Part of the political hype surrounding the Dilnot Report, and the subsequent Care Act 2014, was that, “Nobody’s Granny should have to sell her home to pay for her care”. As a consequence, the Deferred Payment Scheme was made mandatory on all Local Authorities from April 2015.
What is the Deferred Payment Scheme?
The Deferred Payment Scheme is Equity Release by another name. It comes into play when Granny has run out of money – savings and investments (down to her last £14,250 in England in 2023/24 and unchanged since 2010) – and is paying for her own care whilst owning her own property. Prior to April 2015, after the initial 12-week disregard, Granny would have to pay for her own care, unless her Local Authority ran the previous Deferred Payment Scheme, which was interest and charges-free. As a consequence, many Grannies (and/or her Family) felt they had no option other than to sell her home.
How does the Deferred Payment Scheme work?
The first things to say are that it is not universally available to everyone in care and it doesn’t necessarily cover all of the care costs. There’s always a sting in the tail somewhere!
The two caveats that mean the scheme is limited in its application are:
- Elsewhere, I’ve written about Eligible Care Needs and the fact that the Local Authority’s assessment process is, of financial necessity, tough. As with other aspects of Local Authority funding, the Deferred Payment Scheme is only available to those who have Eligible Needs.
- Also elsewhere, I’ve written about the means-testing process, applying in 2023/24, from which Readers will understand there is a limit to the income top-up a Local Authority will pay. For example, the Local Authority may have a limit of £550 per week that it will pay for Granny’s care, but Granny may be in a home costing £750 per week. If Granny’s assessable income is £400 per week, the Local Authority will only top this up to £550 per week, not the £750 per week she is actually paying. The balance has to be made-up from elsewhere – Granny herself and/or other family members. The Deferred Payment Scheme operates with the same limitation, so the amount lent in the above example would just be the £150 per week, not the actual £350 per week shortfall.
Subject to these two caveats, the Deferred Payment Scheme works just like commercial Equity Release; the Local Authority takes a charge over Granny’s home (it has to be a first charge), the Local Authority then starts paying their agreed proportion of the care costs, charging an arrangement fee, and then interest is added to the account so long as the debt remains outstanding.
What are the differences between the scheme and commercial Equity Release?
The key differences are:
- The interest rate and charges aren’t as high on the Deferred Payment Scheme as they are on commercial Equity Release schemes.
- The Deferred Payment Scheme can be arranged on a property Granny no longer lives in, whereas commercial Equity Release generally has to be repaid if Granny goes into care.
The similarities between the Deferred Payment Scheme and Equity Release are:
- There is interest and there are arrangement fees to pay.
- The interest compounds to increase the debt. However, the interest rate on the Deferred Payment Scheme is variable, whereas commercial Equity Release is always arranged on a fixed (or capped) interest rate.
- The debt has to be repaid eventually, certainly when the property on which it is secured is sold.
What are the charges and what is the interest rate?
The charges are not specified in the Care Act 2014, other than they have to be “reasonable”, so Local Authorities can charge what they like by way of an arrangement fee.
The maximum interest rate (likely to be the minimum as well!) is establish by the Act and is linked to the rate at which the Government can borrow money from time to time and is the 15-year “Gilt” rate (Gilts are British Government Securities). A “default component” is added to this to cover future bad debts and this is currently set at 0.15% per annum.
At the time of writing, the 15-year Gilt rate applicable from 01 July 2023 was 4.50% per annum, making the total interest rate 4.65% per annum.
Whilst Granny’s home doesn’t have to be sold during her lifetime, it may well still need to be sold after her death to repay the debt. A somewhat hollow promise, methinks!
If you or someone you care for has a care fees issue, please ask me for advice by completing the following form:
