The combination of improving longevity and an ageing population means growing numbers will need some form of care in old age. Already, around 140,000 elderly people enter care homes each year in the UK, according to the government, and that number is set to rise as the baby boomer cohort ages.
However, while many elderly people rely for years on informal support from family or neighbours, formalised social care is expensive. Average annual care home costs run at between £30,000 and £50,000, depending primarily on whether nursing care as well as residential care is needed. Given that the average stay in a care home runs to around four years, total costs could easily top the six-figure mark.
Care in the home is harder to price because it depends what is needed, but bills ‘can easily run to several hundred pounds a week if an older person needs several care visits a day,’ according to Age UK.
Most families fail to prepare
At present, the state funding system requires people to fund their own care entirely if they have more than £23,250 in savings. Around half of those going into care each year do not qualify for state support and are required to fund at least part of their care costs; but as Stephen Lowe, communications director at Just Group, observes: ‘The level of awareness regarding funding care is almost nil’, and so most families do not have a financial plan in place.
So how can people meet these costs when they arise? One starting point is to seek out a financial adviser specialising in the complexities of later life and the care system. Jane Finnerty, director of the Society of Later Life Advisers, which on its website lists financial advisers who have gained the ‘later life adviser’ accreditation, adds: ‘specialist advice can demystify the situation.’
In terms of funding, there are of course more choices open to wealthier people. Those with sufficient assets could ringfence part of their pension, which has the advantage that any funds not needed for care can be passed on to the family free of inheritance tax. However, the trouble with this solution is that it is impossible to predict what the final bill may amount to. For example, you might ringfence £100,000 within your pension, but that would only see you through three years of care.
A care or immediate need annuity offers a solution. This works in the same way as other annuities, with the cost basically dependent on life expectancy; it can be arranged for a fixed term or for life. With annuity rates at continuing historic lows, it’s an expensive option, typically requiring £100,000 plus; but as Neil Adams, head of pension planning at Drewberry Wealth, explains: ‘If the income from the annuity goes directly to the care home it’s tax-free, so this might be a worthwhile consideration for those with larger estates.’
The benefit is basically peace of mind: first, there’s no need to worry about the risk of the money running out, which could force a move to a cheaper care home; and secondly, the rest of the estate can be safely allocated to the children and grandchildren. It avoids ‘catastrophic loss of assets’, comments Lowe.
What about insurance? There are no specific care products that can be bought to protect yourself in future years, Lowe says. ‘The government would love the insurance industry to design one but it’s too hard to price, and also would require a large market – and that would mean much greater public awareness.’
Adams suggests a whole of life critical illness policy including total permanent disability cover might work. ‘In principle, this would pay out if serious health conditions arose and the payout could be used to fund care costs,’ he says. AIG is one of the few providers offering such a policy; for someone born in 1944, a £100,000 policy would cost around £420 per month.
Those without the wherewithal to pre-fund a care plan will probably have to fall back on the equity in their home. Equity release is an option, but Lowe warns it will only work for care at home; if you need residential care (and don’t have a partner still living at home), your property will be sold and the loan repaid.
‘Most people will need to accept that they either make plans to reallocate their property wealth when they are still in good health, or they effectively roll the dice and hope that their family home doesn’t end up under the hammer when any opportunity to protect its value will have passed,’ says Adams.
How to reduce a potential IHT bill
•Put a lasting power of attorney in place, to enable someone you trust to make decisions on your behalf if you are no longer able to do so.
•If you gift your home to a family member but continue to live in it, you will need to pay a market rent or the property may be liable to inheritance tax on your death.
•There is also a risk that the local authority will view the gift as ‘deliberate deprivation of assets’ to avoid care costs, and will tax the estate as though you had not given the property away. Specialist advice is crucial.
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