After HSBC was slapped with a record £10.5m fine last week for selling unsuitable investment products to elderly customers, it hit home how important it is to get financial planning for care right. But, if you aren't willing to rely on the Government, what can you do to protect yourself?
The Financial Services Authority (FSA) issued its largest ever retail fine to HSBC after its subsidiary NHFA mis-sold investment bonds to elderly customers covering the cost of long-term care. These bonds were entirely inappropriate for the vast majority of customers (87 per cent according to the FSA), who with an average age of 83 had a shorter life expectancy than the recommended five-year investment period for the bonds.
The big problem is that if you leave it too late, paying for long-term care can eat up everything you have. No one can guess how long they will need to be in a nursing home, or if they will need care at all.
"There is a lack of understanding that care is not free at the point of need and that it is means tested," says Chris Horlick from the insurer Partnership. "Most people arrive at point of need and think the NHS is going to pick up the tab for this, and for many people it is a huge shock that it won't."
Care needs vary widely; some people get help from family members and others will not need to go into a home. What we do know, however, is that with fees which now average £36,000 a year and hitting more than £40,000 in London and the Home Counties, it doesn't take long for even the moderately wealthy to see their money run out.
The best place to start is to find out what the state is likely to provide, but if you have even moderate savings, don't expect much help. If you are receiving care at home, you will have to cover all costs yourself if your assets (excluding the value of your home) exceed the upper limit, which for this tax year is £23,250. How much you pay will also depend on where you live. Within England there is something of a postcode lottery, with wide variations in the hourly cost of home care depending on your local authority and some authorities capping the amount you pay each week.
In Scotland, there are free personal and nursing care payments to help towards the cost of care, currently £159 a week for personal care and £72 a week for nursing care payments, but otherwise, the amount you pay for nursing home care is means tested. This time, the value of your home will be included unless any surviving spouse, relative under 16, aged over 60 or incapacitated is still living there. In England the upper limit is £23,250, in Wales £22,000, Scotland £22,750 and Northern Ireland £23,250.
With this in mind, it may pay to alter the way you own your home later in life. Rather than owning the property with your partner as "joint tenants", which means that upon one person's death the other automatically receives that share, you could change this to "tenants in common" so that you are free to give your share of your property to anyone you like. If your partner died and left his or her share to children, or placed it into a trust, that share of your home could be excluded from the means testing if the surviving partner later needed care. The council must look at the market value of the home but will be able to take only half of your home into account.
There are some non-means-tested benefits available including attendance allowance for over 65s or disabled living for people under 65. The state will normally pay for the first 12 weeks of care but there is some shortfall to make up. Beyond this, the only way to meet care home bills is to use savings, investments and property, or take out insurance.
"People should firstly ensure they have sufficient cash to meet their short-term needs," says Danny Cox from IFA Hargreaves Lansdown. "This may be between 10 and 25 per cent of their total liquid assets and is likely to get larger as they get older. Cash ISA and certain NS&I products are tax free which could help improve the returns. The downside of most cash savings is that their spending power falls over time due to inflation."
For longer-term investment a stocks and shares ISA is a tax-efficient way to generate an income. Up to £10,680 can be invested in ISA per tax year (of which £5,340 can be cash) and this rises to £11,280 in the next tax year. "Unit trusts are the next choice since generally the rate of capital gains tax paid is lower than the rate of income tax paid," says Mr Cox. "Gains of up to £10,600 can be realised a year without any capital gains tax to pay."
In the run-up to retirement there are no pre-funded products available to prepare specifically for care fees, and those that were available in the past didn't sell. At this stage in life many people don't have enough disposable income to save for a pension, let alone long-term care.
"Post-retirement, say, from age 65 to 85, the situation is quite similar except that they may well have built up a substantial asset – their home – and might choose to release some of that equity to fund care," says Mr Horlick.
This cash can be used to pay fees directly, or to take out an immediate needs care plan, although there are only two providers: Partnership and Friends Life. This is a type of annuity which makes (tax-free) payments directly to the care provider until you die. So, your care fees are guaranteed for life and you won't need to move into a local authority care home. The flipside is that these are expensive – Partnerhsip's average premium this year was about £100,000 – and if you die shortly after going into care, you may not recoup the money.
If the Dilnot Inquiry suggestion of a cap on the cost of care does come in, this could encourage more insurers to cover this type of risk. If they are covering a limited sum it should make these policies much more affordable. Until then, however, many people could be forced to sell their home. You can release equity if you don't want to sell, but this can be an expensive option.
"The Dilnot report set out an ambitious but achievable plan. We now need the Government to act on it," says Michelle Mitchell, the charity director of Age UK. "It will have a direct impact on current and future generations of older people and they will stand in judgement if the Government holds off any longer."
Expert View
Michelle Mitchell, Age UK
"Many people don't realise care isn't free until they reach the point when they need it. One in 10 people are likely to pay over £100,000 on care costs in old age. This is a huge cost that needs to be considered when planning for later life."
Options
What you can do?
*Start early and you may have time to build up a big enough pot to cover care fees without having to sell your home or take out an annuity. Use up your tax-free ISA allowance and consider investing in stocks and shares rather than cash as this is likely to beat cash over the long term.
*Be Prepared: If you have a partner keep your savings in separate accounts to avoid any problems with local councils using joint accounts to assess your ability to pay for care. Don't forget inheritance tax – you are allowed to give some of your assets to family and friends (including £3,000 cash each tax year plus gifts of up to £250 a person). But be warned: the taxman won't be happy if you do this deliberately to avoid paying care bills.
*At the point of needing care put in a claim for attendance allowance, for people aged 65 or over, worth either £49.30 per week for daytime help, or £73.60 per week for help during the night.
*For security you can take out an immediate needs care plan but there aren't many providers to choose from, so speak to an adviser before signing up. You may need to use your property to free up more cash. You can sign away some or all of the value of your home to an equity release company in exchange for lump sum or regular payments but, again, you must seek independent advice first.
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