The new social care cap explained

What are the implications for you?

Many UK governments have wrestled with what to do about the social care system, shying away from meaningful reform. This has meant that individuals continue to live with the prospect of costly care fees, one day, eating into their wealth in old age. In worst cases, this can lead to some people needing to sell their home, and can erode an intended inheritance to almost nothing.

Recently, Boris Johnson’s Government has announced a new “social care cap” which, theoretically, will prevent residents in England from ever paying more than £86,000 on social care in their lifetime. Yet the reforms have not arrived without criticism.

Many are asking how the cap will be funded, whether it will work and what the implications are for financial planning.

Funding the new cap

It’s no secret that the Government will be introducing a 1.25% rise in NICs (National Insurance Contributions) for employees, employers and the self-employed from April 2022. From the next tax year, this will no longer be taken from National Insurance. Rather, it will appear as a distinct levy on payslips - called the Health and Social Care Levy. For someone earning £10,400 a year, the additional annual payment is likely to be £130. A £100,000 annual salary, however, is likely to pay an extra £1,250.

How much money the new levy will raise is, of course, uncertain. The Government estimates that it will generate about £12bn extra per year. However, total spending on health and social care in England is approximately £235bn per annum, with much of this funded from sources outside of “ring fenced” taxes. The tax raised from the levy is unlikely to affect how much the government spends on these areas, overall.

Why saving £86,000 may not be enough

Under the current rules, you need to pay for your own social care if you have over £23,250 in savings. If you are under this amount, then the council should help cover your costs - although the exact amount they will pay varies, and they will need to conduct a “needs assessment” to determine which services you need (e.g. equipment such as a zimmer frame).

They will also do a means test (a financial assessment) to decide whether the council pays for all of your care, if you need to contribute or if you need to cover all of your costs. Bear in mind that you are not allowed to deliberately reduce your savings or possessions to fall under the £23,250 threshold, which is regarded as “deprivation of assets” and is likely to lead the council to calculate your fees as if you still owned the assets.

Care costs are not cheap. In England, they can range from £531-955 per week depending on the quality of care, the service you need and where you are in the country. Given that people who enter a residential home do so, on average, for 30 months, it is easy to see how the costs can rack up to £82,000 - or more. This may be part of the reason why the Government has set the new “social care cap” at £86,000, so that most people still end up largely funding their own care and the policy does not place too great a strain on the treasury.

The cap and your financial plan

In light of the above, it starts to become clear why most people will still need to account for the possible future cost of social care in their financial plan - irrespective of the new cap. The good news is, the policy could help preserve some of your estate if you end up in residential care for longer than 30 months. For young people with disabilities facing decades of care, moreover, the policy is also likely to be good news.

However, it is yet to be announced whether the cap covers non-care related costs such as food and accommodation (which could amount to £7,000-£10,000 per year). The policy is also likely to mostly benefit more affluent people in richer areas of England, where the average cost of care is £92,000.

One other question that remains unanswered is how the cap may affect the care home market, and people’s behaviour. After all, if someone is diagnosed with an illness that is likely to result in them needing permanent residential care, would they not simply apply for the best, most costly home available - since the state will ultimately end up footing a lot of the bill? Would behaviour like this lead care homes to put up their prices higher, leading to higher costs for people needing short stays? It is not yet clear how the UK government will regulate this.

This leads us to suggest that each individual strongly considers how to make their own plans to cover possible care costs in old age.

For some people the reality may be that, should they ever need care, it would mean selling the house and forsaking most of the inheritance they hope to leave their loved ones. However, by planning ahead early, it is possible to build up your wealth so that you can still leave a meaningful inheritance should you need to spend, say, £86,000 or more on your care. A financial adviser can help you examine the options and craft a plan which brings your financial goals together.