How can we plan for the cost of care?

When Boris Johnson claimed to have fixed social care for a generation, little could he have expected the policy to implode quite so quickly.  The planned cap of £86,000 on the cost of care originally due to come into force this October has been quietly dropped.  With Teresa May losing her majority in 2018 in part due to the ‘dementia tax’ it is no wonder that politicians today are wary of going anywhere near this subject.

So where does that leave us all in thinking about how to plan.  With inflation eroding the value of cash and potentially your income in retirement, we have recently seen more queries about how best to plan for and secure future care costs.  I think the only thing we can conclude is to assume that you’ll need to rely on yourself as limited support will come from the state.

Planning for the unknown and the unwelcome

The average cost of living in a residential care home in the UK is £760 per week. The average cost of a Nursing home rises to £960 per week. And the actual amount depends on where you live and what services you want. For many of us, we don’t simply want what is ‘average’, for either ourselves or our loved ones. Leading residential and nursing homes can cost £80-90,000 and in one of our client’s cases, in excess of £100,000 per year.

Equally, many people would far rather not spend their last years in a care home at all. They want to stay in their own home and receive whatever care they need there. But that can equally end up being very expensive, certainly if live-in care around the clock is necessary.

There is no right answer. Medical needs, the comfort of your own home, the social aspect of a community environment, the proximity of family and of course the financial cost all plays a part.

And of course, we may never need care. So there is a dilemma. Do you keep money aside or save specifically for a cost that may never arise, potentially affecting your financial ability to do the things that you want to do whilst you are able. The usual answer is to put off thinking about it for as long as possible.   It is worth however at least trying to think through some ‘what if’ scenarios to help when that awful moment may come.

So what are the options?

Firstly, planning ahead and scenario testing various outcomes is an important place to start. It is important that you know what the future might look like.

It may be that, even whilst you have maintained your desired lifestyle to the full, you have enough surplus investment to fully cover the cost of care. But if that is the case, is that the best use of that capital. If you end up not needing it, will your family end up paying Inheritance tax on those funds, currently at 40%. Or are there dependents that would actually benefit from a gift now, rather than waiting. That could give them want they need and avoid inheritance tax as well.

For other big expenses that might not happen, we take out insurance – health, car, travel we do it all the time.  And insurance options do exist. There are products now available that provide a specific annuity payment at the point that care is needed. In exchange for a capital sum, the costs of care are guaranteed by this annuity. As with any annuity, if you die earlier than expected, then the annuity company benefits. If you live longer than expected, then you/the family benefit. But why many people use this type of vehicle is that it gives surety and in some cases means that any surplus over the cost of the annuity can be gifted or invested in ways that avoid inheritance tax. It doesn’t work for all, but can be a useful option in the right circumstances.

Another method that is often used is either a lifetime mortgage or equity release. Many years ago, products similar to these (home reversion plans) picked up a bad reputation, but more recently these new vehicles have been developed that offer a far better structure. In both cases, you borrow money against the value of your property. In the case of equity release, any interest rate (usually fixed at outset) is then added to the outstanding loan and is only repayable on death (of the survivor, if jointly owned). Importantly, the amount that needs to be repaid can never exceed the value of the property. This allows you to use the asset value of your property whilst continuing to live there, freeing up any investment capital. It can also mean that you don’t have to touch your pension fund either, which is currently not subject to inheritance tax. This can therefore be an ideal method of significantly reducing any IHT liability whilst giving you capital to live on and fund care requirements.

The alternative, Lifetime mortgages, is similar in many respects to equity release except that you physically pay any interest payments due. If you are in the position where you have retirement income that can pay the interest, it also achieves inheritance tax savings as well as the value of your property for future generations.

This is an incredibly complex area and any decisions need to be very carefully considered, often across the generations within a family. But there are options that can help, often with additional tax benefits as well and starting a conversation sooner rather than later can relieve the burden on family members.

If this is something that you, or family members, would like to discuss further, please speak with your adviser.