Social care reform: lifetime cap on costs may only partially protect assets

The costs of care in old age can be scarily high and difficult to plan for, particularly if it becomes necessary to move into a care home. It’s estimated that while a quarter of older people might escape the need for care altogether, one in seven could incur costs of more than £100,000.

A proposed lifetime cap, announced as part of the recently announced UK government’s social care reform plan, would theoretically ease the burden for many families. But it may not be the cure-all it seems.

The average cost of a place in a residential care home in England is around £35,400 a year, but in London and south-east England, fees can easily top £65,000.

Under current rules in England, a care home resident has to meet these costs out of their income and assets until their remaining assets drop to £23,250 at which point means-tested help from the state would kick in. This can virtually wipe out the financial assets that people have built up during their lifetime. It can also result in people having to sell their homes, unless a partner or other specified dependant will continue living there (in which case the home is excluded from assets for the purpose of the means test).

The proposed lifetime cap of £86,000 is designed to “protect individuals and families against unpredictable and potentially catastrophic care costs”, in the government’s words.

It is a welcome move to provide some protection against this social care lottery – although funding it through an increase in national insurance is contentious. It will finally bring into effect the recommendations of the 2011 Dilnot commission to create such a cap. These recommendations were legislated for in England in the Care Act 2014 but not implemented.

However, the government will need to carefully manage public expectations because the lifetime cap does not necessarily mean that financial assets will be protected or that people needing care will not have to sell their home, as suggested. The details of how the cap will work are yet to be announced and may deviate from the Care Act 2014. Even so, many people moving into a care home may still have to pay thousands of pounds out of their own assets for two main reasons.

First, under current rules which are expected to continue, individual local authorities set the maximum amount that they will pay towards such fees. These amounts are notoriously low, with care homes charging self-funding residents around 40% more to subsidise local authority-funded residents. It is these local authority rates that are likely to be the basis of what counts towards the lifetime cap.

If a person cannot find a suitable care home with costs equal to the local authority contribution, or chooses a more expensive option, the extra amount paid will not count towards the cap. We await to see whether the extra funding for social care announced in the reform will result in local authorities paying a more economically viable rate to care homes.

Costs not covered

The second reason is that the cap will not cover the daily living costs component of care home fees, such as food and accommodation. There is little transparency over what these costs are, and so they have to be estimated.

Everyone needs to meet these costs wherever they live, putting care home residents on an equal footing with people who receive care in their own homes. Care homes typically do not break down their bills into care and residential components, so the residential part may be considerably more than a person living in their own home would spend.

The Care Act 2014 tackles this issue by saying that the government will set a standard amount for daily living costs. Crucial, then, is what that deemed amount turns out to be. As that 2014 policy was being debated, the government proposed setting deemed residential costs at £12,000 a year, at that time about double the basic state pension.

So how might this work in practice? Let’s look at an example. Jo, who does not qualify for means-tested help with care costs, moves into a residential care home, paying £35,400 a year. The maximum the local authority would pay is only £29,500. Moreover, from this amount, deemed daily living costs of £12,000 would be deducted. This means the care costs that will count towards the lifetime cap are just £17,500 a year (£29,500 - £12,000).

The remaining £17,900 (£35,400 - £17,500) is outside the cap. If the total cost of £35,400 were included, Jo would have reached the lifetime cap of £86,000 in less than three years. But with just £17,500 a year counting towards the cap, it instead takes nearly five years before the cap is reached and the state takes over paying any of Jo’s care costs.

Alongside the new proposals, Health Secretary Sajid Javid has suggested that the deemed residential costs should be affordable out of the state pension, though this seems debatable. For people who reached state pension age before April 6 2016, the full basic state pension is just over £7,100 a year, though they might also get some secondary state pension. For those reaching state pension age on or after that date, the full new state pension is just over £9,300 a year.

Anyone whose income is lower than the residential cost limit will have to dip into their assets to make good on the shortfall, unless their income and assets are sufficiently low to qualify them for means-tested help with care costs. As is the case under current rules, those who do not own a home and just have financial assets are particularly vulnerable to seeing the bulk of those assets wiped out.

So while it is true that the lifetime cap (together with more generous means-testing limits) will slow the pace at which assets are used, it does not guarantee that assets beyond £86,000 will be preserved. The government needs to be careful not to over-promise what the changes will deliver.

Jonquil Lowe does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.