People are living longer and the need for long term care is now something which many people consider as part of their retirement planning. The 85+ age group is the fastest growing age group and is set to double between 2018 and 2041. The increased flexibility in pension provision means that people can use their pensions as a means of planning for the cost of long-term care.
In the past, the obligation to purchase an annuity contract at retirement age meant that the amount of income that a member received was fixed going forward. The more flexible pension arrangements and the use of flexible drawdown enable people to continue to build up a fund, tax efficiently, which can be used to fund care if needed or passed on to the next generation tax efficiently if not.
So how is funding for care looked at? Here are some key points:
- If you have a primary nursing need or have a terminal illness and are receiving end of life care then your care should be funded by the NHS. This usually means that there will be no financial means test and you will not be expected to pay for your care. It is worth bearing in mind that you need to meet a high threshold of need to demonstrate a primary nursing need and qualify for NHS funded care.
- If you do not meet this need and either choose to go into a care home or are assessed as having care needs, then the Local Authority will carry out a means test to identify to what extent you should contribute towards the cost of your care.
- The Local Authority will initially look at your income levels. They will look at actual income you are receiving from state pension, occupational pensions and annuities. If you have a spouse still living at home, then there should be some allowance made for them to continue to receive up to half of your occupation and private pensions.
- If you have a flexible pension arrangement, then the Local Authority will apply "notional income" to that pension scheme. This means that they will assume that you have income equivalent to the maximum income that could be drawn under an equivalent annuity product based on the value of your fund. If you are not drawing anything from your pension or less than this amount, then they will "deem" you to have additional income available to you. If you are already drawing more than the maximum equivalent annuity from your flexible pension fund, then they will assess you based on the actual income that you are receiving.
- If, having taken the above into account, there is still a shortfall between your actual or deemed income and the amount needed to fund your care, then the Local Authority will look at your available capital assets. If you have capital assets over £23,250 then they will expect you to use that capital to supplement your income and to fully fund your care and you will be self-funding. If you have assets between £14,250 and £23,250 then you will be entitled to some assistance from the Local Authority but you will be expected to contribute a "tariff amount" based on your savings until the level of your savings falls to £14,250. Thereafter, the Local Authority should pick up the shortfall between income cost of care.
- Some assets are disregarded when calculating the value of the capital assets that you have. This includes the value of your home if your spouse still lives there or if a relative over the age of 60 lives there. It also includes life insurance policies (including investment bonds which have a life assurance element).
- If you have given away significant assets during your lifetime to the point where you can no longer self-fund your own care, the Local Authority may question this. If they feel that you have done this to "deliberately deprive" yourself of assets which would otherwise have been available to meet the cost of care, they may assess you as still having those assets. In this case, they usually apply a "notional income" to the value of those assets. This will also apply to people who withdraw excessive sums from their flexible pensions and give the funds away or invest in disregarded assets.
Not everyone will need care, and even less will need care in a care home setting. However, being aware of the likely costs of care and the impact on your assets can help you plan for the future effectively.
For more information contact Victoria Motley in our Wills, Probate, Tax & Trusts department
via email or phone on 01772 220 022.
Alternatively send any question through to Forbes Solicitors via our online Contact Form.