After four years of debate, the Care Act gained royal assent in May, representing the most significant reform of care and support. As well as measures that aim to increase the quality and transparency in the care system, the act also introduces greater clarity around paying for care, which should help to grow the market for long term care products and advice.
Three key changes will be introduced to provide greater clarity around care costs. The first of these, which will be introduced in 2015, is a deferred payment scheme that will ensure no one needs to sell their property during their lifetime. Instead, the local authority will put a charge on the property to cover care fees and interest, with these recouped on death.
While this will give people more time to market a property, the costs associated with keeping a property mean it is likely that only a limited number of people will want to defer the sale of the property until death.
Capping care costs
The other two measures will help more people going into care. These include an increase in the means-tested thresholds - taking the upper limit from £23,250 (£24,000 in Wales and £26,000 in Scotland) to £118,000 from April 2016. This will mean that more people with modest assets will get a contribution towards their care fees.
The other reform, the £72,000 cap on care costs, will benefit people regardless of their assets. This is also being introduced in April 2016, and although there is some confusion with people thinking that once they’ve paid £72,000 towards their care the government would step in, the cap only applies to care costs up to the local authority rate.
This local authority rate is likely to be lower than the rate paid for care. In addition, people in care will still be responsible for their living expenses, both before and after the cap is reached. These are being capped at £12,000 a year but still represent a significant funding requirement.
Therefore it will take considerably longer - and cost considerably more than £72,000 - before the cap is reached. For example the Institute and Faculty of Actuaries (IFoA) calculates that only 8 per cent of men and 15 per cent of women entering care at age 85 will benefit from the cap.
Raising awareness
While the reforms are likely to be of benefit to only a small number of people requiring care, they may result in important change in other ways. Within the Care Act there is a requirement on local authorities to ‘establish and maintain a service for providing people in its area with information and advice relating to care and support’ including ‘how to access independent financial advice on matters relevant to the meeting of needs for care and support’.
This is regarded as a significant advance. For instance, research by Partnership found that only 15 per cent of self-funders in residential care have received appropriately qualified care fees advice. “The biggest challenge is the lack of awareness of the financial products that can help people meet the costs of their care,” says Thomas Kenny, head of technical pricing at Partnership. “Requiring local authorities to point people in the direction of advice will make a big difference.”
Signalling the potential uplift the market will experience, the two long term care providers - Partnership and Friends Life - were joined by Just Retirement, which launched an immediate needs annuity at the end of 2013. It expects the market - currently worth around £100m to £120m in annual premiums - to grow significantly.
A further boost to the market is also expected as a result of a government awareness campaign. Stephen Lowe, group external affairs and customer insight director at Just Retirement, explains: “The financial services market has a role to play in helping people afford care costs but we need the government to support this through an industrial strength awareness campaign. There is only so much you can do by putting products on the shelves.”
Immediate needs planning
For anyone entering care there are a number of ways they can arrange their finances to help cover the costs of care. As well as using their money to create a portfolio of savings and investments to generate sufficient income to cover future costs, immediate needs annuities can be used to ensure that, however long they live, care costs are covered.
These are medically underwritten to take into account the individual’s health and life expectancy. As well as those that start paying an income immediately, it is also possible to take out a deferred plan. These act like stop loss insurance, with payment kicking in after one to five years.
As deferring payment can significantly reduce the cost of an annuity, this can work well for people who can afford to cover their costs for a few years but are worried about what might happen if they live longer than expected. As an example, according to Partnership, while an 88-year-old going into care pays £103,000 for an immediate needs annuity paying out £22,000 a year, the cost would drop to £21,000 if they added a five year deferred period (see Table 1 for more examples).
Pre-funded potential
Although providers welcome the sales boost they are likely to see, the industry is also looking further into the future at the prospects for pre-funded products. These were marketed in the 1990s in the form of investment bond-linked products.
Changes in investment performance and regulation mean such a product is unlikely now but there are hopes that something more suitable will emerge. Jules Constantinou, regional manager, UK and Ireland at Gen Re Life UK, does not expect any product development for several years but believes there are plenty of options for innovation once consumers are aware of the need. “It is possible to add a long term care option to a traditional insurance product such as whole of life or critical illness insurance. You could also make it an extension on an income protection style product, switching to activities of daily living claims criteria once someone retires or passes a set age,” he says.
The industry is also seeing changes in pension planning as a potential opportunity for pre-funded products. In its research, ‘How pensions can meet consumer needs under the new social care regime’, the IFoA proposes a pension care fund. This would be a ring-fenced long term care savings fund that would sit alongside a defined contribution pension scheme. It would be treated like a pension from a tax perspective but, in addition, any money not used to fund care would be passed on, free of inheritance tax, to a beneficiary’s long term care fund.
Friends Life also regards some form of tax incentive as the key to unlocking this market. It would like pension rules to be changed so that long term care premiums could be paid out of pension funds income tax free. “This sort of incentive would encourage more people to fund their future care costs,” says Brian Fisher, long term care marketing manager at Friends Life. “We need to keep the conversation going around long term care so the public are aware of the costs they might face.”
Keeping public awareness high is essential. While the Care Act is likely to result in a boost to the immediate needs market as more people are directed towards independent financial advice, the creation of a pre-funded market will be a longer term development, requiring support from government to change people’s attitudes to their care requirements.
