Care cost considerations and retirement planning

From April 2016, new rules are to be introduced with the objective of ending the tyranny of rising care costs that expose people to the risk of losing their home to pay for care. But the policy may not be all it seems and comes with a health warning: read the small print.

When the Government’s Care Act became law in May 2014, care and support minister Norman Lamb hailed it as the most significant reform of care and support in more than 60 years.

“For the first time, the Act will put a limit on the amount anyone will have to pay towards the cost of their care,” Lamb said. “We know that one of the biggest concerns people have is how they’ll pay for their care. Until now, people have unfairly faced losing almost everything they’ve worked hard for, in order to get the care they need. In the worst cases, many have to sell their homes or exhaust their life savings. We have put forward a new system which will cap the amount people have to spend on the care they need, regardless of how much they have in savings or assets.”1

Following the recommendations of economist Andrew Dilnot, the Government is capping the amount people will have to pay for care at £72,000. The state will then cover costs above this amount.

The means-testing threshold has also been raised, so government support kicks in earlier. Currently, anyone with assets worth more than £23,250, including their home, gets no help. But the Care Act raises this threshold to £118,500, alongside the cap on care costs.

“This will mean an extra 35,000 older people will get help with their care costs when the system comes into force from April 2016,” Lamb explained. “And by 2024– 2025, up to 100,000 more people will benefit financially as a result of our reforms.”1

But dissenters warn that the legislation won’t do enough to help people meet the rapidly escalating cost of care. For example, the cap excludes accommodation costs, which make up roughly 30% of a care home bill and direct care costs will only be funded up to the amount a local authority would pay for a place in a home. This is an amount which is typically much lower than the price privately funded residents would expect to pay.

An analysis by the Institute and Faculty of Actuaries (IFoA) finds that only 8% of men and 15% of women who are currently aged 85 and entering care are likely to reach the new social care cap when it is introduced in 2016. On average, the IFoA estimate people will have spent around £140,000 on care costs – including daily living costs and top-up care costs – before reaching the Government’s £72,000 cap2.

“Anyone who is expecting that the cap will pay for their care is in for a shock,” says Thomas Kenny, one of the authors of the IFoA’s report. “The cap is there to protect against catastrophic care costs and we estimate that few people entering care aged 85 years will reach it.”2

Instead, savings will remain the key means of paying for care.

“Second to property, pensions are the largest wealth asset for most people,” Kenny continues. “Pensions are largely understood, there is an existing savings framework for them and, with flexibility and the right tax incentives, there are products that could help people to meet any care needs that they may have in the future. However, we also found that there is no silver bullet – there is no one product that would suit everyone’s personal circumstances to help them meet care costs.”2

The Faculty’s suggestion is to create a number of new products to address this issue. One such product idea is the ‘Pension Care Fund’, where any money accumulated that was not used to fund care could be passed on, free of inheritance tax, for use as a long-term care fund by a spouse or other beneficiary. Care Minister Norman Lamb himself suggests that the cap could provide a platform for developing new personal pensions or insurance products that would help people plan.

Those relying on inheritance to fund their retirement need to be particularly cautious. Research from insurance company NFU Mutual, found that one person in seven (15%) is clinging to the hope of inheriting property or cash from their parents to fund their own retirement. Yet, three out of every four people whose parents go into care now could see most of their inheritance steadily eaten up by the associated costs3.

The insurer says over a million homes have been sold in the last five years to pay for long-term care costs, while more than two million elderly people have had to use their savings to fund their care.

“Younger generations could be in for a long wait if they’re banking on an inheritance to fund their retirement,” says Sean McCann, personal finance specialist at NFU Mutual. “People should be making their own retirement plans rather than factoring in property and wealth that could be whittled away by the cost of care and inheritance tax."3

IN SCOTLAND: With the number of over-75s in Scotland forecast to climb 80% by 2035, soaring care costs are high on the political agenda. The Scottish Government is introducing parallel legislation that aims to have more elderly patients cared for at home instead of in hospital. The reforms are designed to integrate NHS and local authority budgets to pay for improved care in the community.

IN WALES: The Welsh administration has pledged to introduce a ‘fairer and less complex system’ of paying for care in the wake of the English reforms. It has just increased its weekly cap on charges for home care from £50 to £55; it will increase this again to £60 next year to reflect rises in inflation, state pensions and benefits. The future shape of the Welsh Government’s policy in this area will be decided in a future spending review after the 2015 general election.

Who will pay?

Recent research shows that a third of women and a quarter of men aged 65 today are likely to need care2.

At the moment, anyone with assets worth more than £23,250, including their home, is given no financial support should they move into a care home. However, the numbers of older people facing large bills is on the rise. On average, a room in a care home costs more than £28,000 per year, rising to more than £40,000 for those requiring intensive nursing care4.

The Institute and Faculty of Actuaries estimates that in London, someone entering a residential care home aged 85 will incur a personal cost of around £117,000 in the four years it takes them to reach the cap.

Someone aged 85 years old in the West Midlands entering a residential care home would take around seven years to reach the cap and incur a personal cost of around £170,000 before that point2.

The Government estimates that only one elderly person in eight will benefit from the cap. But the reforms mean that people should be protected from having to sell their home to fund care costs. Instead, it will become possible to defer payments by effectively mortgaging the property to the state until their death.

“All incomes will benefit from the cap”

And, according to the Government, the capped costs will benefit people with different levels of wealth. The Government’s illustration compares the current costs of care with the likely costs to individuals under its reforms. Its estimates assume three years in residential care at £660 a week:

Initial personal assets Current care costs Capped care costs
£250,000 £177,000 £72,000
£200,000 £173,000 £72,000
£150,000 £127,000 £67,000
£100,000 £79,000 £45,000
£70,000 £50,000 £30,000
£50,000 £31,000 £17,000
£40,000 £21,000 £12,000

Further Ideas: If you are concerned about funding long-term care, please discuss this with your Private Banking and Advice Manager who will be happy to arrange a financial review.


1. Care Bill Becomes Care Act 2014, Department of Health and The Rt Hon Norman Lamb MP,, 15/05/14
2. Just 8% of men and 15% of women entering care aged 85 today are likely to reach the new social care cap, Institute and Faculty of Actuaries, 12/05/14
3. Millions rely on inheritance to fund retirement, says NFU Mutual, Amy Loddington, Financial Reporter, 04/09/13
4. Elderly care crisis claims a million family homes, John Bingham, The Daily Telegraph, 03/09/13

Important Information

This article has been provided to Bank of Scotland Private Banking by external/third party contributors and contains their views as at 22 September 2014 and should not be relied upon as fact and could be proved wrong. The information and opinions may not be accurate after this date. The views expressed may not reflect the views of Bank of Scotland plc.

Bank of Scotland Private Banking assumes no responsibility for the content or any reliance upon the content of the third party websites detailed in this article.

The forecast of future figures or events is not a reliable guide to actual future figures or events and cannot be guaranteed.

Bank of Scotland plc. Registered office: The Mound, Edinburgh, EH1 1YZ. Registered in Scotland, no. SC327000. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority under number 169628.

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