There is plenty to look forward to when entering the later years of your life. One reassuring fact is that a lot more people are living a lot longer than ever. The number of people living beyond 80 is expected to increase fourfold over the next 50 years. For an increasing majority, their retirement years will be long, productive and happy.
The downside to improved life expectancy is that not everyone can be lucky enough to pass their twilight years in the best of health. As people live to be older, the chances of requiring later life care and support also increase.
This is a worrying thought for many. A YouGov survey on behalf of Bupa suggested that around three-quarters of adults expect they will need some sort of care in old age. Half believe their family will take on the burden. A fifth do not know who will care for them.
Care services, whether residential or in the form of supported housing, is not something many people like to think about, for themselves or for their family. But it is a viable option many end up turning to when their care needs go beyond what family can provide.
It is not a comfortable thought, but planning for the possibility of requiring residential care in later life makes sense. It comes with a heavy financial burden – care home costs average around £36,000 per year. Life savings can soon be wiped out, inheritances disappear, or else surviving family are put under huge strain by having to pick up the costs.
There is currently a lot of confusion over government policy on care funding which is not helping people plan their finances for later life. A cap on care spending has been mooted for the past five years, but the government has delayed its introduction until April 2020 at the earliest.
If and when introduced, the cap will be welcome. The proposal is to cap lifetime personal spending on care at £72,000, excluding ‘hotel costs’, or the equivalent bed and board costs of residential care. These will be capped separately at £12,000 a year. With these figures, people will have a much firmer base from which to calculate their liabilities and arrange their finances accordingly, ending the current chaotic spiral of soaring costs.
People will also be entitled to financial subsidies for these costs on a means tested basis. At present, if you have capital and savings above £23,250, you get no support with care costs. The proposal is to raise this to £118,000. As this includes capital held in property, this will still exclude most homeowners from state subsidies. Again, the introduction of this measure has been pushed back to 2020.
Preparing for the Future
Even if you are liable for all care costs, the caps will give people sounder knowledge of where they stand financially, making it easier to plan accordingly.
In terms of practical steps, investment is always an option for raising capital from existing assets. However, investment for growth carries risks and works best as a long term strategy. If you are still not planning to retire for several years, this could be a good option, but as you get closer to retirement the priorities tend to switch to reducing risk, restructuring to protect assets and securing an income.
Annuities looked as if they had been consigned to history when the government abolished the requirement of every state pension holder to invest in one a few years ago, with the general view being that the poor returns they gave hardly made them worthwhile. However, some insurance firms have resurrected the annuity model as a means of paying for residential care.
In return for a lump sum, an annuity provider will promise to pay a fixed amount towards care costs. The annuity will be paid out directly to the care home and is tax free. There are also schemes known as enhanced annuities, or impaired life annuities, available to people with a diagnosed health problem or long term medical conditions.
Finally, there are numerous ways to use the capital tied up in your home to contribute towards care. The drawback of this for many people is it means considerable reduction in the value of any inheritance to be passed on to children or grandchildren. However, with careful planning, so-called equity release schemes can be balanced to cover both the financial requirements of care and retain a share in the property’s capital value.
Equity release is available in two main forms and is generally used as a means to raise funds for care in the short term. A Lifetime Mortgage is a long term loan secured against the value of your home. The home owner can continue to live there, and the loan is paid back following death when the property is sold – interest is payable. A Home Reversion Plan is sold to a reversion specialist on a shared ownership basis. Again, rights to residency are retained, and upon death, or the end of occupancy, the property is sold, with the proceeds shared between the reversion company and the deceased’s estate.
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