonably expect to inherit some of the family estate in due course. If the surviving partner remarries and fails to make provision for their children in a new will, there’s a (real) risk that everything will go to their new spouse instead.
A deferred payment agreement is an arrangement with the local authority that lets people use the value of their homes to help pay care home costs. If you are eligible, the council will help to pay your care home bills on your behalf. You can delay repaying the council until you choose to sell your home, or until after your death.
You need to sign a legal agreement with the council, saying that the money will be repaid when your home is sold. The local authority usually ensures that the money you owe in care fees will be repaid by putting a legal charge on your property. The charge is removed when the outstanding debt is repaid.
You can’t usually use more than 90% of the value of your home to pay for fees. In practice, many local authorities will set a limit between 70% and 80%.
This is to leave you or the executor of your will with enough money to cover the sale costs and to make sure the local authority gets their money back if house prices fall. You can usually only apply to join a deferred payment scheme after you have been in a residential home for 12 weeks or more. Short-term stays in care aren’t covered
Am I eligible to use a deferred payment agreement?
- You should have savings and capital of less than a certain amount, not including the value of your home (in England this is £23,250)
- You should be a homeowner or have another asset that the local authority can use as security
- There should be no-one else living in the property who needs to stay there, such as a spouse, partner, child, a relative aged over 60, or someone who is sick or disabled
- You should be in, or planning to be in, long-term residential care – you won’t be able to take out a deferred payment agreement for temporary stays in care
- If you still have an outstanding mortgage, check the terms and conditions and speak to your lender. Some lenders won’t let you take out another loan secured on the home.
What are the advantages of using a deferred payment agreement?
- The council will pay the costs of your care so you don’t have to straight away.
- You only build up a debt against the value of your home for the amount of time that you are in care.
- The value of your home may increase, effectively paying towards your care costs.
- You can carry on claiming Attendance Allowance, Disability Living Allowance (care component), or Personal Independence Payment (daily living component), if you’re entitled to any of these benefits.
What are the disadvantages of using a deferred payment agreement?
- You will still have to pay for the upkeep and maintenance of your home.
- You will have to keep your home insured and this may be a problem if no-one is living there.
- If you still have a mortgage on the property you will have to carry on paying it.
- House prices could fall leaving you with less money to pay back the fees.
- If you already have an existing equity release scheme you may not be able to join a deferred payment scheme.
- You will lose out on interest you could have earned if you had sold your home and put the capital into savings or investments.
Repaying the amount to the local authority
Any money owing on the deferred payment agreement, including interest and administration costs must be repaid if you sell your home or you leave the care home. If you die, the executor of your will is responsible for repaying the amount owing.
Local authorities are able to charge interest of up to 1.65% (yearly rate, charged daily) (1 July-31 December 2017) on the deferred payment, together with an additional charge for legal costs and administering the payment from the start of the agreement.
Both the interest rate and charge are designed to cover the local authority’s costs in making the loan; they are not allowed to make a profit from the arrangement.When the property is sold, the executor of the estate will be liable to repay the debt out of the estate, though they are not themselves personally liable.
Challenging a local authority decision
If you feel you have been unfairly denied a deferred payment, seek clarity from the local authority about the reasons for this, and make a formal complaint if necessary.
Renting out your home if you enter into a deferred payment agreement
- Renting out your property can give you extra income to pay for your fees but there a few things to bear in mind before you do this.
- Your local authority has to agree that you can rent your property. Sometimes they may offer to place tenants from their housing list into the empty property and pay rent to you.
- Rental income might push you over the limits for Local Authority help or affect other benefits.
- You have responsibilities as a landlord that you may not be able to meet while in care.
- You may need to use a letting agent or get a family member or friend to manage the property for you.
- The property may not have tenants all the time or care home costs may rise faster than the amount of rent you can charge. You may not always have enough rental income to cover your fees or other costs.
- If the rental income will cover all or more than your care home fees, you could choose to rent out your property instead of taking a deferred payment agreement. However, you would have to make sure you would have enough income to cover costs and be sure that the property would be properly managed.
How your income affects deferred payment agreements
- Most of your income (such as your pension and certain means-tested benefits income) will have to go towards paying for your care costs before the local authority will meet the shortfall in what you can afford to pay.
- In England, if you have £23,250 or more in savings and capital you will be considered to be self-funding and you will have to meet the full costs of your care. Local Authorities can be more generous than this, so if you are close to the limit, check whether you might be eligible.
- You will have to make a contribution of £1 for every £250 of savings and capital you have between £14,250 and £23,250. This is known as tariff income. You may also be assessed for a contribution from other income, such as pensions or means-tested benefits.
- You won’t have to make a contribution from any income you get from savings or capital of less than £14,250, but you may still be assessed for a contribution towards the costs of your care from other income you get.
- There are slightly different funding rules if you live in Scotland, Wales or Northern Ireland. You should check with your local authority for how your income might affect your deferred payment agreement.
- Means-tested benefits, such as your State Pension or Pension Credit will be counted when working out what you have to pay.
The Disposable Income Allowance
- Under rules in the 2014 Care Act that apply in England only, your local authority must allow you to keep a minimum amount of income each week if you enter into a deferred payment agreement.
- This is called the Disposable Income Allowance (DIA) and is set at £144 a week. The allowance gives you enough money to pay for any additional costs you might have to continue paying for your home, such as insurance, energy bills and maintenance costs.
- You can choose to contribute more towards the costs of your care and keep less than £144 a week if you wish. However, the local authority can’t make you do this.
You take out a mortgage secured on your property while retaining ownership. You can choose to ring-fence some of the value of your property as an inheritance for your family. You can choose to make repayments or let the interest roll-up. The loan amount and any accrued interest are re-paid when you die or when you move into long-term care.
You sell part OR all of your home to a home reversion provider in return for a lump sum (or regular payments). You have the right to continue living in the property until you die, rent free, but you have to agree to maintain and insure it. You can ring-fence a percentage of your property for later use, possibly for inheritance. The percentage you retain will always remain the same regardless of the change in property values, unless you decide to take further cash releases. At the end of the plan your property is sold and the sale proceeds are shared according to the remaining proportions of ownership.
Note: This may not be the appropriate way ahead if you are already booked to go into a rest home as few providers will accommodate this. Also, the capital released may not be enough to meet the care costs for the longer term.
This is a “niche” area where just a handful of insurers operate. The principle is that if you are going into care then you pay a lump sum. In return, the insurer promises to pay the care home (a set amount) for as long as you (the annuitant) live there.
There is an associated tax perk: provided the payment goes directly to the care home, you don’t pay income tax. Normally the proceeds of an annuity would be taxed at your marginal rate.
As with all annuities, you are gambling that you will live long enough for the exercise to be worthwhile. Should you die early on, the insurer wins. If, on the other hand, you live for many years, you are the winner. On a grand scale, the insurer always wins overall because they employ actuaries to estimate policyholders) longevity and price accordingly.
Care annuities are different from standard pension annuities in another way. As they are offered to older people (the average age of someone taking out one of these plans is 85) their cost is based more on an individual’s health than on other, wider economic factors such as investment returns.
The Care Act 2014
The Care Act 2014 says that local authorities must now try to help you find financial information and advice that will help you plan and pay for your care needs.
This can range from helping you to filling in benefit claim forms to showing you where you can get advice about choosing the best long-term care option for you. They will also be able to put you in touch with local organisations and advisers.