You may have seen the news that the Government plans to reform social care, funded by an increase in national insurance contributions and an increase in the rate of tax on dividends. What are the details of the new policy, and how does it affect you? In this article, our financial planning team here at Vesta Wealth offers some reflections and information for our clients and readers across the North of England.
What we know so far
For many years, successive governments have grappled with the issue of funding for long term care. However, the public and politicians seem to have agreed that urgent reform is needed now, with Boris Johnson having stated repeatedly that “No one should have to sell their house to pay for social care”.
Many people will be surprised to know that under the current rules you need to pay for your own care if you have more than £23,250 in savings. In many cases, the value of a home is included in this calculation. So, for lots of people, this can lead to being forced to sell the home to pay for care.
The Government has said that from October 2023 lifetime care costs will be capped at £86,000, with the state covering the balance of the cost of care. There will be a new measure so that anyone with less than £20,000 will pay nothing towards their care costs (although you may have to make a contribution from your income), and for those with between £20,000 and £100,000 there will be a sliding scale of means tested support available. The £100,000 level is more than 4 times the current £23,250 level.
To fund this, national insurance contributions will rise: 1.25% for employees, 1.25% for employers and 1.25% for the self-employed. There will also be an increase in the rate of dividend tax by the same 1.25%.
The impact on workers & employers
For employees and business owners, these changes will increase the amount of national insurance contributions, as the proposals aim to raise an extra £12bn a year. The extra tax will depend largely on each person’s wages. For someone with a £25,000 salary, for instance, the policy would mean that the worker’s national insurance contributions would go up from £1,852 to £2,045 (an extra £193 per year). On a £75,000 salary, the figures are £5,379 and £6,197, respectively (an additional £818 per year). Employers will also pay an extra 1.25%.
For those receiving income in the form of dividends, the rate of tax will also increase by 1.25%. For example, a higher rate taxpayer receiving £25,000 of dividends would pay £7,475 tax in 2021/2, increasing to £7,762.50 from 2022/3 (an extra £287.50 per year).
The impact on retirement planning
Of course, the big question now is: “Does this mean I no longer have to worry about setting money aside to pay for my future care?”
Those with modest savings and high care costs are likely to see the biggest proportion of their money used to pay for care costs under the new system. For those with higher amounts of savings, the cap could ensure that they pay a lower share of lifetime care costs.
Also, only personal care costs are covered by the cap, meaning that expenses related to food, accommodation, cleaning and energy (so called ‘hotel costs’) are not covered.
If you have a retirement income of £15,000, a house worth £250,000 and savings of £100,000 then this would mean that you would spend £86,000 of your savings and hopefully your retirement income would be sufficient to pay the ‘hotel costs’ element of your care.
If you choose your own care provider, the amount you pay could be a lot higher, meaning that for most people there will still be a strong incentive to maximise the value of your savings for later life.
What does all of this mean for your financial plan?
These changes are likely to reduce the burden of social care costs for many, particularly once the £86,000 cap is introduced in October 2023.
Knowing this figure makes it easier to plan for, and for many people it will help reduce the chances of needing to sell the family home to cover the cost of care. However, it is important to not become complacent with your financial plan. You may need to pay thousands of pounds each year alongside personal care costs in the future, but if you qualify for the full state pension (currently £9,339.20 per year) this could go some way towards covering these costs.
Having other savings available can also help you meet the cost of care e.g. in your workplace and personal pensions. Speak to your financial planner to make sure you are preparing fully for a scenario where you might need to for a care home.
Invitation
If you would like to discuss your financial plan and retirement strategy, then we would love to hear from you. Get in touch with your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.
Reach us via:
t: 01228 210 137
This content is for information purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.