An action plan to fund long-term care

care-home-worker-dressing-old-patient

The population of the UK is ageing, and people's life expectancies are longer than ever. By 2040, nearly one in four people in the UK will be aged over 65, according to a recent Age UK report. But the country has little money set aside for elderly care, at either the state or individual level.

Many people assume the National Health Service (NHS) can be relied on to provide care for elderly relatives.

But while the NHS can step in under circumstances of urgent need, most families have to fund care costs themselves or rely on cash-strapped councils whose budgets have been cut and who can now only provide the bare minimum.

Currently, it is estimated that one million older people who need social care in the UK are not getting the support they need.

NO PREPARATIONS FOR CARE

In 2015/16 the average cost of care for an adult was £716 a week for long-term residential care (across all age groups) and £596 a week for long-term nursing care, according to NHS Digital.

But state support only kicks in when the combined value of a person's savings and any property they own falls below £23,250.

Yet most individuals have no robust plan to pay for care. A third of people say they would sell their property to cover their care costs, according to research from Aegon, which surveyed 2,000 people over age 45.

Another third have not made any preparations for long-term care they may need. Others intend to pay for their care from their regular pension income or from savings and investments.

'It's a real crisis and it's getting worse,' says former pensions minister Ros Altmann. She adds that the social care crisis is more serious than the pensions crisis.

She points out that the government took years to rise to the challenge of relieving the pension burden on its finances - partly by increasing the age at which the state pension is paid - but a similar move is not an option with long-term care.

Altmann says the chancellor missed an opportunity in the Autumn Statement to signal that the government cares about the crisis. The cohort of baby boomers that will retire soon is larger than the cohort currently entering retirement, and the boomers will live longer.

However, insufficient money has been set aside to fund them in retirement by either the government or individuals, while councils are cash-poor.

'Councils currently can't cope', says Altmann, which is when the NHS kicks in. Older people who are not well enough to look after themselves - and can't get out of bed, for instance - are not considered ill enough to receive NHS care.

But by staying at home they can get bed sores and infections that require urgent treatment, the costs of which are borne by the NHS.

PREVENTATIVE ACTION NEEDED

Of course, if these people received help to get out of bed and move around earlier, such ailments might easily be prevented, and they would not cost the NHS anything.

However, as Altmann points out, if there is no preventive action and only help in cases of urgent need, older people take up hospital beds and consume resources even though they may not be seriously ill, which makes it harder for others to get NHS care.

Altmann says nothing in the system deals with the prevention of need at the moment. Preventive services used to be provided by councils, but cuts to their budgets have left them with no resources for prevention.

She adds: 'Taking away the ability of someone with moderate needs to get help, in order to focus on those with substantial needs, causes more people to require help with substantial need.

'That is not the mark of a civilised society. It's a typical political lack of courage to kick the can down the road and tinker with the system a bit so that you can pretend you've done something meaningful.'

The extra funds given to local councils in the Autumn Statement are simply not enough. Currently, the incentive is for councils to leave elderly people in hospital for as long as possible, so that they cost the council less.

Altmann suggests a variety of policy solutions, including inheritance tax (IHT) incentives to pass on money put aside for care free, if it hasn't been used for care; care Isas; employer care saving plans; and elderly care vouchers.

PLANNING ISSUE

Steven Cameron, pensions director at Aegon UK, says: 'Most people don't even want to think they might need to go into care, so paying an insurance premium for the risk of having to go into care would feel very expensive.'

He recommends that couples think about long-term care as partners, because often one partner ends up caring for the other in later life.

Sean McCann, a chartered financial planner at NFU Mutual, points out that people can be tempted to give money away in order to reduce their IHT liability.

But if they do so and then need to apply for care within six months, the local authority could say they have willingly deprived themselves of capital and may ask for the gift to be returned.

The biggest issue is that many people don't consider the issue of care at all, and it falls to their families to make long-term - often very expensive - decisions at what can be an emotional time, says McCann.

Many products and insurance policies are available that will fund long-term care, says Dhawal Chandan, a director and chartered financial planner at Glasgow-based Just Financial Group.

People in residential care or about to be admitted can buy impaired or enhanced life annuities - known as immediate-need annuities - to provide a guaranteed income paid directly to a care home.

This may have tax advantages, says Chandan, but at the same time, it means losing access to the capital lump sum used to buy the annuity.

He says a few pre-funded long-term care policies are designed to cover potential care costs.

'Lately, life insurance companies have introduced policy add-ons specifically designed to provide financial assistance in the event of an individual needing care. The suitability of any product will completely depend on an individual's personal circumstances.'

DIFFERENT TAX TREATMENTS

When it comes to the impact of such products and policies on estate planning, he says every product has different terms and conditions and tax treatment.

For example, an annuity may not pay out to any beneficiaries of an elderly person's estate in the event of their death, unless capital guarantees were put in place when the annuity was taken out.

Against that, such a policy could help reduce someone's estate if it is worth more than the tax-free nil rate band threshold of £325,000 (£650,000 for couples), says Justin King, a chartered financial planner at MFP Wealth Management.

When asked what people can do to give money away to younger generations of their families if they're not sure they won't need it for their care in the future, Chandan says 'this is always a tricky area'.

As a general rule of thumb, if gifts are made with the intention of reducing the value of assets in order to qualify for local authority-funded care, the chances are that an authority will take a dim view of these gifts and deem them a 'deprivation of assets'.

'It is always a good idea to think carefully before making gifts, and also consider the method of giving to ensure this does not have a long-term detrimental effect,' says Chandan.

He says people tend to put this area of planning 'on the back burner' and therefore leave it too late to seek appropriate advice. From the outset it is therefore prudent for everyone to consider social care as a part of their financial planning in retirement.

WAYS TO FUND LONG-TERM CARE

If an individual with a pension income of £20,000 goes into a care home which costs an average of £750 per week (£39,000 annually), he/she will need to generate £19,000 of extra income a year.

Assuming the individual lives in the care home for three years, this would mean a total expenditure of £117,000. Here we discuss the benefits and risks of different funding options with IFA Dhawal Chandan.

Using capital and savings

The most straight-forward way is to use your capital and savings.

Benefit:

  • It's a simple and flexible approach

Risks:

  • In the current low interest rate environment, inflation will erode the real value of money
  • Minimal potential for capital growth while the cash sits in a bank account

Using an investment bond

Depending on the size of the initial investment and growth of the underlying assets, investment bonds can be used to provide a regular income to pay for care fees.

Benefit:

  • Although money made within the bonds is taxable, investors can withdraw up to 5 per cent of the original investment amount each year with income tax deferred

Risk:

  • Should be considered as at least a five-year investment timeframe, as cashing in sooner may incur early exit penalties
  • Annual 5 per cent withdrawals would require a fund of £380,000 to cover the additional £19,000 needed

Immediate needs annuity (long-term care plan)

Someone aged 85 would typically need to make a lump sum payment of £107,600 to receive a lifetime annuity of £20,000 payable towards care costs.

The income payable will vary according to health and age; it will be greater for someone older or with bigger health issues.

Benefits:

  • The plan reduces the risk of the person's estate being eroded by future care costs, giving them increased certainty as to what assets they will be able to pass on
  • If the income paid out by the plan goes directly to a Care Quality Commission (CQC)-registered care provider, there is no income tax to pay on it

Risk:

  • The plan does not guarantee to cover the full costs of care
  • Capital is effectively 'wasted' if the person dies within a short time of taking out the plan

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