Thinking about how you’re going to pay for care in your old age may not be a pleasant task, but planning early is essential, says Marina Gerner.
The British population is getting steadily older. Nearly one in four people in the UK will be aged over 65 by 2040, up from around 18% today. That’s partly due to falling birth rates, but also because we are mostly living longer – over the same period, life expectancy is forecast to rise to 84.1 years for men and 86.9 years for women, a rise of more than four years compared with today. That should be good news – but it means that we face a crisis in meeting the cost of long-term care.
This crisis is the result of poor planning for our retirement spending needs, which typically follow a U-shaped curve. People spend more in the early years of their retirement, when they remain active, then spend less in the middle years of retirement. Towards the end of their lives, spending often spikes again as the cost of additional care and medical expenses rises. While many people are aware that their spending patterns might change over time, most still fail to prepare adequately for the high cost of this final phase of long-term care.
The state won’t provide long-term care
Many families assume that the NHS or their local council can be relied on to provide care for them or their elderly relatives. However, the NHS can only offer the bare minimum of services, while councils have faced budgets cut and are cash-strapped. Full state funding for long-term care only kicks in when a person’s savings fall under £14,250, including the value of their house.
If you have more than £23,250 in savings, you’ll have to meet all the costs yourself. This means that most people will need to pay for some or all of their care, or have it paid by their relatives. Consequently, an estimated one million elderly people who need care are not being provided with any by the state.
“The long-term care crisis is a real crisis and it’s getting worse,” says former pensions minister Ros Altmann. For example, the incentive is for councils to leave people in hospital for as long as possible, so that they cost them less. “That is not the mark of a civilised society.”
Altmann says that the government delayed for many years before taking steps to relieve the burden of rising pension costs on public finances and part of its solution was to delay the pension age – which isn’t an option with long-term care. The care crisis has yet to be tackled: the extra funds given to local councils in the Autumn Statement are simply not enough to address the problem.
The cost of paying for care yourself is alarming. The average life expectancy of a self-funded person in care is four years, according to Just Retirement, a specialist provider of financial products for retirees. In 2015-2016 the average cost of care for an adult was £716 per week for long-term residential care and £596 for long-term nursing care, according to NHS Digital, a division of the Department of Health that collects healthcare data. So let’s assume that the best care would cost around £40,000 a year and we spend the average time of four years in care. That means the overall cost will be around £160,000.
The government plans to introduce a lifetime care cap of £72,000, which means that no one will have to pay any more for their eligible care needs once they have spent that amount. It also plans to raise the upper limit for receiving state support for care costs to £118,000-worth of assets. However, both these changes, which were originally scheduled for 2016, have now been delayed until 2020.
Start planning early
Given that most people will have to pay for at least some of their care, it’s important to think about how you will do it – not least because the best approach may be closely linked to other financial decisions you make. For example, “people can be tempted to give money away in order to reduce inheritance tax”, says Sean McCann of insurer NFU Mutual. But if they apply for long-term care support from a council within six months of making large gifts, the local authority can say they have willingly deprived themselves of assets. In some circumstances, the council can then ask for the gift to be returned.
Hence the importance of careful planning. “It is more beneficial if this planning is done during the early years of retirement,” says Peter Savage of Fairstone, an independent financial adviser (IFA). “Some clients feel paying for care is unfair when other individuals will get it paid for.
I explain that it is much better to pay and have choices of care than to let the local authority decide on where you reside.” Planning for long-term care is much easier when you are just entering retirement, but unfortunately many people don’t do this. “I tend to find that clients will either look to do this around the age of 65 or wait until care needs happen. When care needs happen, then the family will look at immediate care annuities, which I find are quite expensive and it’s reactionary rather than planning.”
Immediate care annuities are products specifically designed to pay for the long term. With this product you pay a lump sum in return for a guaranteed tax-free income for life in care. A person aged 85 years who pays a lump sum of £107,600 for such a product would receive an annuity of £20,000, says Dhawal Chandan of Just Financial Group, an IFA. “Of course, this will vary greatly with each individual’s personal circumstances and state of health as the income is greater for someone with more health issues.”
In this example, the annuity would repay its cost of investment if the person stays in care for at least five years. “Buying an immediate care annuity removes money from an estate, effectively reducing a future inheritance-tax charge,” adds Martin Bamford of Informed Choice, an IFA. “One way for families to look at the cost of an annuity is as a tool to ring-fence assets for an inheritance.”
Take expert advice
However, with more time to prepare, there are alternative options, says Savage. He suggests people could consider a “whole of life assurance policy” to offset the potential cost of having to sell off their assets to pay for care in later life and provides the example of a married couple aged 65.
If the first spouse needs care, the local authority will carry out a financial assessment to determine how much of the care should be funded by them and how much by the local authority. “In this scenario, the spouse who doesn’t require care will continue to live in their property after the first individual moves into a residential care home. The jointly owned property is not included in the assessment. Currently, those who are assessed as having capital above £23,250 – excluding a jointly owned home – are expected to pay towards care costs. The issue only really comes into play when there is one spouse remaining.”
Let’s assume the couple have a £200,000 investment portfolio. The cost of a £160,000 second-death whole-of-life policy (an insurance policy that pays out when both the spouses have died) with AIG would be £194.14 per month (£2329.68 per year), which is the equivalent of a 1.16% yield from the investment portfolio. If neither spouse ultimately needs to pay for care costs from their savings, they’ve managed to pass a further £160,000 to their family for the cost, in this example, of 1.16% a year.
If they have to draw on their savings, the proceeds from the policy will help recoup some or all of what they spend. “This way the couple has planned for a potential care need as well as making sure they can pass on an inheritance.” Options such as this means that it’s worth taking expert advice well in advance of entering care to ensure you get the best outcome for your long-term care and your finances.
Should you consider equity release?
Baby-boomers who have seen the value of their property rise steadily over the last few decades may be tempted to release equity from their house to fund care costs. Equity release usually involves taking out a “lifetime mortgage”, which is a mortgage intended to be repaid only after you die or move into long-term care, and getting a lump-sum payment. The maximum loan-to-value ratio available depends on your age, but it can be as high as half the value of the house for those over 80.
The average house value of those applying for lifetime mortgages was £264,397 in 2015, according to the Equity Release Council, an association of lenders who offer these products. The loan-to-value average was 30.8% and the average sum taken out was £81,324. On average, people are charged 6.2% interest on their loan annually.
The interest on a lifetime mortgage usually rolls up into the amount that needs to be repaid, and further interest accumulates on interest already added to the loan. Hence a typical loan can double in size about every ten years as the interest compounds, making it very expensive. This means that equity release should usually be a last resort, used only if selling your property and moving to a small one isn’t practicable.