FOOL'S EYE VIEW
How You Pay For Long-Term Care

By Jane Mack (TMFJane)
November 30, 2004

At the beginning of November the Financial Services Authority began regulating all long-term care insurance products. The cost of care for elderly people is expensive and complicated and, not surprisingly, the FSA has decided to ensure that financial advisers are equipped with the necessary information in order to help people make decisions about how to finance it. They've introduced a new exam, which financial advisers selling long term care products must pass by October 2006.

Paying for long-term care has become a bit of a political football in recent years, not least because the rules are so confusing. In theory, if an elderly person needs medical care, then it should be paid for by the NHS. But the waters have been muddied by the fact that if the care required is of a personal nature, such as washing and feeding, then it's paid for by Social Services unless the 'client' can afford to pay for it themselves.

And if you've got more than £20,000 in assets and/or savings, then you're expected to pay for it yourself. As neither organisation wants to be lumbered with the bills, rather a lot of people have been forced to sell their homes to pay for care when they may have been entitled to hang on to them. It's a scandal that is still being investigated by the Parliamentary Ombudsman.

Anyway, let's look at the options available:

Care In The Family Home

People who need care in the home can either pay for carers from Social Services or private agencies. Since most Social Services outsource the work to private agencies, you'll probably save money by going to them direct to avoid paying for the extra layer of bureaucracy.

Social Services also appear to charge lots of different prices for different things whereas the private agencies seem to charge a flat rate for time spent. For example, when I investigated the costs for my in-laws earlier this year, I found my local Social Services charged £15.50 an hour for 'Personal Home Care' (washing and dressing etc) and £10.50 an hour for 'Community Support' (doing the shopping and picking up prescriptions).

Prices from a private agency were a flat £9.20 an hour on weekdays, £10.92 at weekends and £18.08 on bank holidays. And they were prepared to do any tasks required during that time.

As I said above, as a general rule of thumb, if you've got more than £20,000 capital and/or savings you will get little or no help with the cost of your carer. This doesn't include your home as long as you continue to live in it. And note that it is only your assets and income that are assessed – anything your spouse personally owns is irrelevant.

However, if you need some sort of personal care and you're over 65, then you may be able to claim Attendance Allowance which can be worth between £39.35 and £58.80 a week. It's tax-free and is not means-tested but is based on the level of care you need and whether it is day-time or night-time care, or both. If you're under 65 you can usually claim Disability Living Allowance instead which offers similar rates depending on mobility and how much care you need.

Care Home Fees

Should you need to go into residential or nursing care, the rules for working out how much of the fees you have to pay yourself are again based on your assets and your income. If you have more than £20,000 in capital, you'll have to pay the full cost of residential care before the local authority will chip in and help. (In Scotland the limit is £19,000 and in Wales it's £20,500).

Naturally, when discussing assets, your home is included because you are no longer living in it. You can't be forced to sell it but if you don't and can't pay the fees otherwise, then the local authority will claim it all back from your estate after your death.

However, your share of the family home won't be included if you've got a spouse, partner or a relative over 60 living in it and, again, note that it is only your assets and income that are means-tested - anything your spouse personally owns won't come into the equation. Even if you live with your partner in the same care home you must be assessed separately and the income and savings rules will apply to you as individuals not as a couple.

However, under separate rules, the local authority can approach your husband or wife (called a liable relative) to see if he or she is willing and able to make some payment towards the cost of your care. In theory, this is a voluntary contribution but if your spouse can afford to make a contribution without hardship but doesn't want to, local authorities have ways of encouraging you to comply, for example, by threatening to reassess your spouse's needs!

Once you're down to your last £20,000, how much you pay then works on a sliding scale of contributions until you're finally left with assets and savings of £12,250 at which point Social Services will pay for the lot. Whatever your financial situation, the idea is that everybody will be left with a minimum amount of income to cover general living allowances.

Note that in England and Wales, your obligation to pay the fees yourself if you can afford to is supposed to apply only to the residential aspect of your care (i.e. personal care). The nursing/medical aspect should be paid for by the NHS but health authorities are interpreting government guidelines so differently across the country that families often have a fight on their hands to convince the authorities to pay up. (This is exactly the sort of thing the Parliamentary Ombudsman has been investigating).

Assuming you have to pay for your own care, what happens if you have income from a state pension, private pension, savings and investments and, possibly, benefits such as Attendance Allowance? How do you find the difference between your income and the actual costs of the care home? There are two main ways of buying a financial product that will pay for this:

Immediate Care Annuity

As you might imagine, this works pretty much in the same way as a pension annuity. You pay a lump sum and in return you get a guaranteed income for life which is used to pay for the care costs. As long as the income from the annuity is paid directly to the care home, it's tax free.

The cost varies considerably as it's dependent on your age and medical health and whether you want the income index-linked. The older and more 'impaired' you are the cheaper it will be and the longer you live the more 'in pocket' you'll be. As a rough guide, the Care Funding Bureau suggests a lump sum that is equal to 4 times the annual income payable. So a gross income of £10,000 a year would require a lump sum of £40,000.

With standard plans, you give up the capital in return for the guaranteed income. But, with certain products, you can pay an insurance premium to ensure the income is guaranteed for a certain length of time, even if you die sooner, or which pays out a percentage of the capital invested minus any benefits already paid out. This aspect of an immediate care plan will be more expensive the older you are.

The advantage of an annuity is that you only buy one when you absolutely know you need it.

Long-Term Care Insurance

Considering you can insure yourself against virtually anything these days, it's not surprising that you can buy insurance cover for long-term care costs although it has proved to be an area that insurers are increasingly reluctant to finance. (It appears there's now only one insurer offering this type of policy - the Pensions Annuity Friendly Society)

The idea is that you pay into an insurance policy via a single one-off premium or by making regular payments. If you find you need to make a claim, you will have to meet certain criteria before the policy will pay out and, obviously if you die without making a claim, the premiums are lost. It's, therefore not surprising that immediate care annuities are more popular as they can be bought at point of need rather than insuring yourself for something that might never happen.

Don't forget that you can always decide to invest your own assets to produce the necessary income although remember you'll be taxed on what you get from it. But at least you'll be able to keep control of all your money!

> Find out more about long-term care from Help The Aged.