With reports that the cost of long-term care is continuing to spiral at almost double the rate of inflation, many Brits are becoming increasingly concerned about their future and the safety of their assets.
A report from industry analysts LaingBuisson has found that many older people living in care homes are paying more than £1,000 a week, with those funding their care privately paying around £314 a week more than those funded by the state. The average stay in a care home is two–and–a–half years, according to the charity, Independent Age, which could mean costs well in excess of £100,000.
Those with assets of less than £23,250 (including property) are eligible for some government support, but for the rest of us – more than half of those who go into care, according to LaingBuisson – the financial burden falls solely on the individual and their loved ones.
Not only does this cause concerns about running out of money to pay for care, but also about how best to protect any potential inheritance.
There are a number of ways to manage the cost of long-term care at varying stages of life, from early savings and investments to annuities and insurances in retirement…
Savings and Investments
The sooner you start saving the better. Whether it be for a specific outlay like a property deposit, wedding, university fees, holiday or, of course, potential long-term care.
Saving into a traditional bank or building society accounts or ISAs can be low risk, yet often offer little in terms of interest and potential growth. ISAs provide a tax-free option, but dipping into any savings later in life to pay for long-term care can mean significant capital depreciation.
Investing in other options, such as government bonds, shares, or unit and investment trusts offers the potential to receive regular returns (though these may be taxable), which can be used towards long-term care while keeping capital intact to pass on as inheritance. However, returns are never guaranteed, and the value of investments can fall as well as rise. There is also the option to invest later in life when the time for long-term care approaches, using capital from the sale of a home or equity release to generate potential income from investment returns.
A financial adviser can help to assess whether your savings and investments could be generating more income, and the level of risk associated with any changes.
Similarly to savings and investments, the earlier you start paying into a pension the better. It is important to regularly reassess what you can afford to invest into your pension scheme and how that reflects the kind of lifestyle you hope to enjoy in retirement. Does it allow for such financial outlays as long-term care?
Monthly pension payments could be a significant help, and there may also be the option to release a chunk or the entire pot in one go – though only the first 25% will be tax-free. This could help make regular payments towards long-term care, or be used to take out a long-term care plan that will guarantee to pay a regular amount towards your care until you die.
Owning property can be one of the most useful assets when it comes to paying for long-term care. Getting on the property ladder as early as possible means you begin paying off your mortgage sooner, making your potential investment more lucrative later on. Regularly reassess your mortgage with a financial adviser to ensure you are getting the best rates on the market.
Many people dread having to use their home – the place they had hoped to grow old in and potentially pass on to the next generation – to pay for long-term care. While selling property enables you to release the full value of your home and access the entirety of its equity, it may take a long time and selling in a rush often means you do not receive full market value. It is also not the only option your property offers.
Downsizing to a smaller home can release equity, while retaining a property within your estate, but there are also a number of equity release options which allow you to access some of the value of your home, while continuing to live there. This is ideal for those who require care at home – it can release enough money to pay for that care for as long as possible until a time as a care home or nursing home is required. There is also the potential to invest the equity in a way that generates income, to pay for care home fees, or to purchase a long-term care plan.
A Lifetime Mortgage provides the option to take out a loan against your property yet still own it. The equity released is tax-free and the loan, and usually its interest, are not paid off until you die or move into permanent care. It does, however, mean that any potential inheritance will be greatly reduced.
Home Reversion, on the other hand, involves selling some or all of the property to the Home Reversion provider in exchange for a lump sum and the guarantee that you can live in the property rent-free for the rest of your life. It is not a loan, so there is no interest or repayment at the end, and it is possible to retain the value of whatever proportion you do not sell as an inheritance. However, Home Reversion providers typically pay below market value, so your property investment will be unlikely to realise its full potential.
To fully understand the features and risks associated with a Lifetime Mortgage or Home Reversion plan, ask for a personalised illustration. Also, be aware that there may be fees involved in seeking mortgage advice.
Renting out your home when you go into long-term care is another way to generate income while keeping your property within your estate. It also means your home will be occupied while you are in care, rather than left vacant. However, it is important to bear in mind that someone will have to act as landlord, there may be costly renovations and repairs required, and income would be subject to income tax.
Care fee plans
Either at the point of requiring long-term care, or at an age where you think it more likely, you can take out an annuity or other insurance to help cover the costs of your care needs.
An Immediate Needs Annuity requires a one-off premium for the policy to pay a regular tax-free income to your care provider for the rest of your life. If you leave long-term care, the money will be paid to you as income, though this will be subject to tax. It can provide peace of mind that you will not run out of funds and have to rely on the local authority to pay for your care, which could mean moving to a home of their choice. A Deferred Annuity, on the other hand, is often cheaper and allows you to defer the payouts for up to five years. You will, however, still need to pay the premium upfront and be able to pay for any care fees required in the interim.
Some companies have also introduced limited cover as an additional benefit to more traditional Critical Illness Cover, or offer Assisted Living Insurance, which provides a pot of money if you lose mental capacity or the physical capability to do a number of daily living tasks. These mostly pay a one-off lump sum to cover the cost of care, so cannot be relied upon in the same way as an annuity to cover costs until you die.
Whatever your stage of life it is important to speak to a financial adviser, who can help to explain your options when it comes to planning for long-term care and offer the most beneficial solutions to suit your individual circumstances.