Long term care – covering the costs if the need arises

None of us can be certain if we will need long term care when we get older and this uncertainty, together with a broad understanding that care costs can be very expensive, means that for many people, this can be a major financial worry.

Most of us would like to imagine that the assets we have worked hard for throughout our lives will pass to our children and grandchildren and not be swallowed up by funding the cost of care in our later years, but with an average weekly cost of £563, a stay of just a few years in a care home can make a significant dent in ones assets.

Even with new rules coming into effect in April 2016, those with assets above just £14,250 will have to cover some of the costs and those with assets over £118,500 will be expected to cover all the costs. Very few will be able to rely fully on the local authority to cover the costs of care should it be required, whether in their own home or a specialist care home.

So what can be done to help cover the cost of care if you have an income shortfall?

One option may be an Immediate Care Annuity, which could be appropriate if you need funding for care to start immediately or within 12 months and want no investment risk. With these arrangements you use a lump sum to purchase the Immediate Care Plan and this provides the certainty of a regular income for the rest of your life. This reduces the risk of outliving your savings and may help avoid selling your home to raise funds.

A recent case of ours helps to outline how this can work in practice.

Our client’s mother was a lady aged 83, suffering from dementia, but with no other health problems and about to move into a residential care home. She had a shortfall of £15,000 per year when considering her actual income against the cost of care in a local residential home selected by her family. She had assets, which included a main home worth £300,000, savings of £150,000 and the clear objective was to ensure that the cost of her care would be met for the rest of her life, however long she lived. At the very least she should be able to pass her property on to her children after her death.

Clearly, she could fund the shortfall from investments, but if she lived longer than six years, taking into account the likely rises in the cost of care, the cash would be gone and the property would probably need to be sold.

So let’s look at how a long term care plan worked in this situation.

Using £101,351* of her savings, we were able to set up a guaranteed income stream for the rest of her life of £15,000, which increased at 5% per annum. Together with her state pension and occupational pension, which also rise in line with RPI, this secured the full cost of her care. So however long our client’s mother lives, the remainder of her savings and her property can therefore be passed to her family after her death.

Whether or not this solutions works out to be better than spending the cash, depends on how long she lives. If she dies in the period immediately after setting up the plan then a proportion of the capital is repaid (within one month – 100%, two to three months – 50% and four to six months – 25%), but for the family, the guarantee that care home costs were covered for life and a good level of her assets would remain intact to pass on was worth the risk of her dying in the early years, before any real value had been provided by the long term care plan.

Because the income is paid directly to the care home it is paid gross, so no tax is deducted, even though the lady is a tax payer.

The income generated means that the return on capital in this instance is effectively 14.8% per annum and when you also consider that this lady’s assets exceeded the Inheritance Tax threshold of £325,000, the funds used to purchase the care plan would otherwise have suffered 40% tax before being passed on to her family upon her death, the effective return on the capital is actually just over 24% per annum.

Assuming this lady lives beyond four years, this would mean that her net estate available to be passed to her family would be greater than if she simply used her cash to cover her income shortfall.

This area can be highly emotive and needs very careful consideration by the families concerned. Professional advice should always be taken.

The example above isn’t the only solution, but for some, the route outlined can provide tremendous peace of mind, with no investment risk and the assurance that specific assets can be passed on in line with original wishes.

The above example should not be inferred as a recommendation. All immediate care annuities are subject to medical underwriting and the income generated from them may be higher or lower than the figures quoted.

*Source for Immediate Care Annuity is Partnership Assurance – November 2014

David Squire, Chartered Financial Planner

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