This is part five of a series on how you can plan and pay for social care costs in later life.
Part one explores why your social care needs probably won’t be funded by the state.
Part two decloaks the social care funding means test. How does it treat your assets and what’s excluded?
Part three identifies the key social care thresholds. These tipping points decide your funding fate.
Part four unpicks how to estimate social care costs using available data.
This post is a case study showing how my retirement plan copes when one of us goes into a care home. I hope the thought process proves useful to anyone facing these choices, or who wants to stress-test their own finances.
Oour previous post explained how to estimate a ballpark number for your social care costs. With that number in hand, you can test your expected retirement finances.
Can your plan withstand the shock of you – and/or a loved one – needing long-term care?
I’ve tested my own finances as an example. The exercise gives me hope we’d survive, should we need to. But not in the way I expected.
Social care cost case study: my assumptions
For my stress test I’ll model the financial shock of me going into a care home. Meanwhile Mrs Accumulator will hold the fort in our real home.
Let’s assume I’m 85 when I go in. My chance of needing residential care increases drastically at that age.
- The average life expectancy for an 85-year-old male care home resident is three years.
I’ll model what happens over six years because:
- The average life expectancy for female residents is currently four years. Modelling extra years will be useful for female readers.
- There’s a chance I could hang around annoying people for longer anyway.
Care home cost inflation is 5% a year.
I’ll use today’s figures for my expected retirement income, care home costs, and the social care system. These are the best proxy I’ve got for what could happen later in life.
However, I’ll use the new social care thresholds and cap proposed for England from October 2023. I live in England and I have to assume this shake-up will be closer to the truth than the current bands.
The UK average self-funded care home cost is around £40,780 per year. That’s according to the process we examined in our article on estimating the cost of care.
Reminder: this guesstimate is for someone who does not qualify for state funding.
For simplicity’s sake, I won’t customise that figure by my region for this case study.
I won’t look at the worst-case cost scenario, either. (Think £68,694 for dementia care in a south-west of England nursing home. I’ll model that one on a dark and stormy night when I truly want to scare myself.)
The social care financial assessment
The means test assesses financial resources held in my name, plus 50% of anything held in joint accounts.
Because Mrs TA needs a place to live, our home is not on the line in this scenario. It’s not sucked into the means test so long as she stays there.
The means test classifies my resources as income and capital.
In the crazy, budget-necrotising world of social care, those terms don’t refer to the standard definitions of income and capital.
- Learn how this applies to you in part two: how social care funding works.
State support is wiped out if I have too much income or too much capital.
Let’s look at my social care scoreboard.
This is made of two components in my case.
- £300,000 defined contribution pension – my half of The Accumulator household’s pot.
We’ll soon see that local authorities aren’t much interested in the 4% rule. They can claim my income is far higher.
- £9,628 a year full State Pension.2 Hopefully the State Pension is still a thing when I’m 85.
That’s it. That concludes the voting from the income side of my finances.
My net income is therefore £19,816.
- £100,000 in stocks and shares ISAs. This is from the 25% tax-free lump sum (I will have) carved from my SIPP.
I intend this pot to deliver £4,000 a year in tax-free income. But it becomes a liability when viewed through the lens of social care funding. I’ll explain why below.
Our only other capital asset is the house. But that’s disregarded from the means test, because Mrs TA wants a roof over her head. (Get her!)
If Mrs TA goes into residential care too or passes away, then the house is fair game.
Capital over £100,000 immediately rules out state support in England from October 2023. Currently the social care thresholds are meaner in England. They are different again in the other home nations.
Capital under £20,000 theoretically rules in state support. But that’s only after most of my income is deducted from the care home cost. We’ll come back to this.
Between those thresholds you’re in the netherworld. You might be eligible for some funding. But it’s fast whittled away by every chunk of your capital in this grey zone.
I have £80,000 in the threshold sandwich.
That doesn’t bode well for my chances of getting support.
Means test says “no”
Because I’m not ruled out for state support on capital grounds, the system shifts to rule me out on income grounds.
The cost of my care home is £40,780 if I have to fund it myself.
But the maximum funding available is £29,128. That’s the cost the local authority would pay for the same care – due to its superior buying power.
The system doesn’t care that self-funders pay a 40% higher premium on average than do local authorities.
If my means-tested income is over £29,128 then I’m footing the entire bill.3
- My actual income is £23,816, including my ISA withdrawal rate.
- But my means-tested income can be assessed as £56,489.
[Rubs eyes in disbelief]
Surely there’s been some kind of mistake?
My means-tested income has been inflated by two mechanisms:
- The tariff income penalty levied on my £80,000 ISA capital caught between the social care threshold jaws.
- Lifetime annuity rates that can be used to assess my pension income, instead of my chosen drawdown.
Open market annuity quotes indicate the income for an 85-year old can be assessed at a much higher level than would be generated by my sustainable withdrawal rate.
Income payable towards care home fees: a quick aside
Regardless of your capital situation, your income above £1,295 a year goes towards your care home fees.
The sliver you keep is known as the Personal Expenses Allowance (PEA).
- If your means-tested income minus the PEA4 is less than the local authority’s care home cost, then the council will make up the difference.
- Should your means-tested income be higher than the local authority cost (plus the PEA) then you’ll pay the whole bill.
- If your actual income is less than your social care costs then it’s all consumed bar the £1,295 allowance.
The care cap could eventually come to your rescue in England. However even that’s a long shot. See below.
Tariff income calculation
Between the social care thresholds, every £250 of capital (or part thereof) adds £1 per to your means-tested income figure.
My tariff income works out like this:
£100,000 (ISAs) – £20,000 (lower threshold) = £80,000.
£80,000 / £250 = £320 per week tariff income added to my means-tested income.
That’s £16,640 in year one (as opposed to £4,000 ISA income I’d expect to withdraw).
£16,640 tariff income added to my net income of £19,816 catapults me far beyond the boundary for support.
That boundary is £29,128 (local authority care home price) plus £1,295 (Personal Expenses Allowance).
Because I’m now classified as a self-funder, my care home bill will actually be £40,780.
I don’t have the income to pay those social care costs. So I’ll end up running down my ISA assets to square the circle.
Still, once I’m below £20,000 in capital, tariff income ceases to be a problem. (That shouldn’t take long at those prices.)
The thornier issue is how my defined contribution pension is valued by the local authority…
Lifetime annuity income calculation
Social care guidance allows local authorities to calculate your pension pot income as:
the maximum income that would be available if the person had taken out an annuity.
This applies once you reach State Pension Age. The local authority can get an annuity estimate from the Government Actuary’s Department or your pension provider.
To see how that plays out, I checked the annuity rates. Reminder: I’m an 85-year-old male with a pension pot of £300,000. I used the Money Helper annuity comparison tool.
The tool comparison flashed up an income of £38,860 for a level annuity with no protection whatsoever.5
In other words, the income wouldn’t rise with inflation. Worse, if I popped my clogs the day after signing up, the annuity provider would bank every penny from my pension pot. Mrs TA wouldn’t get a thing.
That looks like a bad bet for a guy with a life expectancy of three years.
Add the £38,860 annuity to £16,640 tariff income and my means-tested income soars to £56,489.
I have no chance of state support until I tailor my finances to the means test.
Is there a better alternative?
If you can’t beat them, join them. At age 85 an annuity probably will provide a better income than my prudent withdrawal rate rules.
I just need to buy one that takes care of Mrs TA, too.
Annuity protections that provide for partners, the kids, and other beneficiaries mean I won’t match that £38,860 quote.
That’s fine because:
- If I buy an annuity then the local authority must count that as my income.
- They can’t cook up some shady max income that I don’t actually have.
Sacrificing annuity income for partner protection looks like a good trade-off when my life expectancy is foreshortened.
I can secure a £22,346 income from an escalating annuity bought with my £300,000 pension pot.
The income rises with RPI-inflation – handy if I linger – and will pay the same escalating amount to Mrs TA if I don’t.6
Inflation-protection, partner protection, a far higher income versus drawdown – the much-maligned annuity has a lot going for it once you reach a certain age.
Value protection options also enable you to rig your annuity to pay out a lump sum to your family to sugar the pill of your passing. That limits the threat of the annuity company snaffling all your capital should you prematurely push up daisies.
There’s also an immediate needs annuity. This is designed specifically for paying long-term social care costs. The main advantage is your income is tax-free: if it goes straight to a registered care provider.
I haven’t researched these products yet. They may well be better for value for money than the annuities I looked at.
(Monevator contributor Planalyst tells me that a financial adviser would normally recommend an immediate needs or deferred care annuity to deal with social care ahead of other annuity types.)
It’d be worth thinking about annuitising the ISA assets, too.
Beware of Catch-22s
There are other SNAFUs to investigate such as:
- Raising income slightly, only to lose benefits and worsen your overall position.
- Blundering into a solution that has an unexpected tax sting.
Financial barbed wire like this is hard to untangle.
Paying your social care costs is one of those times it’s probably wisest to seek expert financial advice on your situation.
Other options worth considering include partial annuitisation, or drawing down my pot at an accelerated rate.
So where does that leave us?
The case study must go on! So let’s assume I go into the care home having bought an escalating annuity.
By purchasing the correct protections, Mrs TA and I are better off. And we eliminate one of the means-tested income problems.
The other problem is tariff income. That solves itself by year five. See this fun snapshot of my care home years:
- Self-funded care home costs rise by 5% annually.
- Local authority care home costs, Daily Living Costs, State Pension, and Personal Expenses Allowance all rise by 3% annually.
- Social care cap, social care thresholds, and Personal Allowance – no annual inflation rise.
- RPI-linked escalating annuity – 3.5% annual rise.
- My life expectancy is three years. But I’ve modelled six years because I hit the social care cap towards the tail of year five. Who would want to miss that?
Here’s a link to my social care costs spreadsheet. Try running your own numbers.
The edited highlights
My ISA capital is obliterated by my self-funder costs in years one and two.
Capital falls from £100,000 to £20,000 by year three. The proceeds of this pay my care home fees for the first two years.
Tariff income is out of the equation from year three. I qualify for around £2,440 of state support from then on.
I’d aim to keep my ISAs as close to £20,000 as possible. Capital below that lower threshold isn’t captured by the means test. Anything above weighs me down with tariff income at a penal rate.
My actual income isn’t enough to pay for the care home in any year. Hence I drain the ISAs early on. I rely on some state support after that.
From year three, I’m no longer a self-funder. I pay the local authority’s care home price thereafter. That price – minus my assessed income – is the level of state funding I get, until the social care cap is reached.
My assessed income is my net income minus the Personal Expenses Allowance – once I’m no longer dogged by tariff income.
That leaves me with £1,373 income to spare in year three, plus a dribble of ISA income. That’ll all be gobbled up by hidden charges, top-ups, Mrs TA’s gin problem and so on.
Off-stage, the switch from self-funder to state-funded status could be a problem if the local authority and my chosen care home can’t do a deal.7
The local authority doesn’t have to pay my care home’s price. It can offer me an alternative home it declares is more suitable and cost-effective.
I’d be welcome to stay where I am if I could afford it. As I couldn’t from year three, I’d be at the mercy of the local authority’s decision.
What happens to my income?
Yet another grey area is what happens to the income I’m not spending on care homes (years one and two) because I’m burning my ISA capital on the fees instead?
I assume I can ship it to Mrs TA to pay the bills back at base without being accused of deprivation of assets. (That’s social care system speak for: ‘you’re diddling us’.)
Perhaps then Mrs TA could use some of that income to grow her ISAs?
I don’t think I’d be depriving the local authority of capital or income. My capital is paying fees and my income will be the same next year.
But I’m no expert. I’d really want specialist advice before making any such move.
My spare income could also pay for top-up care. I might go for this if the local authority and I disagree on my needs. I suspect I have a higher opinion of myself than the council does.
One thing that I should not do is stick the extra cash in a bank account. It’d only get counted as capital at the next assessment.
Hitting the social care cap
The social care cap cavalry arrives towards the end of year five.8
It’s sobering to remember my last year on this Earth is projected to be year three, according to the life expectancy data.
And also that government headlines imply your care costs are state-supported once you hit the magic £86,000 mark.
My social care costs will reach about £175,000 before the cap puts a leaky lid on it.9
If this same level of ‘protection’ applied to birth control, I’d be a father of five by now.
Progress to the care cap is delayed by all the exclusions. Namely: the self-funder premium, Daily Living Costs, state funded payments, and top-up fees.
My state-funding shoots up in year six once the cap closes. I go from £2,545 to £21,711 in support.
I’m only responsible for the Daily Living Costs once I’ve hit the cap. I can almost cover that with my State Pension.
Hitting the cap leaves me with more disposable income – £20,619 instead of £1,457.
We’ll put it towards a new exo-skeleton for Mrs TA. Hopefully that’ll keep her out of the care home.
If the house comes into play then our capital shoots sky high. We’ll pay full self-funder fees from its value until we reach the cap.
In that case, we’d need to check the merits of a deferred payment agreement versus commercial equity release versus selling it.
Those we leave behind
My main concern is that Mrs TA has enough to live on while I’m living it large in the care home.
Simply put, an individual can’t live as cheaply as two.
The Retirement Living Standards research suggests that a person living on their own needs 68% as much as a couple. As opposed to 50% as much.
The Retirement Living Standards’ £30,600 ‘moderate’ band is a good proxy for our standard of living. A single person needs £21,000 a year to maintain that heady lifestyle.
Assuming Mrs TA’s income* mirrors mine, it stacks up like this:
- £12,000 @ 4% withdrawal rate from £300,000 pension pot.
- £4,000 @ 4% withdrawal rate from £100,000 stocks and shares ISA.
- £9,628 full State Pension.
- £23,816 total after tax.
Mrs TA scrapes over the £21,000 line, thanks to her State Pension.
To cover her without that headroom, we’d be looking at equity release or annuitisation.
That wouldn’t be such a hard decision for us because we don’t have kids. There’s no need to live like poor church mice at such a grand old age.
++*Monevator minefield warning ++ In a futile effort to streamline this case study, I glossed over an important reality. The bulk of The Accumulators’ joint pot is in my name. You can assign 50% of your pension income to your spouse or civil partner so it doesn’t count towards your means test. But you’d need to do that when you were still healthy, and a sub-50% share isn’t disregarded from the test. So how does that work if your pot is less than 50% bigger? And your partner needs, say, 40% of your income to pay the bills? I guess you could fork over 50% anyway, and make it work together to establish a prior pattern of spending before the forensic accountants inspect your bank statements. But who organises their finances like this? Unmarried couples must also watch out. As usual, they don’t benefit from the same financial protections.
Stress test passed
The good news is that our retirement finances can deal with the social care costs racked up in this case study. Assuming my starting assumptions are accurate.
I’m heartened by that. Because we’re hardly operating at the luxury end of the market.
Of course I haven’t modelled every nightmare scenario. Nor even the more likely one – needing care in the home.
Perhaps that can be my new hobby.
The short version: higher costs simply burn up my ISA faster, and increase state support thereafter as my income is swamped by higher fees.
If the house is mean-tested then its value saves the state stepping in until I hit the cap.
The main benefit of greater resources is paying for a higher standard of care than the basic state package.
A high income can also be used to protect your capital assets (such as the house) from being chewed up by fees. Once the cap is hit then your house is safe.
Anyone who triggers a high proportion of state support from the outset will take much longer to hit the cap. Because state funding does not count towards your cap target, you could be left subsisting on the miserly Personal Expenses Allowance for years and years.
If your income is too low to meet the Daily Living Costs then they could consume your home’s value. Those costs are never capped.
Better plan for care
The standout takeaway for me is the system’s eye-gouging complexity. This is not something anyone should have to cope with while in failing health.
So long as social care remains in this patchwork state, I think it’s worth planning ahead of time.
My dream scenario is that we agree this is no way to carry on as a society. The cost of long-term social care is the UK’s worst lottery. None of us know if we’ll be left holding a losing ticket.
A risk of catastrophic outcomes for a minority is best handled collectively. Hopefully we’ll agree to create a proper safety net. One that protects everyone from a bad roll of the social care dice.
Next post: Planalyst runs her rule over various financial products that can help pay for social care.
Take it steady,
Bonus appendix: social care funding – the diagram
This flowchart graphically simplifies the complexities of the social care system. It will help you follow this series:
- The reality is a little more nuanced. But I’m simplifying a few aspects in a vain attempt to stop this case study imploding. Blame the byzantine absurdity of the social care system. [↩]
- 2022-23 figure. [↩]
- After deducting the Personal Expenses Allowance from my income. [↩]
- The PEA is slightly more generous outside England and is called the Minimal Income Amount in Wales. [↩]
- The annuity was a single guaranteed income product. [↩]
- It’s a joint income annuity that pays 100%. [↩]
- It’s possible I could qualify for local authority rates before year three. This is a North Sea sized grey area. I’ve assumed I remain a self-funder in years one and two to keep things less murderous than they already are. [↩]
- For sanity’s sake I haven’t modelled the exact moment I hit the £86,000 social care cap. [↩]
- If I assume the social care cap rises at an inflation rate of 3% I won’t hit it until some point in year six. Your outgoings before the cap is ‘officially’ reached are worse if you self-fund for longer, for example because you have more in capital. [↩]