An under-used solution to the care funding problem

14 Mar 17

Deferred payment agreements can help older people fund their long-term care and should be more widely available

Last week, the chancellor dismissed media speculation that the government was exhuming Labour’s ‘death tax’ – a levy on inheritance to pay for social care. Instead, ministers committed to a funding review, with a social insurance model thought to be an option under consideration.

Such a system will take at least several years to implement, but in the meantime there is much that can be done to improve the existing network of support – including on the controversial issue of paying for care from the afterlife.

Care homes places are largely in demand by people who are over the age of 75, a group with considerable housing wealth. Many, however, will struggle to access this capital as houses are a ‘lumpy’ asset: it is easier to sell half of your shares than half your home. Equity release products are available on the private market, but these can be expensive and not everyone is eligible.

Through deferred payment agreements (DPAs), the state offers a solution to this problem. Under such arrangements, a local authority postpones invoicing care fees in exchange for a claim on the participant’s housing equity. This money, plus interest, is then recouped, typically after the participant passes away.

The Dilnot commission, which was tasked with designing an alternative social care funding system, recognised several benefits of deferred payments. Individuals eligible for the scheme would no longer be exposed to the risk of running down their assets to pay for care. Neither would they have to fund care home fees through a quick-sale of their home: an action that can lead to a 25% markdown on the asset’s value.

What is more, the policy is sound from a public finance perspective. Since councils recover loans from people’s housing equity, they do not have to spend taxpayers’ money to finance the scheme in the medium term. Deferred payment agreements, therefore, align with the government’s commitment to fiscal sustainability.

Putting forward these reasons, the Dilnot commission recommended that deferred payments should become universal. As a result, under the Care Act 2014, local authorities are now required to extend this form of support to all self-funders with less than £23,250 of savings.

The government had high hopes for universal deferred payment agreements, and estimated that uptake would triple between 2012 and 2016. But no uplift in activity materialised, with only 6% of new care home residents taking out a DPA in the last financial year. Considering the benefits for individuals and the cost neutrality, it would be reasonable to ask what prevents uptake and how it can be expanded.

Reform analysis indicates that restricted eligibility is the main reason why deferred payment remains a fringe player. Set at £23,250, the means test prevents too many people from accessing the scheme. The government should therefore consider extending this form of support to people with moderate savings. We find that a limit of £100,000, would increase eligibility by nearly 40 per cent.

The natural concern with expanding eligibility is that the new beneficiaries would be too rich to need local authority support. If you have savings of £100,000 why should your payment be deferred? Given the average stint in a care home costs more than £70,000, however, it is easy to see why this is a reasonable move. Reform research has found that even if the means test were relaxed, 88% of those eligible would not be able to fund the average cost of care through savings.

While a new funding model is being evaluated by the government, steps to alleviate pressures in the short term must be taken. Deferred payments offer value at low cost. The fact that uptake failed to increase since 2014 should not deter policymakers from tapping further into the housing wealth of the older population. Expansion of eligibility should not be a question of whether, but when.

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