Dilnot cap in hand

It’s been 18 months since the Report of the Commission on Funding of Care and Support’ (the Dilnot report) recommended a radical overhaul of social care funding. Many considered the system, whereby an individual with assets over the means-testing threshold of £23,250 had to pay in full for their care and accommodation costs while in a residential care home, unfair. It resulted in about 40,000 homes being sold each year to fund care costs.

In a 2012 survey, 25 per cent of voters listed the issue of funding elderly care as one of their top three concerns, after the NHS and the economy. Older voters are also more likely to vote: in the 2010 election, 76 per cent of over-65s voted compared with 44 per cent in the 18 to 44 age bracket. These factors combine to make the care fees funding issue a hot political issue.

In the January 2013 mid-term review, the government pledged to introduce a universal deferred payment scheme for care costs, so that no one would need to sell their home during their lifetime to fund their care costs. This led to speculation in the media that a cap of £75,000 has been agreed. This is more than double the figure recommended by the Dilnot report. Neil Duncan-Jordan of the National Pensioners Convention described a cap of £75,000 as “too high, mean and cynical”. Indeed, the Dilnot report said that a cap outside the suggested range of £25,000 to £50,000 would not meet the criteria of fairness and sustainability.

New cap

So how will the £75,000 cap work in practice? The Dilnot report gives the example of ‘John’, a single older man who enters residential care towards the end of his life. John had a stroke at 85. He could no longer manage at home and entered a care home that cost £28,500 a year. He lived in the care home for four years before he died. Before this, he lived on his own, in a house which he owned outright and was worth £140,000. He had £220 a week income from his own pension and the state pension. His care costs were assessed at £17,500 ?per annum.

Under the now old system, the value of John’s property meant that he was not eligible for state funding. He had to contribute all his income (except for £23.50 a week) towards care fees and make up the shortfall from the value of his home, under a deferred payment agreement with the local authority. He paid the full cost of the care home from his own resources, spending about £74,000 from the value of his house.

Under the Dilnot proposals with a cap of £35,000, John would reach the cap after two years, following which his care costs would be funded by the state without any charge to John. He would continue to contribute £10,000 per year towards his general living costs, but his personal and state pensions would fund this. He could use the value of his home to pay the £35,000, taking out a deferred payment from the local authority. John would be left with £105,000, three-quarters of his wealth, to pass on to the beneficiaries of his estate.

With the cap now set at £75,000, the outcome for John (and the beneficiaries of his estate) is very different: assuming that the higher means-testing threshold is set at £100,000 (as recommended in the Dilnot report), John’s assets are reduced to below £100,000 after just over two years, following which he will be eligible for some state funding towards his care costs. He will then contribute “tariff income” towards his care costs, but by the time of his death he will still not have reached the £75,000 cap. By my calculations, it would take four years eight months for John to reach the £75,000 cap. Most care home residents will not survive for this length of time, therefore it seems that for those with modest assets, such as John, the new system will not bring significant benefits (see graph).

The main beneficiaries of the new system would be those with higher asset values and greater assessed needs, who would reach the care cap before their assets were reduced to below £100,000. Given that a care home resident still has to pay their own general living expenses of between £7,000 and £10,000 per year, and the care cap only covers the amount which the local authority would pay for the assessed level of care; the total amount that a resident has to pay before reaching a care cap of £75,000 could be nearer to £170,000.

Many clients will be concerned about the impact of care fees on their assets and they (or their children) will still be keen to reduce the care fees liability by any means possible. One key concern in the Dilnot Commission was that the new system should be seen to be fair, so that avoidance of the rules would be kept to a minimum. A cap of £75,000 is unlikely to have this effect.

It has been suggested that individuals take out insurance to cover their care fees contribution, and this could be funded from their pension lump sum on retirement. Surely this won’t be popular with many clients, and in future only a limited number will be fortunate enough to have a sufficiently large pension pot!

Dilnot report: key recommendations

• Individuals would initially be responsible for meeting their own care costs, up to the level of the cap.

• Once the cap is reached, the state would take over responsibility for care costs.

• A cap of £35,000 was suggested as being “appropriate and fair” Contributions towards domiciliary care would count towards the care funding cap.

• The capital threshold (beyond which no state support is given) for those in residential care would increase from £23,250 to £100,000.

• Individuals should contribute to their general living costs (for example, food and accommodation) while in residential care, at between £7,000 and £10,000 per annum.

• Universal disability benefits should continue.

• National eligibility criteria should ?be introduced.

• Care assessments should be portable.

• There should be a single system of charging for care for adults, whether they are of working age or retired.

Investment duties of attorneys

When managing money for the benefit of another person (whether as deputy, attorney or trustee) making investment decisions is an important part of the role. Trustees have a specific duty under the Trustee Act 2000 to: take advice from a suitably qualified person before investing trust monies, to have regard to the standard investment criteria, and to review the investments periodically. In contrast, there is no statutory duty imposed on attorneys with regard to the investment of the donor’s funds, even though they are in a fiduciary position.

Although the Mental Capacity Act 2005 Code of Practice runs to more than 300 pages, it does not give any practical guidance on investment of funds by attorneys.

In the unreported case of Re Buckley (January 2013), Senior Judge Lush gave welcome guidance on the responsibilities of an attorney regarding the management of the donor’s monies.

The case was brought by the Public Guardian, who applied to revoke an lasting power of attorney (LPA) and cancel its registration, because the attorney (the niece of the donor) had invested £90,000 of the donor’s money in a risky business venture and used a further £45,000 for the attorney’s own benefit.

Senior Judge Lush granted the application and highlighted the need for further guidance in this area from the Office of the Public Guardian (OPG). In the meantime, he made the following recommendations:

• Attorneys should ensure that any investment products they purchase are provided by a Financial Services Authority-regulated firm, so that they are covered by the Financial Services Compensation Scheme, which provides investor protection for amounts up to £85,000.

• Attorneys making investment decisions should act as though they were subject to the duties imposed on trustees by the Trustee Act 2000 with regard to investment of trust funds.

• Attorneys and their financial advisers should have regard to the historic criteria approved by the court for investing funds on behalf of patients with some allowance for updating.

SJ Lush emphasised the fiduciary duties of an attorney and in particular the need to keep the donor’s assets and investments separate from the attorney’s own funds. He listed the situations in which an attorney must apply to court for permission, namely:

• to make gifts beyond the limited scope of section 12 of the Mental Capacity Act 2005

• to make loans to attorneys or members of their family

• to invest the donor’s funds in the attorney’s business

• to make a sale or purchase at an undervalue; and

• for any other transaction where there is a conflict of interests between the donor and the attorney.

He added that ignorance was no excuse. While attorneys are not expected to pass an exam on the provisions of the Mental Capacity Act and the Code of Practice, they should read the “information you must read” on the LPA itself and familiarise themselves with the Code ?of Practice.

As mentioned, the guidance in the Code of Practice regarding management of the donor’s funds is very limited. It sets out the standard of care expected of an attorney and mentions that an attorney may wish to take financial advice. It is to be hoped that SJ Lush’s comments will prompt the OPG to publish guidance for attorneys, with some practical examples of what attorneys should and should not do.

Solicitors and other professionals involved in managing another person’s finances will be alert to the potential for conflicts of interest between the attorney and the donor, but a lay attorney is less likely to spot the potential for conflicts. Again, it would be useful for the OPG to give examples of situations that give rise to a conflict of interests.

In the absence of such guidance from the OPG, it would be good practice for a solicitor advising on the creation of an LPA to provide a guidance note to the attorney(s) setting out their responsibilities regarding management of the donor’s money. Donors should also be asked to give careful consideration to the suitability of the proposed attorney and whether any restrictions should be included for the donor’s protection, such as the need to produce annual accounts and have them audited and a specific requirement to obtain financial advice before making investment decisions.

State pension reform ?announced?

The government White Paper on state pension reform, published on 14 January, set out plans to introduce a new flat rate state pension, for those retiring in April 2017 or subsequently. The key elements are as follows:

• flat rate pension for a single person will be £144. The National Insurance (NI) contributions/credits needed to qualify for the full pension will increase from 30 to 35 years. There will be a minimum qualifying period of ten years NI contributions/credits before entitlement to a state pension will be built up. Anyone with fewer than ten years NI contributions/credits at retirement will not qualify for a state pension.

• there will be no facility to inherit or derive rights to a state pension from a spouse/civil partner; and contracting out will be abolished.

As with all reforms, not everyone will benefit. The winners will be lower earners who would otherwise get a basic state pension, as well as the self-employed, who can get a maximum state pension of £107.45 at present. The losers are likely to be higher earners, who can get a state pension of up to £250 per week under the current rules, depending on their NI contributions. After April 2017, their pension will be capped at £144 per week but they will keep the benefits they accrued up to 2017. The abolition of contracting out should lead to higher NI contributions for those in final salary pension scheme.

Public sector workers are likely to benefit from the reforms as they will receive the more generous flat-rate pension and still be entitled to final salary schemes, which are more generous than those available in the private sector.

Other news

The Office for Tax Simplification (an independent advisory panel) has recommended that the Department ?for Work and Pensions introduces ?form DWP 60 to provide pensioners with an annual statement of taxable benefits and state pension payments, similar to the employee form P60. Under the current system, elderly clients have ?to check the tax status of their state benefits for themselves and work out the ?amount received during the relevant ?tax year.

It also suggested that banks and building societies should be required ?to check annually that the tax status of an account is correct and provide account holders with guidance relating to tax on interest.

And the National Institute for Clinical Excellence (NICE) is to move into social care from April 2013. At present, NICE’s role is limited to providing guidelines for healthcare and, in particular recommending drugs for medical conditions.

From April, NICE will develop guidelines for domiciliary care, the mental wellbeing of older people in residential care and the transition between health and social care.

Lauren Killilea is a senior associate at Shoosmiths

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Dilnot calculations could be misleading, says Clive Barwell

“An Organisation for Economic Cooperation and Development 2011 report into long-term care suggested that ‘board and lodging’ costs may represent as much as two or three times the personal care and nursing costs combined. If so, the Dilnot report example could be wide of the mark, as the care costs would only be somewhere between £7,125 and £9,500 per annum, not £17,500.

“Therefore, it would take between eight and ten years before the £75,000 cap was breached. Based on statistics provided by Partnership Assurance, only one in eight self-funding residents live for eight years or more, so the vast majority would not benefit from the cap.

“With the means-testing threshold, the government’s comments to date have been lacking in two key aspects – the lower threshold and the tariff income to be applied to assets between those parameters. Right now, the lower threshold is £14,250 and the tariff income is £1 per week per £250 between that and the upper threshold of £23,250. So, if the upper threshold is raised to £100,000, but the lower threshold and tariff income remain as they are currently, there is potentially little or no benefit.

“At £100,000, the tariff income would be £343 per week, which, when added to pension income in the Dilnot example, would give a total income of £563 per week. With total care and accommodation costs at £548 per week, including the personal expenses allowance, which is now £23.50 per week, the local authority contribution would only be £8.50 per week. Big deal!

“Maybe I am being cynical, but I suspect the government is planning an approach to claim they are implementing the spirit of Dilnot, but which actually has minimal impact on the public purse.”

Clive Barwell is head of later life advice at Towergate Financial

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