Old age is costly, but advance planning can be a minefield
Nursing care can wipe out a lifetime's savings but experts hope that proposed reforms will encourage more insurers to offer suitable cover
Sunday 10 July 2011
The prospect of paying for long-term care in old age is almost as frightening as actually needing it. Nursing home costs, at an average of at least £36,000 per year, can rapidly wipe out an entire lifetime of savings.
And with state help currently at a bare minimum, many people are facing the burden of these costs alone.
There is, however, hope that improvements could be on the way in the form of the Dilnot Commission report, which last week recommended capping the amount an individual has to pay to meet adult care at between £25,000 and £50,000, with £35,000 selected as the ideal figure.
"If you know that you've got a figure to aim for, even though it might be tough, it is still better than the present situation with people having to sell houses to pay for mum or dad, or themselves," says Gordon Morris, the managing director of Age UK Enterprises. "The Dilnot report is saying that if you are requiring care you will only need to fund the first £35,000, rather than a bill which could run into hundreds of thousands."
In order to reduce the threat of extreme care costs which force tens of thousands of people to sell their home every year, once an individual has reached this £35,000 cap the state would step in to help out. However, this ceiling does exclude "hotel expenses" such as accommodation and food, with annual contributions of between £7,000 and £10,000 deemed appropriate.
For those who cannot afford to meet their personal contribution, it has also been suggested that the upper threshold on assets a person can keep to qualify for means-tested state help should be raised from the low of £23,250 to £100,000.
Currently, local authority support is based on an individual's income and savings. If they are particularly low the state may help you to pay for your long-term care costs, but because this affordability assessment includes any property, savings, investments and pensions, you could well be forced to cover all care costs on your own.
In England, this means that if you have assets worth over £23,250 you will have to pay for everything. The only respite may be that if any surviving spouse or partner is still living in your home, or you own the property as "tenants in common", rather than joint tenants, it will be ignored for means-testing purposes. Also, the over 65s who are funding care costs without any help can claim attendance allowance, which is worth up to £73.60 per week.
"Unlike inheritance tax (IHT) which kicks in only at £325,000 for a single person and £650,000 for a couple and charges 40 per cent on the excess, long-term care can eat up everything over the threshold," says Christopher Wicks from Bridgewater, the independent financial adviser. "This means for a people who own a family home worth, say, £250,000, plus a few savings, could well find that all of this goes to meet the cost of the care."
To get an idea of the impact these proposals might have, the report has said that while under the present system if you had lifetime care costs of £150,000, you could lose up to 90 per cent of your accumulated wealth. With the introduction of a £35,000 cap and extended means test, you would spend no more than 30 per cent of your assets on care costs.
Few people expected economist Andrew Dilnot to commend free social care at home in England – which fortunate Scots are currently entitled to – and the reform proposals have been broadly welcomed by charities and insurers.
The cap in particular has been applauded as a way to encourage insurers into the market, something that is sorely needed. Today, "immediate needs" annuities are the only tailor-made policies designed to cover long-term care costs, but these can be extremely expensive and choice is limited to only two providers, Partnership and Axa Sun Life.
"The current crop of insurance products for long-term care are, frankly, rubbish, with little or no minimum standards and a poor public reputation," says Cliff D'arcy of Fool.co.uk. "For the insurance industry to make long-term care insurance valuable, it needs a radical overhaul and a sea change in public opinion. No one wants to see more profiteering from insurance aimed at the over-65s!"
Premiums are based on your health, age, sex and, of course, the amount of income you want, which is typically designed to cover part of your care costs with the rest met by state benefits and your income.
Once you've taken out this type of insurance you can't get the capital back, so if you die soon after entering care you won't have recouped the money and your children will lose out on their inheritance. It is hoped that if these insurance policies could be adapted to cover a limited sum, ie the first £35,000 that individuals are expected to pay without state help, they could become more affordable.
"Dilnot is trying to create a climate which makes it easier for financial products and insurance to thrive. Everyone will agree that the current system is chaotic, difficult to understand and flawed in many ways," says Jim Boyd of the provider Partnership.
"The lack of clarity combined with a chronic lack of awareness about the fact that people have to meet care costs on their own if their assets are worth more than £23,250 means that individuals are completely unable to plan for care."
This target of £35,000 to build up during your lifetime makes life easier for consumers who prefer to self-insure too, as well as insurers looking to price products. Your tax-free individual savings account (ISA) allowance is a good place to start, with contributions of £10,680 permitted in the current tax year.
Once you are over 55 you can also take a 25 per cent tax-free cash withdrawal from your pension pot, although you would need £140,000 pot to be able to take out the full £35,000.
Equity release is yet another option in which you borrow against the value of your home, rather than selling it. This would enable you to release a lump sum to fund care costs, although this typically means paying over the odds in terms of interest charge.
Downsizing to a smaller property may be a more prudent way to free up some money, particularly if you are still living in a large family home. You may even decide that it is better to sell your home and begin renting instead but with such significant decisions to make, taking independent financial advice is crucial.
If you know you are going into social care, you cannot simply gift your home to your children as it will be deemed by local authorities to be a deliberate attempt to avoid paying care bills. However, in terms of financial planning for potential social care bills you might have later in life, IHT could play an important role.
The rules state that you can give away £3,000 each tax year and you can make gifts of up to £250 a person, with extra gifts permitted for family events such as weddings and births. You are able to give to your partner or spouse free of IHT but anything outside of these exemptions will be regarded as potentially exempt transfers which means they will be added back into your estate if you die during the following seven years.
"If you've got significant assets you might want to be gifting that away ahead of time when you've got plenty of years to go. It is a good tax planning tool anyway. The issue arises only when people know they are going into social care, but if you give away assets before you're ill that's not an unreasonable thing to do," says Adrian Lowcock from IFA Bestinvest.
Gordon Morris, Age UK Enterprises
They've attempted to make things as clear as possible with this report and we want the Government now to get a move on. Then we come on to the big challenge of making sure people understand what the cost of care is, what sort of support they can get and which products are available.
People need to understand that cover for care is not just about buying an off-the-shelf product; it's about finding the appropriate solution for your needs.
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