Confronting the issue of long-term care could be your greatest legacy.
The number of British people aged 75 or over is expected to double by 2030.1
Yet few of us are adequately prepared for an extended old age, whether in terms of saving or preparing for accommodation or care needs.
“Most of us will see a financial adviser about our pension, but in general we don’t want to think about getting old and we certainly don’t like to imagine ourselves being unable to live independently,” says Tony Müdd, divisional director at St. James’s Place.
“But if you don't save, or don't think about the costs of care, the reality is you might not get what you need or would want.”
Currently, if you need end-of-life care, your local authority will carry out a means test to work out who pays – but regional differences are considerable.
If you live in England, for example, and your capital and savings are above £23,250, you will have to fund the cost of personal care and accommodation yourself. In Scotland, the personal care you receive in a care home is free if you’re over 65, but you’ll have to pay accommodation costs if your capital and savings are more than £26,000.
“Clearly you don’t need to be rich, or even moderately wealthy, to have to pay towards your care costs,” remarks Müdd.
Cap in hand?
The Care Act means a cap will be introduced in 2020 on what people should have to pay for care themselves. Social care is a devolved matter for Scotland so the Care Act generally applies only to local authorities in England, Wales and Northern Ireland.
The reforms are intended to help people make informed choices about the best care options for them, and to enable them to pay in a way that suits them. The government had hoped this would stimulate a market for end-of-life care; not many products have since been created but some insurers are starting to add an element of care provision to their life insurance plans.
‘Whole-of-life’ policies pay out a fixed sum on death to cover the financial impact of losing a family member. These options are commonly used to meet Inheritance Tax liabilities and funeral expenses. However, some are evolving to help meet the costs of care.
“Some whole-of-life policies now pay out a reduced sum early if you have been assessed by a medical specialist as suffering an illness, accident or infirmity which leaves you unable to perform everyday activities,” says Müdd.
Whole-of-life cover is usually arranged 10, 20 or 30 years in advance, whereas other options for later-life protection are taken out at the point of need. One of the most underused solutions, according to Müdd, is an immediate needs annuity (INA).With an initial lump sum payment, you can take an INA out when care is required and thus ensure a guaranteed income for as long as care is needed.
“Although it’s got the term ‘annuity’ in it, is not like a traditional annuity,” says Müdd. “It’s not based on interest rates, which are currently at historic lows. It probably won’t cover all of your care costs, but it pays very high levels of return – anything from 20% to 25% – and it is tax-free if the money is paid directly to the care home.”
“Of course, you could just use investments such as ISAs and unit trusts to pay for care. But that doesn’t give you the reassurance of an immediate needs annuity,” says Müdd. “But INAs are not without disadvantages – in the case of death, they don’t get passed on to beneficiaries.”
A quarter of people should need to spend very little on care, but one in ten will have more serious needs and could face care costs in excess of £100,000.2 While selling your home could be an option to free up the money needed, many view this as a last resort, so it’s important to anticipate future care needs and buy the right kind of financial protection.
Even if you do have to pay for care, you may still be entitled to some benefits like the attendance allowance and the personal independence payments.
Individuals should always seek financial advice before arranging later-life protection. Your local authority should be able to provide you with more information on claiming benefits and care services in your area.
1 National population projections, 2014-based, Office for National Statistics, October 2015
2 Caring for our future: progress report on funding reform, Department of Health, July 2012