Welcome to part two of our series on how to plan and pay for long-term social care in later life. 

Part one covered why most people will pay some, or all, of their care fees. We also explained why England’s new social care cap doesn’t stop steep bills. 

Today we’ll see how the social care means test applies to your assets.

The first step to getting help with social care funding is to ask your local authority1 for a care needs assessment.2 This determines your eligible care needs.

Your local authority is obligated to fund, at least partially, your eligible care needs – if you qualify for financial help.

That’s a big if.

Notice I’ve highlighted the word ‘eligible’. Why? Because any social care funding you do receive only goes towards care that your local authority deems necessary.

What if you or a loved one needs help with washing, or dressing, or preparing meals, but your local authority doesn’t agree? Then that care must be self-funded, organised some other way, or done without.

Paying for ineligible care doesn’t count towards your social care cap either.

The gap between genuine needs and official provision explains why some are forced to choose between large bills or being unsupported.

The social care means test

No matter how healthy your finances look today, the risk of being sucked into a financial black hole later in life makes it worth knowing how the system works.

Most long-term social care services are means-tested.

The means test is officially known as a financial assessment. It’s undertaken by your local authority. The test should follow your care assessment if you got an ‘eligible needs’ verdict.

Your financial resources are divided into capital and income for the purpose of the means test.

(Note that social care defines those terms quite differently from their common meanings.)

To gain social care funding, your capital and income totals must both fall below certain thresholds.

Some assets don’t necessarily count towards the means test. Your home is likely to be your most important asset that’s sometimes excluded.

The rest of this post explains which assets count as capital, which as income, and when they’re excluded. (Or disregarded in the jargon.)

In part three we’ll explain how your capital and income determine your funding fate, when pitted against the social care thresholds.

So what does capital and income actually mean in the convoluted world of social care?

Social care funding: capital

Your means-tested capital includes:

• Cash stored in bank or building society accounts, ISAs, and National Savings Certificates
• Investments in stocks and shares ISAs and general investment accounts. (i.e. not in pensions)
• Property – your home is exempt in certain scenarios. (See the home section below)
• Premium Bonds
• Trusts – sometimes exempt, sometimes not – seek advice
• Business assets
• Land

Pensions rarely count as capital except for a few exceptions. We’ll cover those in the pensions section below.

Debts secured against an asset are deducted from its value. Ten per cent is docked from an asset’s value if selling it incurs significant fees. 

Disregarded capital

‘Disregarded’ capital is not included in the financial assessment. Capital not counted includes:

• The value of your main or only home if:

(1) Your partner or a dependent family member lives there. (Your live-in carer may also count). 

(2) You need care at home, not residential care.

• Personal possessions
• The surrender value of life insurance policies
• Investment bonds with a life assurance element (as bought from life insurance companies). A local authority may count these assets if they believe you bought them to avoid care fees
• Personal injury payments held in trust or administered by a court
• Trust money – depending on how the vehicle is structured

Social care funding: income

Your means-tested income includes:

• Private / workplace pensions (exceptions below)
• State pension
• Annuities
• Employed / self-employed income (in Northern Ireland and Scotland)
• Rental income
• Investment bond withdrawals
• Trust income
• Most benefits (some exceptions)

Your income should be calculated after tax.

Disregarded income

Some income is disregarded completely, some only partially:

• Earnings from employment or self-employment (England and Wales only)
• Pensions in some cases – see pensions section
• Interest from savings (where this is assessed as capital instead)
• Disability Living Allowance or Personal Independence Payment mobility components (but not care or daily living components)
• Attendance Allowance
• Pension Credit Savings Credit
• Income in kind (i.e. payments other than in money)
• Winter fuel payments
• War Pension Scheme payments except Constant Attendance Allowance
• State Pension Christmas Bonus
• Personal injury trust payments
• Child Tax Credit, Child Benefit, or Guardian’s Allowance
• War widow’s and widower’s special payments

Capital and income notes

Your assets should be classified as capital or income but not both. For example, money moved from your pension into an ISA will typically be treated as capital instead of income. It shouldn’t be double-counted.

Your local authority must assess you as an individual. Resources that belong solely to you don’t count towards your partner or spouse’s means test.

Joint assets like bank accounts or property are split 50/50 unless you can show evidence of an unequal share.

The shared finances of unmarried couples are treated differently. (Usually worse than their legally bound counterparts.)

Deprivation of assets

If the local authority thinks you’ve arranged your financial affairs to deliberately avoid care fees, it can invoke the deprivation of assets rules.

That enables it to count assets you’ve transferred to someone else, or otherwise disposed of, as if you still own them. 

Such assets are known as notional capital and notional income. Those figures are added to your running capital and income totals. 

Your local authority can’t just assume you’re fiddling the books. It must show that avoiding care fees was a significant factor in your decision to dispose of the assets under investigation. 

There is no time limit preventing past disposals being viewed as ‘deprivation of assets’, however. For example the Inheritance Tax gifting rules do not apply. 

But a ‘deprivation of assets’ claim can’t stand if you were healthy at the time of disposal and couldn’t have foreseen a need for care. 

Timing and previous patterns of gifting count as evidence. 

• Spending savings on a once-in-a-lifetime cruise shortly before your means test wouldn’t look good. 
• Neither would converting assets into a display case of antiques that you claim as personal possessions. 
• Nor treating the family to new cars, or a house ‘sold’ at a fraction of its real value. 

Local authorities can seek debt recovery from you and even third-party beneficiaries of your assets (e.g. family members). They can do this if they believe you’ve underpaid care fees in a case of deliberate deprivation. 

You can challenge a deprivation of assets decision via your local authority’s complaints procedure. 

You must be allowed to submit evidence to substantiate your version of events. 

Finally, even failing to claim State benefits can count as deprivation of assets. 

Check your benefits eligibility using this tool from Age UK. 

When does your home count towards the social care means test?

Your home only counts towards the social care means test if you or your partner require permanent residential care. Even then, your home is disregarded if it’s occupied by any of the following:

• You
• Your partner / spouse
• A family member who is over age 60 or is incapacitated
• A child you’re responsible for

The definitions of family member, occupied, and incapacitated are precise. But they’re also quite wide-ranging, including grandchildren, step-, adoptive- and in-law relationships.

The family member concerned must have been living in the property before you went into residential care.

It’s also possible for a local authority to disregard your home if your long-term carer gave up their home to look after you. Your carer needn’t be related.

If you and your partner both go into residential care then your home is means-tested. This could entail losing existing funding because your property is no longer disregarded.

Ownership

The value of the house is automatically split 50/50 where you and your partner own it as joint tenants. (Joint owners with a survivorship clause in Scotland).

You can divide ownership in any proportion as tenants in common. (Joint owners in Scotland).

Some solicitors tout a tenancy in common as a method of reducing care home fees.

For example, one partner’s share could be put into a trust controlled by their children. When that partner dies, legal ownership passes to the children. Meanwhile the trust apparently protects the right of the surviving partner to continue living in their own home.

If the surviving partner later goes into residential care, then only their share of the home should count towards fees. That’s assuming everything works as advertised.

A brief look into this arrangement suggests it’s fraught with risk for the surviving partner when their interest conflicts with the children. It could also fall foul of the deprivation of assets rules.

Valuation

If your property is included in the means test then it’s assessed at its present market value:

• Minus any mortgage or other loan secured upon it. This can have consequences for equity release.
• Minus 10% of the value to cover selling expenses.

Precise valuation isn’t necessary if you and the local authority agree your home’s value pushes you comfortably over the upper social care threshold.

Once the property is sold, your situation is assessed based on the actual proceeds you have left.

Equity release

Equity release schemes reduce the amount your home contributes to your means-tested capital. But note this only comes into play when your property is no longer disregarded.

Meanwhile, equity release can lead to complications such as:

• Adversely affecting your social care funding because the payouts increase your capital (lump sums) or income (regular payments).
• Reducing your means-tested benefits.
• Blocking your ability to pay for residential care via a deferred payment agreement (see below).
• Penalising you for moving home, or living with a new partner.

Equity release schemes trigger the sale of the home when the last of the joint-applicants moves into residential care. That makes these schemes ill-suited to funding residential care.

Downsizing is a simpler form of equity release.

Note your share of the released capital becomes eligible for means-testing if your partner downsizes while you’re in residential care.

The 12-week property disregard

The local authority should disregard your home from your financial assessment for the first 12-weeks after you permanently move into residential care. This applies if the remainder of your capital falls below the upper threshold.

This disregard means the local authority is liable for more of your care home fees until you can sell your property, or agree a deferred payment agreement.

In Scotland, the 12-week property disregard is more flexible. It can apply regardless of thresholds, and also to temporary care home stays. 

Deferred payment agreement

A deferred payment agreement protects you from being forced to sell your house in your lifetime to pay for permanent residential care. 

This option enables you to defer care home fees when:

• Your house is means-tested
• You can’t or don’t want to sell it
• There are limited other means at your disposal to pay the fees
• You can’t pay all your fees from your income
• The remainder of your capital (not including your share of the home) falls below these thresholds:

– England and Northern Ireland: £23,250

– Scotland: £18,000

– Wales: £50,000

Signing up for a deferred payment agreement effectively means your local authority loans you the money to pay residential care fees. Your home acts as security for the loan.

The loan is repaid when you sell your home, pay some other way, or you pay out of your estate after death.

You can rent out your property and use the money to pay some of your fees or loan. Some councils may even supply tenants.

Your local authority can charge administration costs and interest on your loan.

Check that any existing loans secured on your home – such as mortgage or equity release – don’t preclude a deferred payment agreement.

Why not just sell your home instead and use the proceeds to pay your fees, then invest or save the rest?

Apart from tax implications, a deferred payment agreement lets you benefit if your home rises in value. Of course, that bet can go the other way too.

Local authorities must also consider requests to use deferred payment agreements to top-up your care.

In other words, it can be used for ineligible needs that aren’t covered by your official care plan.

Your local authority uses your available house equity to decide if your request is sustainable over time.

You can also request a deferred payment agreement if your other capital assets are slightly over the threshold and not easily accessible.

Pension exceptions

Private and workplace pensions are normally classified as income. However, pensions can count as capital, or be disregarded altogether.

Firstly, 50% of your private/workplace pension or retirement annuity is disregarded if:

• You need residential care
• The money is paid to a spouse or civil partner
• They do not live in the same care home

This disregard doesn’t apply if you share less than 50% of your pension income. It can also affect your partner’s means-tested benefits.

Investments left untouched in a defined contribution pension pot are disregarded if you’re below State Pension Age. This does not count as deprivation of assets.

If you take your pension as a regular income then it counts as… wait for it… income. Defined benefit pensions and annuities are treated the same way.

But pension amounts taken as an occasional lump sum should be classified according to the product the assets land in.

Likely depots such as bank accounts, stocks and shares ISAs, and property all count as capital.

Note: it’s not crystal clear when an occasional pension lump sum counts as capital and when it counts as income. It could be treated either way but it can’t be treated as both. The defining factor is regularity. Therefore monthly withdrawals can be assumed to fall in the income camp. 

Drawing on your pension

Once you reach State Pension Age, the local authority can treat you as taking your private pension – whether or not you actually do so.

If you don’t take a pension income then the local authority can estimate a notional income as if you bought a lifetime annuity with your pot.

This annuity income estimate can come from your pension provider or the Government Actuary’s Department.

Your local authority can also count the annuity rate if they decide you’re drawing down too slowly.

In this case, they must disregard your actual pension income to avoid double counting.

An annuity estimate could well imply a higher income than you actually drawdown using a prudent withdrawal rate. This would penalise you for conserving your portfolio. We’ll dig into this later in the series. 

If you drawdown faster than the annuity rate then they’ll just use your actual pension income.

Mean test

Once the local authority calculates your total capital and income the next step is to see if you qualify for social care funding. Here the relevant thresholds and minimum income allowances come into play.

Those are not easy tests to pass but the idiosyncrasies of the system can throw up surprising results. We’ll cover that in part 3 on social care thresholds. 

Take it steady,

The Accumulator

1. Contact your Health and Social Care Trust in Northern Ireland. [↩]
2. Contact the adult social services department. [↩]

The war in Ukraine is not yet a week old. By some accounts the invasion has already taken longer than Russia expected. And been bloodier. Other commentators see a grim escalation ahead.

Most of the developed world – though notably not yet China – has moved to ostracize Russia morally, physically, and financially.

There’s been a step-up in military supplies to Ukraine.

But it’s the economic sanctions that are most extraordinary.

The unfortunate Russian people seem to get caught up in all the big developments in warfare.

Russia lost the first modern industrial war, against the Japanese in 1904-05. The revolution of 1917 included arguably the first war for global public opinion. Russian casualties were astronomical in the first two ‘total’ World Wars. (The Soviet Union’s pivotal role in defeating Hitler cost the bloc at least 27 million lives.)

Russia was a linchpin belligerent in the Cold War, obviously.

And as others have explained, Putin has been waging a new kind of information war against the West, with strikes aimed at everything from the US presidential elections to the Brexit referendum.

Battlefield status report

Now Russia finds itself on the other side of a ‘hot’ economic war. The barrage of sanctions and prohibitions applied in the past week is unprecedented. They’ve culminated in cutting several Russian banks from the Swift system that facilitates international payments.

The aim seems to be to turn Russia into a North Korea or an Iran, should it refuse to ceasefire. An unbelievable potential fate for (what was) the eleventh largest economy in the world.

Pity the everyday Russians. Their country might have become a kleptocracy where opposition leaders were jailed, poisoned, or shot. But at least they could shop and go on holiday.

Not for much longer.

This being a financial blog, let’s consider some dramatic scenes from this economic war.

Collapse of the Russian ruble

Putin’s regime derived popular legitimacy for tackling the economic chaos of the 1990s that culminated in Russia’s currency collapsing in 1998.

The following graph must therefore make grim and portentous viewing in the Kremlin:

Source: CNN

Bank runs in Moscow and elsewhere

With their currency in free-fall and their banks under immense duress, Russians have been trying to get their money out of their accounts and into something that might hold its value. This has the makings of a bank run.

5am and the run on ATMs begins in Russia https://t.co/uYqADASMrI

— Olga Lautman 🇺🇦 (@OlgaNYC1211) February 27, 2022

No wonder. Older Russians well remember going hungry in previous bouts of chaos.

Such scenes indicate the sanctions having their intended affect. But could financial chaos for everyday people harden support for Putin, just as the Blitz bolstered Britain’s resolve in World War 2?

Interest rate jumps to 20%

The Russian central bank isn’t looking for any strategic bright side. To support the ruble and to try to keep money in accounts – and the country – its key interest rate has been more than doubled to 20%, from 9.5%.

And we were cheering UK savings accounts paying out better than 1% again.

Domestic firms have also been ordered to sell 80% of their dollar assets held overseas in an attempt to circumvent US, EU, and other country’s new restrictions on Russian central bank action.

Collapsing asset values

The result of this economic shock and awe has already been devastating for Russian assets.

To give just one example, here’s what’s happened to Sberbank of Russia, sometimes cited as Eastern Europe’s largest financial institution:

Invading Ukraine has initiated Russia’s own bespoke version of the financial crisis of 2008 and 2009. No wonder the likes of hedge fund veteran Bill Ackman says Russian banks cannot be trusted to hold at this point.

A few Russian assets have been popular with UK private investors over the years. One is Raven Russia, an operator of Russian warehouses. Raven’s preference shares were seen by some as attractive for their high dividend yield.

Holders of Raven Russia have sat through plenty of dramas in the past. As this latest invasion unfolded, some bulletin board posters saw another opportunity to load up.

Unfortunately for them, it looks like this game of Russian roulette may have finally played out:

Even those of us who don’t believe we have direct exposure to Russia will be hit by the fallout from Russia’s turmoil.

For example, BP and Shell – major components of the UK stock market – are going to have to take writedowns to get out of Russia.

It’s also possible restricting Russian money could hit the high-end London property market. That might hurt listed developers like Berkeley Group, although it’s thought Russians are responsible for only a small share of sales.1

Luckily for passive investors, exposure to Russia in emerging market funds has already dwindled to about 4%, according to data provider Lipper.

Bitcoin panic buying

Russian citizens face financial ruin, at least relative to their global peers. Perhaps that’s why the price of Bitcoin just leapt more than 10% in 24 hours:

Cryptocurrencies are notoriously and unpredictably jumpy. But this move is mostly being pinned on younger Russians trying to turn their money into something that can’t be frozen by the State or devalued by sanctions – and that perhaps can be taken out of the country.

It may also be due to people buying and donating cryptocurrency to the Ukranian army.

Ukraine has also asked for crypto exchanges to freeze Russians’ accounts. The big exchanges are reluctant, for commercial and legal reasons – and also because it goes against the grain of crypto.

The ‘flippening’ of the Russian ruble

It’s hardly apples-to-oranges, but for the record Bitcoin’s price surge and the collapse in the Russian ruble makes the market cap of Bitcoin ($815bn as I write) greater than the Russian currency’s money supply of 63 trillion rubles (just over $630bn right now).

Crypto-pundits call this a ‘flippening’. The upstart Bitcoin has ‘flipped’ Russia’s national currency. (The ruble has actually been flipped before, back at Bitcoin’s previous all-time high.)

This doesn’t mean really anything. There are US tech companies with a bigger market cap than Bitcoin, let alone the Russian money supply.

But it does illustrate again the sudden stress in the Russian financial system.

Hyper-inflation looms

At this point the Russian state may already be running out of long-term options. True, Russia is still able to export energy. Paradoxically this is sold for hard currencies like the US Dollar and Euro – even as the West also shuts off Swift to try to crush Russia’s finances.

Energy is by far the most important Russian export. Europe, the US, and the UK buy around $270bn in Russian goods and services in a typical year. Energy predominates.

For as long as Russian fossil fuel can be swapped for hard currency, Russia might limp on. I’m no macro-economic expert but one wonders for how long though, before Russia’s central bank must start printing money to pay the State’s obligations?

Russians have endured several periods of high inflation over the past 40 years. If foreign reserves dwindle and access to fresh euros, dollars and other hard assets worsens further, hyper-inflation may loom.

For a country so reliant on imports for much of the stuff of modern life, this could be catastrophic.

China may well be the lifeline here. That sets up the unedifying prospect of a bipolar world and a new Cold War.

Economic warfare hits home

I don’t say this to offend anyone, but I can’t help feeling a little sorry for ordinary Russians going about their business in the face of all this mayhem.

Obviously it completely pales besides the fate of Ukrainians seeing their apartment blocks reduced to rubble, their friends and family killed, and autocratic repression on the horizon.

But when I think back to the financial crisis of 15 years ago, I do not underestimate the fear of seeing your life-savings going down the pan.

Even in the West, the average person has very little say over major events. For instance many of us bewailed how Brexit crushed the pound and curbed our options to live and work abroad – despite us being personally against the whole folly. We marched and moaned, but ultimately we had to lump it.

Well, the West’s economic warfare waged against Russia make such privations look like a cut in a kid’s pocket money.

And this is on a people who truly have very little voice – where opposition is chopped down to size whenever it rises much above the level of a babushka bewailing the price of bread.

Again, compared to what Ukraine is enduring that’s trivial. We can debate Western policy missteps at the margin, but ultimately the Russian state has brought this misery on its people.

Still as someone who has spent my adult life pursuing financial freedom, I can’t imagine the gut punch of seeing your country’s economy implode.

Let’s hope for all our sake this war ends soon.

p.s. The image above is by 19th Century Russian realist Konstantin Savitsky.

1. The use of offshore holding companies and the like makes it hard to be sure. [↩]

What average pension growth rate should you use when trying to achieve your retirement goals? A comfortable retirement depends on not being too optimistic about what your pension funds can deliver.

Unrealistic assumptions can put your plans in peril. You can see this by experimenting with different pension growth rates in a retirement calculator.

An over-optimistic pension projection

Growth rate 9% per year over 35 years.
Projected retirement income = £27,000 p.a.

A historically realistic pension projection

Growth rate 7% per year over 35 years.
Projected retirement income = £14,000 p.a.

A low growth pension projection

Growth rate 5% per year over 35 years.
Projected retirement income = £7,000 p.a.

As you can see, changing the annual average pension growth rate leads to massive differences in final incomes.

The worst mistake you can make is to base your retirement plans on an unrealistic growth rate. If your pension fund returns fall short then you won’t have put enough away to meet your income needs.

What’s a realistic average pension fund growth rate?

Sadly, short of being mates with Dr Who, there is no way of knowing your future returns.

We can speculate about what might happen.

• Years of dystopian low growth as the world deglobalises?
• Or a golden age of AI-generated miracles powered by hydrogen and the blockchain?

Pick your forecast!

A more practical method is to use long-term historical returns. With over one hundred years of data to call upon, historical returns are a reasonable  gauge of market behaviour through thick and thin.

This approach doesn’t tell us what will happen – it offers us no guarantees whatsoever – but it does inform our pension planning with a more realistic baseline.

Using historical returns

The longest-term, average annualised return you can get is the number to use.

• The UK equity average annualised return1 is 5.4% from 1900-2021.
• Global equity annualised returns are around 5.3% over the same period.
• Those numbers are real returns – meaning they strip out inflation.
• Most retirement calculators assume nominal returns. They expect growth rates to include an inflation estimate.
• So you could add an average inflation expectation of 3% to the real returns above.
• That gives you an 8.3% global equities growth rate for your retirement calculator.
• However, it’s important to use asset return numbers that reflect your actual portfolio composition.
• And few investors can stomach 100% equities as they get older. Our risk tolerance tends to decline with age.
• UK government bonds have delivered an average annualised real-return of 1.8% from 1900-2021.
• That means a more typical 60/40 portfolio (60% equities / 40% bonds) has historically achieved around 4% after inflation.
• So 7% (4% real return + 3% inflation) is a reasonable average pension growth rate based on historical returns.

Are there any alternatives?

Yes, one approach is to use expected returns. They’re typically based on current market valuations.

The equations that underlie expected returns adjust for influential factors like whether the market is considered to be over- or under-valued.

These predictive models aren’t necessarily more accurate than using historic returns. But they’re a very useful second opinion. Especially when markets are thought to be over-valued – as they are now.

Many commentators forecast that high valuations mean we can expect future returns to be lower than in the past.

This FCA report sets out the case for lower annual real returns over the next 15 years.

It assumes 4.5% for equities and -0.5% for government bonds.

You can also construct your own, up-to-date, expected returns for every asset class in your portfolio. This post on the Gordon Equation shows you how.

Remember: the higher your rate of return, the greater the risk that the markets will fail to deliver. Err on the side of caution.

Asset allocation and likely returns

You can influence your average pension growth rate by changing your asset allocation.

Devoting a higher percentage of your portfolio to a diversified range of equities will increase your prospects for higher growth.

This move increases risk.

The less risk you can tolerate, the more you need to dampen down your portfolio’s volatility with government bonds. But increasing the amount of bonds in your portfolio lowers your prospects for growth over time.

This trade-off is the nub of investing.

Ultimately, whatever average pension growth rate you choose, the reality will probably prove quite different. Prepare to adapt over time by adjusting your plan’s key components.

And be sure to consider all the other aspects of retirement planning to put yourself in the best possible position.

Take it steady,

The Accumulator

1. Returns are total returns which assume you reinvest dividends and interest. [↩]