Could a Government Guarantee become a contradiction in terms?
The words “Government Guarantee” appear to be part of a politician’s stock armoury and a comfort blanket for much of the electorate. However, let’s not overlook the fact that “there’s no such thing as a free lunch”. And definitely not when the Government is doing the catering.
BANK DEPOSIT GUARANTEES
If the bank or building society (deposit-takers authorised in the UK by the Prudential Regulation Authority) you have your money with is declared “in default” by the Financial Services Compensation Scheme (FSCS), you can be compensated for your lost savings, up to a value of €100,000 per person per institution. The FSCS is funded by an annual levy paid by regulated businesses, but the cost of which is passed on to customers via fees levied on current accounts, charges on products sold to them, and the margin made on interest rates.
However if the “default” occurs, not just in a single institution, but across the whole banking sector, then the government provides an implicit guarantee to protect all deposits. In 2008 the government went even further and partially nationalised two whole banking groups. In broad terms the government borrowed money off our pensions funds (by selling them gilts) & used that money to buy bank shares from the pension funds (probably at a loss to the pension funds where the then market price was below that which the funds had bought them).
Subsequently (a) pension scheme members had to pay more into their schemes to makes good any losses: (b) bank customers were faced with higher banking costs as the banks rebuilt their balance sheets: and (c) taxpayers had to pay more tax to cover the coupon (interest) due on the gilts. So if you belong to all 3 categories: a taxpayer, a bank customer, and someone saving for retirement, you are hit three times over. Since then another arm of the government, the Central Bank (Bank of England), has bought issued gilts from the pension schemes, under the guise of Quantitative Easing, and is returning the income it is receiving from the taxpayers, via the Gilts, back to the Government.
How very “Ponzi-esque”: Bernard Madoff would be proud!
The 2013 Queen’s speech has reaffirmed the Coalition Government’s proposed changes to the issue of Long-Term Care Funding, the cost of which is divided into 3 categories:
- Health care – provision of services like nursing & specialist therapy etc;
- Personal care – provision of help with bathing & dressing etc;
- Board & Accommodation – comprises the cost of providing meals, heating, laundry etc;
If you medically qualify for needing Health Care, then NHS Continuing Care will pick up the costs for all 3 categories without any financial means-testing assessment and without limit.
Alternatively if you medically qualify for needing Personal Care, which is instead the responsibility of your Local Authority and not the NHS, you will be expected to meet the cost of Categories 2 & 3 out of your own resources whenever you have assets (that don’t qualify for disregard) valued in excess of £23,250.
There is no upper limit to the costs you could face paying and there is no compulsion on Local Authorities to offer Deferred Payment option. The latter can be used when your Principal Private Residence is your only valuable asset left that puts you above the £23,259 threshold; under it the Local Authority pays Categories 2 + 3 costs up front and then recoups their total outlay after your death from the eventual sale of your home.
Proposed Situation from April 2016
Health Care criteria are the same.
Personal Care’s non-disregard asset threshold will be £118,000 instead of £23,250. There will be an upper limit of £72,000 to the lifetime costs you could face paying, but that only applies to Category 2 costs (personal care) and not Category 3 (Board & Accommodation). All Local Authorities must offer a Deferred Payment option.
Let’s look at an example to illustrate the ramifications of the changes. Imagine you own a house worth £488,000, but you need to go into a residential care home. The one you have chosen charges, after having carried out a social care services financial assessment regarding your Care Plan requirements, £1,200 per week. However, only £200 of that applies to Category 2 costs; the remaining £1,000 per week pays for Category 3 accommodation.
You have no savings but you have pension income of £223.50 per week, so that leaves £800 per week (after £23.50 pension income disregard) funding shortfall. After 360 weeks, the total amount you have spent on Category 2 costs is £72,000; the limit set by the Government. Alas, you would have also spent 360 weeks at £800 per week towards Category 3 costs, = £288,000. Your local Authority has lent you the £72,000 + £288,000 which, once deducted from the sale proceeds of your home post death, leaves you with £118,000.
Of course if you have the temerity to have a net worth at death, even after paying for your long-term care costs, in excess of £325,000, then there will be a potential Inheritance Tax liability because the Government is freezing that tax-free allowance, specifically to help meet any costs the Government has decided taxpayers should guarantee as a result of the introduction of the £72,000 contribution cap.
Timeo Danaos Senator et dona ferentes