A big blank on the personal finance map is paying for long-term social care. By that I mean how we’ll fund care for ourselves and loved ones if we need support to cope with serious physical and mental deterioration in later life.

• Think the threat is thwarted by the UK’s new Health and Social Care Levy? It’s not.

• Maybe you think it’s taken care of by the NHS? It’s not.

• You might think: “That’s a bridge I’ll cross when I come to it.”

Yeah, that last one was my approach.

I stuck my worries in a box labelled: Too complicated. Too scary. Too far away.

Then I buried it in the psychological sand.

It could be you

Avoidance is not a strategy, however – especially in the UK.

Increasing need, rising costs, squeezed budgets, and political prevarication means that in Britain the expense of long-term social care falls disproportionately on those unlucky individuals who require the most help.

• How will we pay for our care if the worst happens? Sell the house? Is there an alternative?

• How do we hedge against the chance that we may not need long-term care? I don’t want to save huge sums for something that never happens.

• What State-funded support is actually available?

• Are there smart ways to deal with means tests when we’re assessed for support?

The answers are out there. And now that I’ve looked inside the box, I think long-term social care can and should be planned for.

At the very least, it seems less scary than when it lurked like a death star on the fringes of my mental and financial map.

Strap in for a bumpy ride

The UK’s patchwork of social care funding options makes for a big topic.

In this post, I’ll explain why you’re likely to pick up the bulk of the tab – regardless of those headline-grabbing social care caps.

In later posts we’ll cover:

• How does social care means-testing work? Which assets are included and excluded?

• What care is not means-tested?

• Can we devise a rule-of-thumb figure for social care to plug the black hole in our financial plans?

• How do you pay for social care? What are the options – with an emphasis on those that avoid selling the house from under anyone you care about?

Social care funding thresholds

The social care funding thresholds help illustrate why you’ll probably pay for some or all of your care:

Your financial assets are means-tested when you seek local authority support1 for your care.

If your assets are valued:

Above the upper threshold – You pay for your care. You’re a self-funder in the jargon. At least until your assets are so depleted that you fall under the threshold.

Separately you may be entitled to limited support via the NHS. But don’t count on it.

• Scotland and Northern Ireland make personal care services universally available. These aren’t means-tested. You may well need to pay for other home care services, though.

Between the thresholds – You’re eligible for some local authority financial help but also need to contribute from your own assets and income. I’ll deal with the impact of that formula later in the series.

(Between the thresholds doesn’t apply in Wales.)

Below the lower threshold – You qualify for more funding but it’s not unconditional. You’re still liable to pay from your income (which includes benefits and the State Pension) above yet another minimum threshold.

Which brings me to the salient point about social care funding.

Nothing is as it seems.

• Being eligible for care doesn’t mean it will be funded.

• Funding from your local authority doesn’t mean all your social care bills will be paid.

• Even if you qualify for financial assistance, there can and likely will be a gap between the care the State will pay for and the care you want.

A maze, hidden in a labyrinth, inside a jungle

Navigating the social care system is like dealing with a second tax code.

Even terms like ‘personal care’ in the table above refer to a defined set of services that don’t encompass everything you may need.

You also have to be assessed as needing specific types of care to stand a chance of receiving a service for free. That’s trickier than it sounds.

Whether your home falls into the means-tested mix depends on other conditions. We’ll explore those later in the series.

The thresholds also have a habit of not moving with inflation. The upper threshold for England hasn’t shifted since 2010/11.

Meanwhile, the real (after-inflation) cost of care in the home has risen by 10.6% since 2015/16 and care home places by 12% over the same period, according to healthcare charity The King’s Fund.

Unlucky for some

The anti-bonus ball in all this is a postcode lottery effect. This sees outcomes vary widely by local authority and region.

Personal funding shortfalls in England can be exacerbated by the North / South divide, for example.

Local authorities in the North tend to pay lower rates for services than those in the South.

Moved south to be closer to family after entering the system? That could make it more difficult to cover social care expenses.

Multiply all this complexity by different systems in each of the home nations and you have a throbbing headache.

No wonder most of us hope the problem just goes away.

The next section illustrates why the new social care cap in England is no wave of a magic wand. While less relevant to readers living in the other home nations, it does reveal some of the traps to be wary of throughout the UK.

The social care cap – why it doesn’t fix the problem

England’s new social care cap comes with more strings than a puppet show.

The centrepiece is an £86,000 lifetime cap on social care costs.

Once your spending hits the cap, the local authority is meant to take over paying for your care. This is a universal benefit. No means-testing required.

But the devil is in the detail and he’s up to no-good.

In reality there’s a range of care expenditures that don’t count towards your cap.

Your spending can shoot far beyond £86,000, yet your metered tally shows you falling short. This forces you to keep spending because you haven’t ‘officially’ reached the cap.

Even if you do hit the cap, the expenditure exclusions can leave with you bills to pay after your local authority steps in.

The impression that your social care expenditure is capped at £86,000 is ‘technically’ the case in the same sense that attending office parties during a pandemic is ‘technically within guidelines’ – if you ignore the real world.

Let’s walk through the main loopholes. (Because they’re that big.)

Daily Living Costs (DLCs)

Firstly, £10,400 per year of care home fees don’t count towards the social care cap. The idea is that an individual remains responsible for their food, board, and utility bills, before and after they’ve hit the cap.

DLCs put a flat rate figure of £200 per week on this responsibility.

Local authority care discounts

Imagine you need to go into a care home. It costs you £700 per week because you don’t qualify for financial support i.e. you’re a self-funder.

But the same care, in the same home, costs your local authority £500 per week – because they negotiate a better deal for residents they’re obligated to support.

Guess which figure counts towards your social care cap?

Did you guess the lower £500 per week – despite the fact the care you’re getting actually costs you 40% more?

Oh, you complete and utter cynic.

Yeah, you’re absolutely right.

But you’re not quite cynical enough! Because you must also deduct the £200 per week from those DLCs.

In this example, only £300 per week counts towards your cap. Your total spending won’t reach the cap for five and a half years.

Care home fees paid by self-funders are 41% higher, on average, than costs paid by local authorities for places in the same care homes. That’s according to figures quoted by The King’s Fund.

Qualify for any State support before you hit the social care cap? That money doesn’t contribute towards your £86,000 total, either.

Only money that you contribute from your own pocket counts. Minus the premium you pay as a self-funder. Minus payments for services your local authority deems unnecessary.

Care needs assessment gaps

Only spending on your eligible care needs counts towards your social care cap.

Only eligible needs will be funded by your local authority once you hit your cap.

Your eligible needs are determined by a care needs assessment. And who runs that? Local authorities.

These are the same local authorities that suffered a 55% cut in government funding between 2010/11 and 2019/20, according to The Kings Fund.

The BBC reports that half of requests for help are turned down.

Budget pressures are one reason why your local authority may think you need less care than you do.

Pay as you go

As a self-funder you can of course pay for all the care you can afford.

After you hit the cap, you can keep paying for care beyond your eligible needs using top-ups. If you have the money.

The bigger the gap between your needs and what’s deemed eligible, the more you’ll pay out-of-pocket.

For example, you may want to pay for additional care services in your home. Or perhaps for more hours of help with cooking meals than your local authority deems necessary.

In a care home, you may want a bigger room with more facilities than the council will stump up for. You may also be charged for extras – anything not covered by your official resident’s care plan.

You may start self-funding a care home place but become eligible for support later. That can leave a funding gap if your local authority will only pay for a cheaper home but you want to stay put.

Or you may wish to move closer to loved ones – who live in a more expensive part of the country – after your needs were assessed in a cheaper region. You’d have to pay the difference if the council refuses to increase your funding.

There are still more exemptions, but you get the point.

The cap doesn’t fit

The reality is you can rack up large social care bills that don’t trigger the cap.

Even if you do qualify for financial support, there can be a gulf between what you need and what the State will pay for.

And I haven’t even covered the inequities of the social care formula that penalise homeowners in areas with low property prices.

This Is Money has an excellent piece on that. It includes a damning verdict from Andrew Dilnot, who chaired an independent commission on social care from 2010 to 2011.

The bottom line is that if your house is your only spare asset, then selling it to fund long-term social care remains a live threat.

The good news is that there’s little chance you or a significant other will end up homeless. There are plenty of deferred payment and equity release options available. We’ll look at those in a later post.

But in part two of the series, I’ll cover how your assets are assessed in the social care means test.

Take it steady,

The Accumulator

1. Health and Social Care Trust in Northern Ireland [↩]

What caught my eye this week.

Very interesting news this week from Belgium is not a phrase that has grown stale from overuse.

But as the world gropes towards a better post-pandemic work-life balance I read:

…workers in Belgium will soon be able to choose a four-day week under a series of labour market reforms announced on Tuesday.

The reform package agreed by the country’s multi-party coalition government will also give workers the right to turn off work devices and ignore work-related messages after hours without fear of reprisal.

“We have experienced two difficult years. With this agreement, we set a beacon for an economy that is more innovative, sustainable and digital. The aim is to be able to make people and businesses stronger,” Belgian prime minister Alexander de Croo told a press conference.

Ten years ago you sought financial independence to get out of a stifling office culture. It was about finding a better balance between making ends meet and the freedom to control what you did and when.

But now everything from hybrid working to four-day week trials to more calls for a universal basic income shows the system may be adapting, too.

Capitalism co-opts and exploits – one big reason it’s so successful. What was rebellious in the 1960s was mainstream youth culture by the 1990s, for example.

4% for all

While it’s hardly a serious prospect, some have wondered: what would happen to economic growth if FIRE1 went mainstream?

They’ve even couched the less productive population that might result as morally irresponsible.

But while it’s an equally unlikely prospect, I wonder: what would happen if it was the other way around, and the mainstream went FIRE?

Could more of us end up – whisper it – happy at work?

[continue reading…]

1. Financial Independence Retire Early. [↩]

And you thought the pandemic kept you up at night. A wave of high inflation is engulfing the UK economy, with January’s 5.5% CPI inflation measure the highest for 30 years.

Few will sleep easily as the cost of living soars.

It’s enough to send you back into social isolation to avoid paying higher prices:

Of course, an irony of high inflation is it can make it rational to spend now rather than battening down the hatches and saving for the future:

• If the prices of furniture or cars are going up so quickly, can you afford to put off a purchase?

• If the real terms spending power of your cash in the bank is getting eroded faster than a prince’s credibility, why save?

These are questions we haven’t had to think about for years.

At Monevator we believe you should still try to live within your means and pay yourself first. Investing in a range of assets is the best way to protect yourself against inflation in the long run.

But that’s not to downplay things – nor to forget that poorer households have few real assets and little option but to suck up higher prices on daily essentials, or go without.

Moreover in the UK things are nailed-on to get worse before they get better.

Energy bills will soon spike with the 54% increase in the regulatory price cap in April.

And while an imminent National Insurance increase won’t itself feed into inflation (and may even dampen spending) it all adds to the squeeze on our spending power.

Two factors behind high inflation

There’s a big debate as to why inflation is so high after decades mostly in the doldrums.

I skimped on it in my earlier quantitative tightening post, in the interests of time and space. (Yours and that article’s, not Albert Einstein’s…)

But let’s now get into it.

Beyond causing you to wince every time you reach the supermarket tills, high inflation is roiling the bond and stock markets.

Traders have scrambled to anticipate how and when Central Banks will raise rates in response.

This is hardly a no-brainer. Central Banks must try to choke off high inflation without strangling the post-Covid recovery.

And how they can best achieve that depends on what exactly is causing prices to rise so quickly.

There are two main theories:

• One side sees a supply shock. The pandemic plunged us in and out of lockdowns. Our shopping habits changed more than a five-year-old’s wishlist to Santa. Factories and distributors couldn’t cope. The result? Surges and gluts that have screwed the price of everything, from oil and lumber to used cars and gym equipment.

• The other side says it’s all about demand. Consumers have too much money. Their wallets were bloated by overly-generous government aid to offset Covid. Savings were fattened by all that time we were Zoom-ing in our undies instead of going out spending. Very low rates (and booming stock markets) have given everyone too much financial firepower.

For what it’s worth I’m mostly in the supply shock camp. (Though I must admit it’s getting lonelier.)

I expected huge disruptions from lockdowns, so I was not surprised by them. Listening to firms reporting their earnings, I’ve been hearing about problems up and down the supply chain. But these will be solved. And I see no reason why secular deflationary forces have gone away, longer-term.

To give just one illustration, the online furniture retailer Made saw its key Vietnamese suppliers shutdown when Covid overwhelmed that country last year. Made is now carrying tens of millions of pounds worth of deferred revenue on its books – and it’s a sure bet some would-be Made customers went elsewhere. Yet rivals faced the same issue. And some of their customers went to Made.

The net result is whatever stock retailers did have in could command a higher price. Especially as it has become very expensive to ship in replacement goods from Asia, with container rates increasing by as much as 800% last year. Discounting was reduced. Sales grew, but margins were crimped by higher costs.

This to me is all indicative of a supply kerfuffle.

Admittedly, some select companies are boasting of straight-up sky-high demand.

Disney is one. US customers seem willing to hurl money at the House of Mouse after two years cooped up with their kids. On a recent earnings call, its execs all but boasted of their ability to charge higher prices at Disney’s theme parks.

So I do see both forces at work.

In addition, demand shock advocates also note how the US government sent out money in the mail. They see a housing boom in the US, the UK, and elsewhere. They point to meme stock and crypto bubbles in the midst of the pandemic as indications of money to burn.

And then they wonder what us supply-siders are smoking?

Unusually abundant money has probably thrown fuel on the fire. But I’m not convinced it’s the cause of high inflation.

For one thing, the widely-fingered form of fiscal Covid support deployed in the US – universal stimulus cheques – wasn’t really done so much in Europe. But we’ve still got the high inflation.

As for easy money, near-zero interest rates didn’t cause high inflation before Covid – nor in Japan for many years before that.

So why now?

And the key forces that kept price rises low before Covid haven’t gone away either.

To return to my Made example, that company will continue to source from numerous global suppliers and undercut slower legacy businesses like John Lewis. Brexit has introduced more friction into UK trade, but it hasn’t turned off globalization.

Similarly, Made’s technology platform should continue to drive higher sales from a relatively smaller base of staff and premises than older firms can achieve. Some of this efficiency will be passed on to consumers as lower prices.

These wider trends (and others) have helped keep lid on inflation for decades. They are beyond the authorities’ control.

Why does it matter what’s causing high inflation?

If high inflation is mainly due too much money sloshing around – from interest rates kept too low for too long or from government super-spending – then rate rises are just the thing we need.

By raising interest rates, central bankers make it more expensive to borrow and more appealing to save. This pours cold water on the animal spirits of companies and households, taking some heat out of the economy.

Expansion looks riskier, so less of it happens. Interest charges on debt go up, meaning less money to spend on everything from factories (companies) to stuff (consumers).

But what if high inflation is mostly a supply chain issue, as I suspect?

In that case raising rates might not be so helpful.

Sure, rate rises will slow the economy, and reduce demand for what money can buy. That will mean less pressure on stretched supply chains, and less scope for companies to jack-up prices.

However higher interest rates don’t magically make supply chain problems go away. In fact they could inhibit some solutions – expansion at ports, say, or hiring more workers.

Thus raising rates could slow the economy without curbing inflation, at least for a while.

Which raises the spectre of stagflation – a stagnant economy in a death pact with high inflation.

Again we haven’t seen that for more than 40 years. And as 1970s revivals go, you’d rather get a mullet.

Higher wages could embed high inflation

Regardless of what caused this high inflation, the key issue will be whether central bankers can head off a wage spiral.

If workers expect prices to keep rising and are able to demand higher salaries, they will spend their extra earnings bidding up prices even more.

This is the stuff of nightmares for central bankers. I suspect it’s why the Fed is talking tougher than economic conditions really warrant. (I believe US growth will probably slow quite quickly from here).

The governor of the Bank of England got a kicking earlier this month for urging wage restraint. But we should understand where he’s coming from.

I’d be all for fat cat wages rising slowly and everyday workers’ earnings rising more quickly – in real terms – in a sustainable way over several decades.

But wages that quickly spiral to chase ever-escalating prices are no good to anyone. Again see the 1970s.

You can’t blame workers for wanting more money. High inflation means that even with eye-catching nominal wage rises, real (after-inflation) wages are falling:

Source: FT

The trouble is once wages go up they seldom go down. They are ‘sticky’, in the jargon.

Don’t believe me?

Imagine Apple cut the cost of iPhones by 20%.

That’d just be a Black Friday sale.

But what if Apple chopped salaries by the same amount?

It’d surely make global headlines.

Take a look at this graph from the Office for National Statistics:

Source: ONS

As you can see, worker incomes have grown at a positive – albeit slowing – clip for, well, ever.

Individual firms might go through retrenchments that give them more bargaining power with staff for a time. And there can be shenanigans at the margin (e.g. more part-time staff or fewer better-paid staff and more contractors). But salaries in aggregate go up and stay up, adding to the cost base and fueling higher prices, as companies try to maintain their margins.

People become accustomed to a certain lifestyle and they are loathe to give it up. If employers try to cut their wages, they’ll try find another job.

Very low unemployment makes that much easier.

Curb your enthusiasm

Twitter abounds with armchair economists screaming that central bankers should raise interest rates yesterday – as if the mandarins at the Bank of England and the US Federal Reserve haven’t noticed that inflation is running at twice their target rate.

These bankers know high inflation could well prove a blip – provided wages remain restrained.

Besides supply bottlenecks getting sorted out, there are technical reasons to expect inflation to calm down. Prices can leap, but provided they stop leaping they stop contributing to inflation. An oil price approaching $100 a barrel will continue to be painful, for instance, but it won’t keep boosting inflation year-over-year unless it goes above $100 and beyond.

Bankers also know that hiking rates will take a while to have any impact. We might only know they’ve raised them too much when the impact is felt alongside a slowing economy.

Finally, the cure for high prices is always high prices. Capitalism sorts out inflation by finding new sources of supply or by promoting substitute goods for profit, which curbs further price rises.

Many people will tell you it’s obvious how this will play out. They will point to current market forecasts of inflation expectations and rates, which imply this high inflation is transient and that interest rates will indeed rise for a bit, but should then will start falling in a few years.

I think that’s likely, but I don’t think it’s a slam-dunk.

Market forecasts always look highly rational at the time. But those curves weren’t predicting today’s inflation at 5.5% – nor markedly higher interest rates – a couple of years ago.

Far from it.

Great expectations

How this all shakes out is anyway highly relevant to us, both as consumers and as investors.

High inflation can increase the correlation of shares and bonds in the near-term. It’s bad for both, as they fall until they find a new level appropriate to the more inflationary environment.

That would leave the safety cushion element of a typical 60/40 portfolio looking rather deflated.

Longer-term, shares can benefit (high inflation can boost sales and profits, if only in nominal terms, bringing down those frothy valuations) but it won’t be such a smooth ride.

As always we everyday investors probably shouldn’t be making heroic bets in an attempt to outwit the multi-trillion dollar markets.

As I’ll discuss in my next post, a diversified portfolio is more not less important at times like these.

We may be in a new regime for inflation and rates, compared to the past 30 years.

But I see it as more as the equivalent of a new government than of a radical overnight coup.