Cracking the care conundrum
What is the best way to fund your future care when there is no certainty that you will need it?
You may not need care in the future, but could you afford to pay for it if you did? Care and support services are not free and, unless you qualify for NHS Continuing Healthcare, you are likely to be expected to pay something towards the cost. Even if you are accepted for government funding, your choices of which care home to attend will be severely limited.
There is simply no avoiding the fact that longer life expectancy brings a requirement for people to plan financially for a day when living independently may be difficult, or even impossible. Despite this, fewer than one in three over-45s are factoring the cost into their retirement plans, and 40% don’t think they will ever need long-term care.1
“Aside from the emotional barriers that deter people from thinking about the possibility of being frail or in poor health, a major problem is that individuals do not know what care costs they might face,” says Tony Müdd, divisional director at St. James’s Place. “A quarter of people will need to spend very little, but one in ten will have serious care needs, and could face costs in excess of £100,000.”2
Removing the uncertainty
Thankfully, solutions that insure against the risk of needing long-term care are slowly emerging. One such option is ‘later-life care cover’, which offers ‘whole of life’ insurance with the possibility of cashing in part of it early if you are no longer able to live independently. This takes the uncertainty out of how care costs would be met in the future, while leaving a financial legacy for loved ones if care is not needed.
When you take out a policy, you decide how much cover you want at the outset. This is called ‘the sum assured’, and it is the amount that would be paid out on death or diagnosis of terminal illness. If you do not need care, a lump sum is paid to your estate to provide financial assistance for your family, or to help with any Inheritance Tax liability. But if you can no longer live independently, the policy is designed to pay out an ‘early claim’ lump sum of up to 75% of the sum assured to help towards the cost of care.
Later-life care cover is suitable for anybody who wants peace of mind that their care needs can be met if necessary, recognising that less local authority support may be available in the future. You may still be supporting children or grandchildren; or perhaps you do not want to be a burden to your children or loved ones if you do need care.
Aside from later-life care cover, several insurers offer ‘immediate needs annuities’, also known as ‘care fees plans’, which plug the gap between your income – usually from pensions and savings – and the care fees. These can offer relatively good value, and give you the reassurance of knowing that you’ll receive a regular payment to cover the costs of your care for as long as you need it. However, you will need a lump sum to purchase one.
If you are a property owner, another possible solution is to sell up or downsize to pay for your care. If you have children and want to hang onto your home until they can inherit, you could consider renting it out instead. Those choosing this option will need to consider that rental income will be subject to Income Tax and they will be required to complete a tax return. An equity release plan*, which allows you to access the value in your house without having to sell it, is a further possibility. (However, you should be mindful that tax and welfare benefits may be affected and you must check that the chosen plan will meet your needs should you wish to move in the future, or want your family to inherit it.)
Of course, you could just ‘self-insure’ and create your own funds to draw on in future if need be. Saving into a tax-efficient ISA over a period of years, for example, will allow you to build up a fund which could be used to meet care costs. But not everyone has either the income or the discipline to do that.
So what is the right answer? It will depend on many factors, including your age, your health, and what funds are available. However, planning ahead and taking expert financial advice – rather than merely relying on state provision – will help give you your choice of care, should the need arise later in life.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.
The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.
* This is a lifetime mortgage or home reversion plan. To understand the features and risks associated with such products, please ask for a personalised illustration.
1 Tilney, The Cost of Tomorrow, February 2017
2 The Health Foundation, NHS and social care funding – three unavoidable challenges, May 2017