Preparing for long-term care costs - avoiding the cost of long-term care
There are only two ways to avoid the cost of long-term care:
- Be prescribed care by your doctor, or Social Services, for medical reasons
- Have less than the minimum level of means-tested assets
Your local authority or trust will still expect you to contribute some of your income if you’re below these limits.
If care is being arranged at home for medical reasons, although many NHS Trusts may forget to mention it, they should pay for the ongoing care; it is worth chasing this up yourself if there is a chance it applies in your situation.
The second point has received a lot of attention of recent years. As you own your house, you might think that you have no chance of getting under the means test limit. However, because you are still living in the house when you arrange care at home, the value of the house is not normally taken into account in the means test.
Because people have been concerned about the prospect of having to sell their house in order to pay for care, a raft of often spurious pseudo-legal plans and strategies have emerged to remove assets – generally the main residence – from your estate for the purposes of the means test. The most frequently adopted ruse is to use a form of Trust to gift your home to your children. The logic goes that, as it no longer belongs to you, it will not be included in any means test.
However, councils have the power to look into any arrangements during your lifetime, and can make a judgement on whether they believe the only reason for setting up the arrangement was to get out of care funding (known as “deprivation of assets”). If they cannot be convinced otherwise, they can simply ignore the arrangement, and include the full market value of the asset in you means-tested estate. In these times of budget cuts and austerity, they will take some convincing.
Such arrangements can be doubly ineffective; they often do not work for care cost reduction, but can also hamper legitimate strategies for reducing Inheritance Tax where the overall estate is larger than the nil-rate bands, currently £325,000 per spouse/civil partner.
Funding Long-Term Care
If you want to limit the eventual total cost of care, it is possible to buy an insurance contract, known as an immediate needs annuity, that will cover the costs indefinitely for a fixed initial lump sum. The initial sum will not be far off the cost of 4 years of care costs, so a decision needs to be made on whether living longer and having to find the extra cash is a bigger problem than dying early and having paid more than you actually needed.
Equity release and Lifetime Mortgage products are now available, enabling you to borrow against the value of your house to release funds for your care. It is unlikely that the cost of care will eat up the whole value of your house. For example, if you have pension income of £10,000 and your care arrangement costs £34,000, you only need to find £24,000. If you decide to go for an immediate needs annuity, this will amount to roughly £100,000, which is less than half the average UK house value.
It should be noted that the maximum level of Equity Release is generally 25% of the value of your house, so this may not be the full solution for everyone.
Houses will generally increase in value over time. If some of the equity is released, the increase in value could even pay for the repayments on the loan that are rolled up until the eventual sale. This means that there can still be a reasonable inheritance for the children.
Whole of Life insurance
Finally, there are versions of “whole-of-life” life insurance which will cover you for an agreed amount, based on how much you think would be needed for your care costs. Let’s say you worked on 5 years of care with an initial fund shortfall of £30,000 a year, going up by 5% a year. This would indicate a need for about £165,000. You could set up a policy to cover this amount, which would pay out when you need care on a permanent basis. This could, in turn, be used to buy an immediate needs annuity, as described above.
Some of these schemes will give a pre-payment of a percentage of the insured amount on diagnosis of the onset of dementia or Alzheimer’s to help before permanent care is warranted.
As every individual will have different circumstances, there can be no “one size fits all” solution. It is important to seek out qualified advice, and there is a small but growing pool of expertise available in the IFA market – look out specifically for the Certs CII (MP & ER) designation, or advisers affiliated with the Society of Later Life Advisers (SOLLA).
More important than anything, though, is to ensure that you have given someone you trust the legal power (a “Power of Attorney”) to act on your behalf if you lose the mental capacity to act for yourself. Also, make sure you speak with your loved ones about your wishes for your future care, and ensure that they understand your full financial situation.
At the end of the day, money is there to be enjoyed. If you have managed to build up savings or equity in your house, it is nice to think that it will be you who gets the benefit from it. If this is the benefit of a more comfortable final few years, wouldn’t your family want you to take it?
This article about preparing for long-term care costs was written for MyLife by Beacon Wealth Management.