How to cope with the cost of care
Mary Cross moved into a residential home in Wiltshire at the end of 2005. Her 62-year-old daughter Anne says: “We looked at quite a few homes, but a lot of them were depressing. This one was quite expensive, and cost £4,000 a month, but we felt it was worth it.”
Mary sold her house and moved in, with £180,000 in the bank to pay for care. Anne says: “Mum was 85 when she moved in, so we didn’t have any worries about the money.”
However, three years and £144,000 down the line, they realised Mary couldn’t afford to stay in such an expensive home. Anne says: “She still had too much in the bank to qualify for help, but she didn’t have enough to stay where she was, so she was forced to move.” Sadly, three months after moving, Mary died.
The cost, even of more standard homes, soon adds up. A survey by Saga found that the average nursing home costs £25,000 a year. Alex Edmans, a spokesperson for Saga Care Funding Advice Service, says: “After property purchase, long-term care is likely to be the biggest expenditure in someone’s lifetime.”
Ian Owen, chairman of Partnership Assurance, says: “Most people think the state will pay; that it’s some sort of continuation of the NHS.” But the NHS will only provide funding if you have very serious medical needs, classed as ‘complex and unstable’. If your needs aren’t deemed this serious, you will qualify for some help from your local authority, but not a great deal.
The rules differ across the UK, but in most places, if you’re aged 65 or over, you will receive the Attendance Allowance, which pays either £47.10 or £70.35 a week tax-free, depending on your situation. If you live in a home that provides nursing care, the NHS would normally pay £101 a week towards this.
In Scotland there is no Attendance Allowance, but you get Personal Care payments - and overall, the system is slightly more generous.
These sums, however, are a drop in the ocean. For the rest of the cost you will be subject to a means test. If you have assets lower than £13,500, you will have most care needs met by the local authority; if your assets are between £13,500 and £22,500, you will get some help; but if you have more than this upper limit, you will receive no financial support at all. If you live alone, your house will usually count towards this, so most people end up selling their home to pay for care.
Given that the number of people needing care is rising, the government recognises something has to change. Health Secretary Andy Burnham says: “We don’t want to see a country where every year the standards of care for older people go down and down. We have to reverse that trend.”
In June 2009, the government issued a Green Paper proposing three alternative solutions. Under the first, when you reach 65 you have to pay between £17,000 and £20,000 to guarantee free care in later life.
There are a number of proposals about how this would be funded. One is that funding would come out of pension lump sums or as a tax paid on death. This is the government’s favoured option, although some experts question its efficacy. For example, Edmans argues: “It would probably have to be compulsory, which would create a lot of resentment.”
The second option is a shared-care deal, where the state would pay for up to a third of care costs and you would pay the rest. And a third option is a voluntary insurance scheme, which would mean paying between £20,000 to £25,000 in premiums in order to get free care.
It’s not clear yet which of these schemes will be introduced, or indeed whether a possible change of government would halt the process entirely. But even if one of these solutions is adopted, none of them covers the residential aspects of care.
WHERE TO START
All this means that it makes sense to make plans for yourself. The rules are very clear – you can’t escape the means test. Ashley Clark, a director of needanadviser.com, says: “If you deliberately deprive yourself of assets in order to avoid paying for care, you’re breaking the law.”
However, you can get involved in other types of planning, which will coincidentally mean you are below the means test maximum assets.
There are a number of situations in which your house will be excluded from the means test. If a family member over the age of 60 is living there, for example, it will automatically be excluded.
It can also make a difference how you own the house; most couples are joint tenants, so when your spouse dies you automatically inherit. But you can also own as ‘tenants in common’, so on death each of you can leave your half of the house to whoever you choose. After the death of the first partner, you’ll only actually own half of your house.
Given that you can’t sell half a house, for the purposes of the means test, it will be considered worthless. Of course, you cannot do this specifically for care-planning purposes, but it may make sense as part of inheritance tax planning.
The third mechanism that would put your home outside the means test is a trust, because assets in trusts aren’t counted. The usual approach is either a discretionary trust or a life interest trust. The downside is that the rules surrounding trusts are changing all the time and the taxation of them is becoming onerous. If you want to take this route, it’s worth seeing a specialist adviser.
Again, you couldn’t do this specifically to escape fees, but it could reasonably be seen as IHT planning.
There’s a big risk with all of these options, however. If the council decides you have done any of these things in order to get around the rules, it has the power to include the home as part of the means test anyway.
Clark warns: “You must do it before there is an expected likelihood of needing care. As soon as you’re diagnosed with something that makes care more likely, you’ve crossed the line. That could be something like a diagnosis of diabetes or high blood pressure.” This pitfall means it’s worth talking to an adviser before getting into this sort of planning.
INVEST YOUR ASSETS
You can also look at cash assets. The rules mean you’re not even allowed to spend it to avoid paying fees. Clark points out that “frivolous spending is considered deliberate deprivation of assets”. However, you may choose to give money away as part of IHT planning.
Another option is insurance bonds. These are investments, but are structured as life insurance, so they aren’t included within the asset calculations. Clark explains: “It’s legitimate to invest in a bond for tax reasons, because they allow you to withdraw up to 5% of the capital each year tax-free.”
However, he warns that regular income from these bonds is counted within the means test, so income would only be exempt if it was taken irregularly.
They aren’t suitable for everyone. Their underlying investments can include everything from bonds to property and shares, so you need to be happy with the investments the investment bond makes. They may also have high charges, which aren’t particularly transparent, and buying a bond has to be done far enough in advance to prove it is not a deliberate move to get around the rules.
MAKE YOUR OWN PLANS
If none of these approaches suit, you will need to look at your options for paying for care.
There are a number of products on the market. The first is insurance. This used to be widespread, but now there are only a few policies available. They allow you to pay premiums during your working life, and if you satisfy the claims criteria, the insurance will cover the costs of care.
The second, more common approach is an ‘immediate needs care plan’. In return for a lump sum, the plan guarantees to pay your care home fees for the rest of your life. The price will depend on your circumstances. The advantage is the security. The disadvantage is that if you were to die less than three years into holding the product, your heirs wouldn’t get the money back.
The third is a variation on this – ‘a deferred care plan’. This is a similar sort of plan, except you take it out now and defer your income for up to five years. This is cheaper, but needs to be planned in advance.
The fourth option is an annuity. This is a bit like the immediate needs plan but it doesn’t necessarily pay all the fees. It will pay a fixed sum, which may rise, but isn’t guaranteed to do so in line with care fees.
This was the option that Ralph Simons, an 89-year-old retiree from Esher in Surrey, chose. “I lost my wife two years ago and was fed up with trying to look after myself, so I started looking at care homes,” he explains. “The home I chose in the end is expensive [the fees are £5,800 a month], but I think of it as rather like living in a hotel.” .
Ralph initially felt he couldn’t afford it, but went to see an adviser, and decided to sell his home and buy an annuity from Partnership Assurance. He spent almost £157,000 in return for an income of £3,729 a month.
“At first sight it seemed quite exorbitant,” he comments. “But the annuity is paid directly to the care home, so there’s no tax on it, and I don’t have to worry about eating into a lump sum.” The rest of the fees he pays out of his pensions. He adds: “It means that I don’t have any money worries.”
The fifth option is to invest the proceeds of any house sale and use the income to pay fees. But this is a highly risky option as investments can go down as well as up.
The final alternative is to rent out your home, and use the rent to help pay for your care.
However, this will rarely cover all the fees, and you’ll also need to think about tax, as well as the costs and hassle of running and maintaining a property.
There are no easy answers, but it certainly pays to ask a few questions before you rush into making a decision. Ian Owen says: “People tend to go into this in a hurry, but you should start thinking about care before you actually need it.”
WHAT IS A 'LASTING POWER OF ATTORNEY’?
Most people believe that if something were to happen to them, their loved ones would naturally have the power to take any of the financial and welfare-related decisions required to look after their interests.
But they don’t. Steve Pett, managing director of Allied Professional Will Writers, says: “You would have to go to court to gain that right, and if you’re an unmarried partner, the court may grant it to a relative instead.”
The only way to guarantee you will be looked after if you lose what is known as ‘mental capacity’ is through ‘lasting power of attorney’ (LPA). There are two versions, one financial and one related to welfare, and they give you the right to make decisions for a loved one. These replace the old ‘enduring powers of attorney’, which were simpler but provided fewer safeguards against abuse.
Pett says: “Applications for the new powers aren’t simple; there are more than 20 pages to fill out for each type of LPA.” You can get a professional to complete them for you, but as they will charge anything between £100 and £1,500, it’s worth getting a few quotes first.
On the plus side, however, the forms were simplified in October 2009, and as Pett says: “They’re well worth the trouble. You would spend far more and it would be much more stressful going to court to try to get a ruling.”
If you get an LPA, it does remain open to abuse. Pett says: “There can be situations where family members may bully an elderly person into signing it over.” However, if you’re worried that yourself or a loved one is in this situation you can report it to the Office of the Public Guardian on 0845 330 2900 or go to publicguardian.gov.uk.
HOW MUCH WILL MY CARE COST?
The Green Paper estimates that, on average, a 65-year-old will need £30,000 of care in retirement. However, this varies widely, with 20% needing care costing less than £1,000, while 20% need care costing over £50,000.
1. Care in a residential home
Homes without nursing care cost around £24,000 a year; those with nursing about £30,000.
2. Care in your home
You can expect to pay about £13 an hour for a carer in your home. If you wanted care in the morning and the evening, your annual bill could reach £10,000. If you need care in your home, you will be subject to the means test, but your home won’t be included in the calculations. You can either take the services provided by your local council or you can apply for Direct Payments and pay for services privately.
3. Care from a relative
This is the cheapest option. However, you need to consider respite care for those times they may not be able to be there. Most councils offer residential respite care for less than £100 a week, which will cover very basic needs.
Generally thought of as being interchangeable with life assurance, but isn’t. Life insurance insures you for a specific period of time, at a premium fixed by your age, health and the amount the life is insured for. If you die while the policy is in force, the insurance company pays the claim. However, if you survive to the end of the term or cease paying the premiums, the policy is finished and has no remaining value whatsoever as it only has any value if you have a claim. For this reason, life insurance is much cheaper than life assurance (also called whole of life).
A test to assess the financial “means” or resources (income, savings, property) of a person to determine whether or not that person is eligible for financial assistance (such as state benefits, legal aid, free prescriptions, etc) from the government. A means test can also be used by the courts to determine whether or not a person is eligible to enter bankruptcy proceedings or if they have the means to repay their debts to their creditors.
Lasting power of attorney
Refers to the legal document which allows an individual (donor) to nominate a person or people (attorneys) to make decisions on his or her behalf should they reach a state where they no longer have the mental capacity to make certain decisions. LPA can be divided into two groups: the donor’s financial wellbeing and their health and general welfare. You can choose anyone you trust to act as your attorney provided they are over 18 and not bankrupt when they sign the form and you can appoint more than one person to act and can choose whether they can act together or independently. An LPA is a powerful and important legal document and you may wish to seek advice from a legal adviser with experience of preparing them.
Issued by life companies and designed to produce medium- to long-term capital growth, but can also be used to pay income. The minimum investment is typically £5,000 or £10,000 and your money is invested in the life company’s investment funds, so the bond can either be unit-linked or with-profits. They offer a number of tax advantages, such as the ability to withdraw up to 5% of the original investment amount each year without any immediate income tax liability. Also, a number of charges and fees apply, such as allocation rates, initial charges, annual charges and cash-in charges. As investment bonds are technically single-premium life insurance policies, they also include a small amount of life assurance and, on death, will pay out slightly more than the value of the fund.
Generally thought of as being interchangeable with insurance but isn’t. Assurance is cover for events that WILL happen but at an unspecified point in the future (such as retirement and death) and insurance covers events that MAY happen (such as fire, theft and accidents). Therefore you buy life assurance (you will die, but don’t know when) and car insurance (you may have an accident). Assurance policies are for a fixed term, with a fixed payout, and unlike life insurance have an investment aspect: as a life assurance policy increases in value, the bonuses attached to it build up. If you die during the fixed term, the policy pays out the sum assured. However, if you survive to the end of the policy, you then get the annual bonuses plus a terminal bonus.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.
The tax levied on the total value of your estate after you die. IHT has to be paid by the beneficiaries of your estate before they can receive any of the money from it. The money can’t be taken from the value of the estate _– it has to be paid before any money can be released. There is an IHT threshold – known as the “nil-rate band” – below which no tax is levied (£325,000 in 2011/12). Any amount above the nil-rate band is subject to tax at 40%. If your estate totals £600,000, there is no tax on the first £325,000; however your estate will pay 40% tax on the remaining £275,000, a total of £110,000. Prudent tax planning can reduce your IHT liability, so always consult a specialist solicitor.