What the government’s social care reforms mean for you
Earlier this week Boris Johnson announced the government’s social care reform strategy, after pressure to do more to help the elderly and those unable to care for themselves.
The government’s new plan will see the introduction of a 1.25% ‘health and social care levy’. For those entering care after October 2023, in theory the most they should pay is £86,000 and the government will pay the rest.
The levy will be funded through an increase in National Insurance contributions and dividend tax, meaning this is a policy that’s as divisive as it is drastic.
On the one hand, those who don’t want to sell their homes or raid their life savings to pay for their care can now pass more money down to their loved ones. On the other hand, many working people are frustrated by the increase in taxes. People entering the care system with little over £86,000 will still have to spend most of their money.
How will National Insurance contributions change?
Here’s a breakdown of how much National Insurance you might pay now versus how much you’ll pay after the increase in April 2022:
£10,000 salary: £52 paid now; £57 with 1.25% increase - £5 extra each year
£20,000 salary: £1,252 paid now, £1,382 with 1.25% increase - £130 extra each year
£30,000 salary: £2,452 paid now; £2,707 with 1.25% increase - £255 extra each year
£40,000 salary: £3,652 paid now; £4,032 with 1.25% increase - £380 extra each year
£50,000 salary: £4,852 paid now; £5,357 with 1.25% increase - £505 extra each year
If you’re employed and your company offers a salary sacrifice scheme, you can reduce the amount of National Insurance you pay by putting more money into your pension instead. However, this does mean your take-home pay will be lower. Have a chat with us and we’ll help you work out whether this is the right move for you.
Does this make it easier to prepare for the future?
For many people, there’s no way to know whether you’ll need care in future and how long you’ll need it for. This has made it hard for financial planners to determine exactly how much should be set aside for this purpose.
We’ve long had to do a ‘finger in the air’ calculation. For example, we know that people spend three years in a care home on average. Care home costs can vary but let’s imagine you choose one which costs £30,000 a year. This would mean you’d need £90,000 or perhaps £120,000 to be on the safe side.
Of course, it would cost more if you were there even longer.
We once had a client whose mum went into care and sold her house worth over £400,000. The client walked away with what was left: just £16,000 of inheritance.
Another client’s dad went into care at the age of 60 and lived there for 25 years. As you can probably imagine, being in care for this long can eat into the wealth you’ve worked hard to build throughout your working life.
Are there any costs after the £86,000 has been paid?
Although there’s an £86,000 cap on ‘care costs’ thanks to the levy, the BBC warns that residents may still face bills for food, energy and even accommodation after the cap is reached. You might also need to save more if you want to live in a nicer care home. So, while the new levy gives us slightly more direction and makes it easier to predict than before, nothing is certain.
With the help of a financial planner, you could incorporate your care costs into your plan for the future. The amount you’ll need to set aside will vary depending on your circumstances and the right financial products for you, but someone who saved £143 a month and received a 5% return could potentially have £86,000 stashed away within 25 years.*
However, it’s worth noting that as part of Boris Johnson’s announcement, he said that the government will work with the financial services industry to try and introduce a system where people can insure themselves to cover the £86,000. It’s unclear how this will work so we’ll keep our eyes peeled and update you when we know more.
If this is the first time you’re thinking about care costs, adding this to your list of financial priorities might be frustrating. But if setting this money aside means you can pass your home or other valuable possessions down to your loved ones, planning ahead will give you one less thing to worry about.
*This is for illustrative purposes only. When you invest, your capital is at risk and you may come away with less than you invested.