'One in four of us will need long-term care': Are we saving enough for our retirement?
But we don't want to think about it and we don't plan ahead, though the costs can be huge. Julian Knight on the options for funding help in our old age
Sunday 28 September 2008
As people live longer, more will need care either at home or in residential accommodation. The costs, though, can be huge.
"People don't like to think they will need long-term care, but once you reach the age of 65, there is a one in four chance that's exactly what you will need," explains Lizzie McLennan, senior policy officer at Help the Aged.
Ms McLennan estimates that it can cost around £25,000 a year to fund a place in a residential care home. However, in some parts of the country – most notably London – where property prices are high and available beds thin on the ground, the bill can be over £30,000 a year. And that's before any costs for creature comforts that the new resident might request.
"If you want an en suite bathroom or direct access to a garden then the costs can rise further," says Sandy Lowth, an independent adviser with financial-planning firm Informed Choice. "I have just costed two places for a couple and the total has come to around £120,000 a year."
But an estimated 12 million people are not even saving enough for a comfortable retirement, so expenses on this scale will be beyond them unless they sell their property or any other asset they may have wished to pass down to their family.
State help is limited, with local authority contributions being strictly means-tested. If you have assets worth over £22,250 and live in England or Northern Ireland, you will receive no help with care costs apart from an attendance allowance for care received in your own property or residential accommodation, or a registered nursing care contribution if you're living in a nursing home.
People in Scotland fare better. The Scottish Executive pays a personal care allowance. But even north of the border, people still face considerable expense. "The system doesn't pay the basic accommodation costs or for food. These account for a large proportion of care home fees," adds Ms McLennan.
As for the tactic of giving away assets – such as property or shares – in order to beat the means test, that is playing a dangerous game. Under what are called "deliberate deprivation" rules, local authorities are entitled to order the gifted asset to be returned to the estate of the individual who is claiming help with care home costs. Crucially, there is no time limit on the local authority's power to do this.
But despite all these financial constraints, it seems that few of us think so far ahead as to what we will do if we need long-term care
"Invariably, the key decisions are made at the time the individual is ready to enter the home – and often it's the daughters and sons who make the choices," says Ms Lowth. "At this stage it's a case of working with the assets of the person requiring care and ensuring that a lasting power of attorney [the right of a third party to sell an individual's assets] is in place.
"The first priority is to take advantage of all government help. After this, it's a case of trying to boost the individual's income so that they can pay for the care. Often this means using some of the assets to buy an annuity – an income for life."
But in order to buy an annuity that pays out enough to cover care home fees, the individual may need very substantial assets indeed – often in excess of £500,000. However, adds Mr Lowth, "the size of an annuity is based on life expectancy. Therefore, if the person taking out an annuity is elderly and unwell then the income paid will be much higher than if the individual is younger and in reasonable physical shape, because they could live longer."
The amount of income paid is often reduced by a decision to buy capital protection alongside the annuity. Capital protection means that should the holder of the annuity die having received less than the original sum invested, the balance will be repaid as a lump sum to the estate. But as a rule, tacking on this protection to an annuity policy can cut the income received by more than a third.
An alternative strategy is to sell the individual's assets and then reinvest them with the aim of producing returns that can then be used to pay care fees. But unlike with an annuity, there is the age-old investment risk that returns can go down as well as up – and the newly acquired investments may ultimately have to be sold to meet the fees anyway.
Life insurance bonds are often proposed as a means of paying for long- term care. The big advantage is that because it is categorised as life insurance, this type of bond is excluded from the local authority means test. But there is a caveat. "The bond must be bought before the need for care arises, otherwise the local authority may deem the investment a deliberate deprivation and include it in the means test anyway," says Alex Edmans, a care funding adviser with Saga.
Long-term care insurance became available in the mid 1990s, but over the past few years the market has withered on the vine. Ms McLennan says there is no appetite among providers. "Insurers say that the one in four risk [of needing care] is uninsurable. They reckon they would have to charge so much in premiums that no one would buy the policies in the first place."
There is another potential vehicle for meeting some of the costs of long-term care: releasing equity tied up in the family home.
"The individual's care requirement may only be help with some daily living activities such as getting in and out of bed or having a bath," explains Dean Mirfin from specialist adviser Key Retirement Solutions. "Equity release can be a good way of freeing up cash so to meet these expenses, which are far less than for full-on residential care."
In effect, equity release is a form of remortgaging where a lump sum or income is paid in return for a proportion of the proceeds from the sale of the property when the individual moves or dies.
"If the homeowner needs, say, a few tens of thousands to pay for home care costs, they can unlock this money by signing over only a relatively small proportion of the property. The rest could then be left for their loved ones as an inheritance."
And it seems more and more people are choosing to stay put. "The number of care home places is actually shrinking in some parts of the country and far more are being looked after in their own property, perhaps only for a few hours a day," says Ms McLennan. "Costs start at around £12 an hour for this type of care, which is clearly less expensive than entering a residential home. I can see that equity release could be a tool to fund such expenses," she adds.
But it is worth bearing in mind that if the homeowner enters residential care and the property is unoccupied as a result, then under the terms of the equity-release contract, the loan must be repaid – usually through the sale of the property.
More generally, equity release comes with big health warnings attached. Last week, for instance, consumer group Which? described the practice as strictly a "last resort".
"I think that the interest costs are high and they roll up over time. This can soon eat up the equity in the property for what is, at the outset, a relatively small loan," says Ms Lowth.
Ms Edmans says an alternative to equity release is to ask the local authority to defer payment of care home fees. "The authority will put a charge against the property so that the money owed is only repaid when it's sold. Importantly, the local authority doesn't levy interest on the deferred amount."
But Ms Edmans adds that it is at the local authority's discretion as to whether to allow deferred payment of care home fees.
All in all, though, Ms Lowth says the best advice is to plan early for long- term care by building up reserves. "The key is to try to have as large a retirement income in place as possible, through pension saving."
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