by Andrew Dines
Director & Chartered Financial Planner
The government recently announced drastic social care reforms which will result in the amount people in England pay for their own care being capped at £86,000.
Any care costs over this figure will be covered by a new ‘health and social care levy’ which will be funded by an increase in National Insurance contributions and dividend tax.
The new cap will apply to anyone entering care after October 2023. The changes could save people tens of thousands of pounds and result in a rise in the amount loved ones inherit.
But is the new levy as straightforward as it seems? Are there any hidden charges to consider? The changes are likely to affect how we plan for social care, which makes financial planning so important. Here we take a look at the questions our clients have posed regarding the matter. We hope it helps.
How much will National Insurance increase?
In April 2022, National Insurance contributions will increase by 1.25%. Here’s a breakdown of what this might look like for you:
- £10,000 salary will pay £5 extra each year - £52 now versus £57 in future
- £20,000 salary will pay £130 more each year - £1,252 now versus £1,382 in future
- £30,000 salary will pay £255 more each year - £2,452 now versus £2,707 in future
- £40,000 salary will pay an extra £380 each year - £3,652 now versus £4,032 in future
- £50,000 salary will pay an extra £505 each year - £4,852 paid now versus £5,357 in future
Short term pain for long term gain?
The changes have received a mixed response from the public. Some people are happy with the levy because they’ll no longer have to sell their homes or deplete their life savings to pay for their care.
Instead, they can now pass the family home down to loved ones. For these people, changes to their National Insurance contributions may seem like a small price to pay for more wealth in future. It may be a case of short-term pain for long-term gain.
Others have criticised the decision to fund the levy this way, as those who are already struggling financially will now see their take home pay fall a little further.
On top of this, anyone with less than £86,000 who needs care will still need to spend all their savings. Even those with slightly more than this figure may be disappointed at how little they have left, despite contributing towards the levy.
How does it differ across the UK?
The new health and social care levy will apply across the whole of the UK and the money raised will be distributed between each country.
However, at present, the £86,000 cap will only apply to England and it’s not yet clear how funding will be managed in Scotland, Wales and Northern Ireland.
Are there other costs to consider?
Determining exactly how much you need to set aside for care costs can be challenging. After all, it’s hard to predict 10, 20 or 30 years in advance just what level of care we’ll need. For example, the cost of a retirement home can be much higher than the cost of hiring a carer to visit in your own home.
It’s worth noting that although the levy will cover the cost of care, many people will still have other expenses they’ll need to cover themselves. For example, you may need to use your own savings to pay for accommodation, food and bills even if you move into a retirement home.
Another factor to consider is how life expectancy differs for care home residents compared to those of the same age who live more independently. ONS data shows that male and female care home residents across all age groups have a shorter life expectancy than non-care home residents.
For example, male care home residents aged 65-69 are expected to live 6.5 years and female care home residents are expected to live 7.5 years. Meanwhile, male non-care home residents in this age group have 19.7 more years on average, and female non-care home residents have 22.8 more years. In older age groups, the gap still exists but isn’t quite as wide.
What’s the best way to prepare for this?
Planning for later life care is something people rarely think about until they’re reaching retirement. Some people have already been retired for several years before they admit to themselves that they might one day need to pay for support.
Yet the sooner we all start planning for end-of-life care, the better. It’s one of those decisions that our future selves will thank us for.
There are plenty of proactive and empowering things we can do to ensure we’re well looked after while also leaving a legacy for loved ones to remember us by.
For example, smart savings and investments can make a world of difference to the amount we retire with. With the help of compound interest, our investments can do the heavy lifting while we focus on our work or personal lives.
We also need to create a will and select a Power of Attorney to intervene and manage our affairs if we’re unable to do so ourselves.
As the social care reforms show, saving for retirement itself isn’t enough. There’s more to estate planning than saving money into a pension, although this is certainly an important component.
It’s also necessary to think about those last few years. How much might we need to fund our care and how much do we want to leave behind for loved ones? You can’t take it with you, but you can use it to make life easier for those you care about.