1. Understand the dynamics of the long-term care market and the factors driving growth
2. Describe the key elements of the Care Act in particular the financial aspects relating to care funding
3. Outline the main funding options for long-term care
4. Identify the opportunities in the later life advice market
5. Evaluate how to provide a later life service to your clients
Jan Holt, Head of Business Development Team, JustRetirement
PRESENTER: In order to consider the viewing of this video as structured CPD, you must complete the reflective statement to demonstrate what you’ve learned and its relevance to you.
Hello and welcome to this Akademia session on the Care Act 2014. I’m Mark Colegate and I’m joined now by Jan Holt. She’s Head of the Business Development Team at Just Retirement. Well, Jan, what are the opportunities now for advisers in the long-term care market?
JAN HOLT: Well, if advisers haven’t looked at this market for a while, now might be a really good time to take another look, and that’s why in today’s film we’re going to explore the care market overall and the growth potential in it, and from here we’ll move on to an overview of the Care Act 2014 and in particular focussing on the financial aspects. I’ll recap the needs and objectives that potential clients will have and look at the range of options available to meet these needs.
The Care Act introduces change and in turn significant opportunities for financial advisers, so we’ll consider these along with other sources of potential clients.
PRESENTER: So, let’s start with the market, what does it look like and is there a genuine advice opportunity?
JAN HOLT: Yes, there’s no doubt that this market is one that offers tremendous opportunity for advisers. So at the moment it’s estimated that there are around 53,000 people who self-fund their care and they’re entering into the care market every year. Now of those only 7,000 receive financial advice on their options, which is only 13%. Currently of the 53,000 entering care on a self-funding basis around 1,200 of them will buy an immediate needs annuity; however, it’s estimated that up to 40% of those people could actually benefit from this product if they knew how to get help and advice. So Just Retirement commissioned some research via YouGov, and we found that two thirds of people wanted independent financial advice when considering their care options. However, perhaps due to the circumstances at the time, as the figures bear out, many people don’t seek out advice and that’s possibly to their detriment.
So, thinking of this another way, under the new proposals all of those 53,000 self-funders entering care each year will be provided with information by the local authority and pointed towards obtaining further advice. This represents a huge opportunity for advisers. And if we focus in on the over-80 population, the market’s vast when we consider the fact that we’re an ageing population, that there are more of us living into old age and that the probability of requiring care will only increase over time.
PRESENTER: So we can see that the numbers of people potentially needing care are continuing to rise, but what about the costs involved?
JAN HOLT: Well to give some idea the average cost of care is over £730 a week, or over £550 a week where there’s no nursing care required. So if a self-funder lived for eight years there’d be a potential cost equating to over £304,000, that’s using the average weekly care fees of £732, and this doesn’t take into account inflation of course, which is higher than average in the care market.
PRESENTER: And what are the conditions that would typically trigger a need for care?
JAN HOLT: Well we can see here on the slide some of the clinical conditions behind why residential care is needed. So the table shows clearly that dementia is the top condition that results in the need for care. However, other common conditions such as stroke and arthritis, they’re also standing out, along with other conditions related to general old age. Now dementia’s an important condition to point out, because the projected rates of increase in sufferers are likely to have a significant impact on the number of people requiring some level of care in their lifetime. So it’s set to increase by 25% in 2021 and then double by 2051.
PRESENTER: And what does all of this mean for intermediaries?
JAN HOLT: There are great many people with a future potential long-term care need, and it’s a need that’s unlikely to be satisfied by the number of advisers who are currently active in this area. In spite of the clear need for advice in the later life area, the supply is quite limited. Demographics clearly show that the proportion of people who are very old is the fastest growing sector of the population, with the number of people over 90 expected to nearly treble over the next 20 years. Around one in three women and one in five men aged over 65 today are expected to enter a care home; however, there are only currently around 600 advisers active in this market.
So there’s clearly a very big opportunity for advice in this part of the through retirement market, and to summarise the opportunity there are already 125,000 people having to find a way to fund their own residential care, and there are 325,000 people having to fund their domiciliary care needs. So currently there are 450,000 already receiving care and only 600 advisers actively operating in this area. So if you think of how many people will join those numbers each year and with the typical immediate needs annuity case size at around £100,000 the opportunities are significant.
PRESENTER: The Care Act 2014 was granted Royal Assent on 14th May 2014, but can you give us some insight into what’s included and what happens next?
JAN HOLT: Yes, the Care Act 2014 is predominantly split into three areas, so reform of care and support, a response to the Francis Inquiry on failings at Mid Staffordshire Hospital and Health Education England and Health Research Authority. The Department of Health consulted on the first parts around the reform of care and support and what elements will come into force in April 2015, and that consultation completed on 15th August 2014 with the results due in October 2014. For the reforms that are due to be implemented in April 2016 there’ll be a second consultation.
PRESENTER: So can you take us through some of the key elements that were addressed in the Care Act?
JAN HOLT: Yes, the reforms will look at a universal deferred payment arrangement, a public awareness campaign promised by the Department of Health to help communicate all the changes, provision of information and advice, and a cap on care costs and changes to the means test thresholds, and I’ll go through each of these in turn.
So what does the universal deferred payment arrangement entail? Well this is part of the reform due to come in from April 2015 and is expected to be offered subject to certain qualifying scenarios in particular where the individual has less than £23,250 in assets. The deferred payment would be recouped by a charge on the individual’s property with interest applied throughout, and that’s currently expected to be set somewhere between 3½ and 5%. So this is in contrast to the existing deferred payment scheme which if available is interest free until after the death of the individual.
The deferred payment would become repayable on death; however at the moment there’s a query as to whether one of the features of equity release products, the no negative equity guarantee, would apply on these arrangements. In addition, it’s currently unclear what the advice requirements would be for this arrangement and how this would differ to other approaches available. At the moment it’s possible that the regulations will not require financial advice and so individuals would be able to sign up directly for these arrangements. This is not finalised yet.
The Government has also committed to undertake a public awareness campaign, and that’s expected to start late 2014 or 2015 and it’s anticipated to run for several years. The main areas of focus for the campaign will be to raise awareness of the probability of a need for care in later life and the responsibility people will have to pay for this care. Underlying this of course is the demographic time bomb waiting to happen. The public are largely and blissfully unaware that at least one in four people aged 65 will need care provision at some point, and the situation will only get worse as we experience an ever-ageing population.
This communication is crucial for the government as it needs to hit home that the state simply won’t be able to afford to provide ongoing care and that self-provision is becoming essential. It also needs to address the fact that the public is totally unaware of the costs involved with care provision and it has an expectation that the state will cover any costs. There’s also a recognition that the insurance industry is best placed to provide products that can mitigate these risks, and Just Retirement is actively involved through the ABI to work with the Department of Health on product needs. The government awareness campaign is likely to focus on a lot of the positive ideas, such as the care cap and the deferred payment arrangement. However, although this will help raise awareness, it’s unlikely to give a full picture of the scale of the problem. So this is where providers and advisers can step in.
The reforms will also look at how information and advice is distributed particularly through local authorities. At the moment the reforms have stipulated that the obligation is with the local authority, but they haven’t stated how this should be done. The reforms specify that there needs to be provision of information and advice which relates to care and support, but there needs to be further clarity around some of the terminology. For example the reform calls for independent advice; however, digging into the detail of this currently independent means external to the local authority and doesn’t require the advice to be regulated. All that said early drafts of the statutory guidance being written at the moment has stated that any advice should be regulated.
At the time of recording this film the first draft of the guidance is being consulted on, so there’s talk of further case studies or guidance notes that will come out in due course and this will help make things clearer for local authorities. Regardless, local authorities will need to provide information, information that covers people’s responsibilities to pay for care and information on the options that they have to pay for this, and there are many ways that the costs of care can be financed assuming of course that people have sufficient assets that mean they are self-funders. That is they’re responsible for their care costs and this is exactly where the knowledge and the impartiality that a professional adviser can offer at this time of need and that will be particularly valuable.
Paying for care is the area that’s attracted most attention, particularly with the publicity generated around the idea of the £72,000 cap, and the changes to what people have to pay depending on their assets as well as the means test threshold. So before we look at the care cap it’s important to know that these figures still haven’t been finalised and are yet subject to more consultation.
So how does the care cap work? Well this is expected to be introduced from April 2016 and set at £72,000 increasing in line with average earnings over time. Importantly for those considering going into care now it’s only payments after April 2016 that will count towards the cap. Individuals will be assessed by their local authority to see if they qualify. With the qualification point thought to be broadly in line with the current need rating of substantial. The main issue that needs highlighting however is that the cap is not intended to cover all of the costs associated with care, and this is the part that most people needing care will struggle to understand and will need help with. So the costs described as hotel costs will be excluded from the cap, up to £12,000 per annum. In addition, any costs in excess of the local authority allowance are also excluded, and that puts a very different light on the cap. So, to help explain this further, let’s look at an example of the care cap in action.
Let’s take Mrs Smith. So she’s in a care home and has sizeable assets still remaining, therefore she has to pay for all of her care costs herself. Now, if the care home fees are £732 a week, or £38,064 a year, we’ll assume that the local authority allowance is £532 per week. So this means of the £732 that Mrs Smith actually pays £200 is automatically excluded from counting towards the cap, because it’s above the local authority rate. But it doesn’t stop there. We also now have to factor in the hotel costs, in this example £12,000 per annum or £231 a week. So like the client top-up hotel costs are also excluded from counting towards the cap. Now this means a further £231 a week won’t count towards the care cap. It’s also worth noting that when the cap is eventually reached responsibility for paying both the client top up and the hotel costs will continue to fall to Mrs Smith to pay.
So to put this in another way in just the course of one year Mrs Smith will have paid £38,064 on care costs, but only £15,664 of this will count towards the cap. So this example shows it would actually take 4½ years for Mrs Smith to reach the cap of £72,000 and she will have spent £175,000 in the meantime. But it doesn’t quite stop there, because Mrs Smith would still have to pay over £22,000 a year, that’s £431 a week for 52 weeks, for her care costs even after the cap has been reached. Now this example of course does assume that there are no changes to the cap limits, the allowances or depletion of assets.
PRESENTER: So does this mean that the cap is a bit of a red herring?
JAN HOLT: Well some research undertaken by the Institute of Actuaries suggests that the cap would only be reached by 8% of men and 15% of women. Although there is wide regional variation with up to 19% in London reaching the cap compared to 5% in the West Midlands for example. But the message here is clear, for most people the care cap will not be relevant; in fact those people who do reach the cap will have spent on average £140,000 on their care with further ongoing costs still to be met. For people making these decisions now the proportion hitting the cap will be even lower, because their current payments won’t count towards it until April 2016. The perception amongst the public may be different however with many people expecting their total liability to be capped at £72,000, and therefore this is one area where there are opportunities for advisers. It’s also worth mentioning now that if your clients want a real cap on care expenses they can achieve this with an immediate needs annuity, and we’ll be talking more about that later.
The last area of the Care Act we’ll get to grips with will be the means test threshold. As it currently stands there is no assistance for care costs for anybody who has assets over £23,250. So this means that those people are responsible for all of their costs until all they have left is £23,250. From April 2016 the upper threshold is expected to be increased to £27,000 if no property’s included, so for example if there isn’t a property or if a spouse is continuing to live in it. If there is a property to be included in the means test then the upper threshold will then be increased to £118,000.
Now this means that anybody with assets over £118,000 will have to pay all of their care costs until the new cap is reached. Once an individual’s assets have depleted to below £118,000 then the tariff income will apply, and that means for every £250 of assets over the minimum threshold of £17,000 £1 is added to the weekly income figure and used to contribute towards care costs with the local authority contribution being reduced by the same amount.
Now as we’ve already seen with the introduction of the £72,000 cap and 2016 assessments then a review is going to be required to check if payments count towards the cap for those people receiving care. And the numbers are already truly staggering. So there are believed to be around 125,000 people in care homes who are self-funding and about 325,000 people who are self-funding their care in their own homes, all of whom will need to be assessed, and given that local authorities are going to be required to provide information and help there is potential for thousands of new clients and their families looking for further advice from advisers.
PRESENTER: There’s certainly a lot to think about in relation to the opportunities and changes coming through as a result of the Care Act, but for those that need to take action now what options are available for funding care?
JAN HOLT: The first thing to consider, however unlikely, is whether the client would actually need to pay for their costs at all. Now obviously this would only apply to a few people; however, it’s always worth checking and ruling it in or ruling it out. So state funded care will depend whether the care need is temporary or whether the individual has a primary health need, the complex condition and substantial and ongoing care needs. If the client qualifies then care can be funded through the NHS, including care in a home. However, this is rare. So it’s likely that most clients of financial intermediaries will need to consider the options available to them to self-fund their care.
Now once it’s been established that the client has a need for care there’s a need to fully investigate their income and their expenditure in order to ascertain any shortfall. So the client’s income should include any benefits and allowances from the state, including state pension as well as any private pension income. For expenditure, well naturally the cost of the provision of care has to be allowed for, but just as importantly the ongoing living expenses the client will incur which can’t be underestimated. And there are several ways in which clients can fund for their care, and these generally split into two areas, so they’d either be property related or asset related. So let’s have a look at each of those.
For property related, then we can look at the deferred payment plan, so this is the current set up in place at the moment. Then there’ll be the universal deferred payment scheme, as we mentioned earlier this will be available from April 2015. Equity release is a popular method for releasing the value of a client’s home to pay for care needs, although more frequently for domiciliary care than for residential care. Letting the property may be an option, and again this utilises the value from a client’s property through rental income.
The asset related options are: to spend down cash, so simply where a client undertakes to reduce the size of their assets over time by directly spending cash reserves: to have an investment portfolio, so for clients who already have established a sizeable portfolio they can use this to fund their own care; to use immediate needs annuity, which is a product that provides a tax efficient income stream that can be paid directly to a care home.
PRESENTER: But with so many options available to clients which one’s the right one for advisers?
JAN HOLT: Well essentially there are two high level objectives to consider, which is to maintain quality care for the remainder of the client’s life and to try to protect the client’s assets as much as possible. And with this in mind there are a number of possible solutions perhaps involving a mix of the funding options we’ve just been through. Of course it will depend on the client’s individual circumstances, depends on their available assets, their attitude towards investment risk, capacity for loss and their health. It’s worth noting that although not every solution is perfect the immediate needs annuity does provide certainty for the two high level objectives that we’ve mentioned here. As mentioned earlier it’s also very effective at placing a real cap on care costs, because it provides income for as long as the person needing care lives.
So, if we have a quick look at how an immediate needs annuity works, well it’s a long-term care insurance contract providing a selected level of benefits, and these benefits are payable for the life of the person in care. To be eligible for an immediate needs annuity, the person has to be in need of care, so residential or domiciliary, that is in their own home, and that need is expected to be permanent. So for example they’re not expected to recover the need for care to stop. There are a number of conditions that would qualify an individual for this type of product; for example mental impairments such as dementia or the inability to perform one or more of the activities of daily living.
The plan must be set up with payments going to a registered care provider. This then means that the income payments can be made tax free. Once the plan is set up the destination of payments can change to another registered care provider or to the annuitant directly if the annuitant does move out of care or to a non-registered care provider such as a family member. If it is subsequently paid directly to the annuitant or non-registered care provider then tax will be deducted in the same way that purchase life annuity tax rules work. So that would mean that the income is deemed to be part return of capital and part income, the income element is taxed at the savings rate, currently 20%.
PRESENTER: Well, let’s come back to the opportunity set for advisers, sum up the opportunity and how can advisers access it?
JAN HOLT: Yes, as we’ve previously mentioned, the sheer volume of people who are going to need help with planning and paying for care is vast, and we’ve seen already that there are 53,000 new self-funders entering into care every year, and this number is only likely to increase. On top of that there are literally hundreds of thousands of people currently in care who’ll be going through reassessment, and they’ll need help in understanding their options and looking for advice on the best way to fund their care. The reason that this is such an opportunity is that currently there are very few advisers who are actively operating in the market, which means that the demand for quality care advice and products will offer new avenues of business to many advisers who might be willing to get involved. The time to act is now as we’ve previously looked at local authorities are having to consider what their plans and what their operating procedures look like already, and so this is the opportunity to get in touch with your local authority to find out more about what they’re doing.
Perhaps one of the obvious questions that gets asked is where and how do I find these clients? So for this there are two main sources. Many advisers will already have clients who are in their 50s and 60s, usually clients that you’d be helping through their own retirement planning, and given today’s demographics it’s very likely that it’s exactly these clients who will have parents still alive in their 70s, 80s or 90s, and they’d be prime candidates for care planning and care funding. It makes complete sense to include a referral process from your existing clients as it’s likely that they could already be the power of attorney for those needing care. This then becomes a natural fit in the advice process, and for advisers wanting to look a bit wider there are a number of introducers that they could consider engaging with to offer advice services through.
The obvious start for this would be local care homes, but there are also solicitors, estate agents, local doctors’ surgeries, all of these could provide ideal opportunities for referral business. To provide advice in this area advisers will need additional qualifications, in the form of CFA, that covers long-term care insurance, or the IFS Level 3 Certificate in Long-Term Care Insurance, or G80, which is the long-term care life and health protection exam which is no longer available. As we’ve seen this is an area of increasing need for advice, so whether intermediaries refer to a specialist or advise directly on this area it can’t be ignored.
So, to sum all of this up, the Care Act 2014 is upon us, and we’ll soon be seeing the opportunities and change from this, which will inevitably lead to a greater need for financial advice. Local authorities are facing huge changes in responsibilities and they’ll become a major source of client leads for this business opportunity. As the market potential starts to ramp up, it’s worth spending some time to familiarise yourself with the funding options available and also the new products coming to the market.
PRESENTER: And in practical terms what are some of the things that advisers can do to get help and support in this market?
JAN HOLT: So advisers definitely aren’t on their own in this, there are lots and lots of people who have support available to help them get a deeper insight into the care market and of course the needs of clients in that market and how they can help satisfy those needs. So I’d suggest advisers look out for support from specialist providers like ourselves, and they also look at some of the trade organisations who are really looking to support advisers who want to be proactively developing their specialism in the later life market.
PRESENTER: Now we focussed a lot on the Care Act, but there are obviously a lot of other things going on in the long-term care market, what are some of the key things that advisers need to keep an eye on?
JAN HOLT: Well of course alongside care reform we have significant pension reform on its way, coming into effect from April 2015. So for those advisers who are operating in the at-retirement market then there is significant change ahead. So they’ll need to be considering, once the final rules are known, they’ll need to be considering how this will impact their advice processes and what alternative or additional options are going to be made available to their clients as we move into 2015, so really important to keep a very close eye on that. And it’s for that reason that I think our next two Akademia films are going to focus in on some of the key areas in terms of retirement income planning.
PRESENTER: Jan Holt, thank you very much.
JAN HOLT: Thank you.
PRESENTER: In order to consider the viewing of this video as structured CPD, you must complete the reflective statement to demonstrate what you’ve learned and its relevance to you. Among the learning outcomes covered by this session are: understanding the dynamics of a long-term care market and the factors that are driving growth; describing the key elements of the Care Act 2014, in particular the financial aspects relating to care funding; outlining the main funding options for long-term care; identifying the opportunities in the later life advice market; and evaluating how to provide a later life service to adviser clients. Please now complete the reflective statement to validate your CPD.