Paying the bill
Most of those withdrawing money from their pension have not thought about how they will pay for future care costs.
As many as three in five people who have taken money out of their retirement savings under pension freedoms have not planned for how they would meet future care costs, according to research from Citizens Advice.1
The survey finds that just 16% have budgeted for care costs they may face as they grow older and only marginally more (23%) have a back-up plan, such as equity release* or selling their home. A worrying one in ten are hoping to rely on others, such as family or the government.
Under the current local authority means-testing system, anyone with capital of more than £23,250 must shoulder the financial burden of care themselves. Fees can be eye-wateringly high, depending on the services required and where in the country they are provided. The average cost of care in the UK is £675 per week2, but these costs can spiral once nursing care is factored in. The average length of stay in a care home can leave people facing bills in excess of £100,0003.
“Care costs can be a heavy financial burden that many people are unprepared for,” says Gillian Guy, Chief Executive of Citizens Advice.
“It is unsurprising that many people in their fifties are not thinking about how they will pay for care costs when the need for this could be 10, 20 or even 30 years away. But this issue does need some attention, otherwise people risk dipping into their pension now only to find they need some of the money later.”
A generation ago, the key concern would have been to save enough to fund what was expected to be a relatively short retirement and to leave a reasonable nest egg for children. While medical advances have helped more people survive diseases like cancer, stroke and heart attacks, increased longevity, together with a rising incidence of debilitating diseases like Alzheimer’s and other forms of dementia, mean that demand for care is rising. As a result, retirees face many more pressures on their wealth, including their pension savings.
“People are expected to balance the need for income today with potential costs they could face later in retirement, while the improved tax position on death means some individuals will want to hold some of their pension back for children or grandchildren to inherit,” says Tony Müdd, Divisional Director at St. James’s Place.
“Ultimately, if you want more than the most basic standard of care, you will need to make sure your pension and other assets can fund your potential needs in later life,” he adds.
If you do end up needing residential or nursing care, you could use some of your pension to buy an immediate needs annuity, investing a lump sum to bridge a care gap that could exist for an unknown numbers of years.
Aside from pensions, there are a range of other options to consider. Saving into a tax-efficient ISA over a period of years will allow you to build up a fund which could be used to meet care costs, while some life policies will pay out early if a care need arises. Property you own may also represent a source of significant wealth, although not everyone will want to sell their home.
“The key is to confront the issue sooner rather than later, and discuss your wishes with a financial adviser, because often the best option is not always the most obvious one,” says Müdd.
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 Citizens Advice, 23 August 2016
2 Care homes trading performance review, Knight Frank, 2015
3 Figures from Care homes trading performance review, Knight Frank, 2015 and What you need to know about care home fees, 27 June 2016, saga.co.uk