Planning how to pay for care – a topic full of uncertainty. Will you spend all of your life savings just to get sub-par care and accommodation? Or, will you find yourself with just enough to afford the care you’d really want in later life?
And, what if you play it safe, holding back money that could have been used on holidays or helping family, only to live independently in your own home for the rest of your life?
With Labour’s decision last year to abandon the proposed cap on care costs, this isn’t something you should ignore. It needs to be built into your financial plan, and carefully at that.
In this video, we’ll explore how the cost of care can derail your plans if not properly accounted for. We’ll look at common pitfalls, like hoarding too much capital or underestimating how care might actually unfold. And finally, we’ll give you practical options to help with care costs, so that you can plan ahead without compromising your lifestyle.
Hello and welcome to Insightful Planning with Astute. I’m Elliot Unsworth, Head of Client Proposition at Astute Private Wealth, and in this video, I am going to explore the idea of long-term care and some practical financial planning strategies to assist you in overcoming any challenges you may encounter in this area.
What precisely do we mean when we say “long-term care”? We’re looking at the possibility that one day, you might need additional support—whether it’s in a care home, assisted living, or receiving care at home. Now, it’s easy to get caught up in the fear of high care costs. You might be wondering, “Should I set aside a huge chunk of my resources just in case?” or, conversely, “Should I be thinking about giving away my assets, so they don’t get absorbed by care costs, leaving little to nothing for my children?” But today, we want to show you that there’s a more balanced approach.
Let’s start with some numbers to put things into perspective:
- Age of Entry: On average, people enter long-term care around the age of 85.
- Duration of Care: Most people spend around 2 to 3 years in care. However, over a quarter of stays can last more than 3 years.
- Cost of Care: The average cost of residential care in the UK is about £49,000 per year, while nursing care costs more, averaging around £65,000 per year.
- Means Test: Some individuals are entitled to help with the cost of care, and can request a means test, which is an assessment of your income and capital.
These figures might sound a bit overwhelming, but here’s the key takeaway: not everyone will need care, and not everyone who does will need it for an extended period. So, does it make sense to allocate all your resources, or indeed give away your capital, for something that might never happen or only happen for a brief time?
Here’s where careful cashflow planning comes into play. Instead of setting aside all your resources for care, let’s consider creating a plan that strikes a balance. We’ll start by estimating the potential cost if you do need care. We can create different scenarios: one for short-term care, one for longer-term care, and maybe a third for no care needed at all. We have incorporated this into a basic Financial Plan that we constructed for one of our clients, so all the details for this client (their assets, income and expenditure) have already been included.
In our long-term care scenario, we have modelled a worst-case scenario or, at least, a case that would be statistically unlucky; for this, we have assumed that care needs start at age 85 and last for 5 years at a cost of £50,000 p.a. and that the surviving spouse lives until age 100. For illustrative purposes, this client asked if they could earmark a particular investment for the payment of care fees, and so the cashflow software allows us to “lock” it so that it is not touched until the care fees come into play. You’ll see in a moment why this is important.
It is worth noting that here we have added the cost of care onto the client’s existing costs of living, as they were before age 85. Some may reason that going into care would mean a reduction in normal lifestyle costs (such as holidays, motoring, sports, etc); however, I believe that, although these particular costs would reduce, they could easily be replaced by new costs; for example, a cleaner for your home, a gardener, and regular work needed to adapt your home to meet your new needs. As such, in this example, we have not reduced the normal lifestyle costs.
Here you can see that the care fees are covered by the earmarked capital, but there is a shortfall of income throughout most of their early retirement, which we can see as we “locked” the account earlier. Enough remains to cover the regular expenditure of the surviving spouse for the rest of their life.
What this means is that in addressing the potential need for care, the implication is that this client would need to sacrifice their lifestyle, perhaps one holiday per year. The question is: is it worth forgoing comfort and luxury in retirement to make sure that you can afford to pay for a cost that may never come? Furthermore, what if the cost was more than this, due to needing care earlier, or having very comprehensive care needs?
We can change this scenario (unlock it) to show that all of the client’s capital is available at any given time, and now the opposite is true; their lifestyle can be afforded in retirement, but the care fees cannot be. Furthermore, the surviving spouse is left in the red for the rest of their life. So, what can you do to address this issue?
Pre-planning is a notoriously difficult task because, as at the time of speaking, there are no mainstream insurance products to cover care costs. There was a time when you could pay a premium to an insurance company that would, in turn, pay a pre-agreed sum to your care provider for a pre-agreed time. Think of this much like car insurance or life cover. However, these policies are not currently available.
And then pre-planning is difficult because every individual’s idea of planning is different. There are those who want to be able to afford good quality, luxury care, possibly in their own homes (should they need it), and then there are those who just do not worry that care fees will ravage their estate and reduce the legacy they will leave to their family.
Both objectives invariably involve depriving yourself of the use of your own capital, so if this is a route you want to go down, then careful use of cashflow planning can at least help you confirm the minimum amount you need to earmark so that you don’t unpalatably impact your lifestyle.
The important thing is to avoid two extremes: You don’t want to deprive yourself now to potentially pay for something that might never happen. But you also don’t want to leave yourself unprepared. That’s where good cashflow planning comes in—it helps you find that sweet spot between safeguarding your future and enjoying your present.
Let’s go over some of the key options when it comes to funding care costs:
- Using savings and Investments is a straightforward approach, but not always the most efficient. If care is needed, we can access funds, but you don’t want all your assets tied up here.
- Equity Release or Downsizing are great ways to unlock funds if and when they’re needed, particularly if you’re asset-rich but cash-poor. This would result in injecting cash into your plan, which could then be used to cover care costs. Furthermore, releasing equity to pay for care reduces the value of your estate and is particularly useful if your home makes up a large part of your inheritance taxable estate.
- Secure income streams such as “immediate needs annuities” are insurance policies designed specifically to cover care costs. While not cheap, they provide peace of mind in exchange for a lump sum at the outset – this can be seen in the way the capital dips sharply in value in this cashflow.
- Regular income from pensions, for example, are often sufficient to fund care costs, and can be drawn upon by a local authority.
- For some, family support is part of the plan, but it’s crucial to discuss this openly and plan together to avoid future misunderstandings.
Remember, the goal is to live your best life without fear of what might happen in the future. By discussing this with one of our financial planners authorised in this area (and involving those closest to you, too), you will have the right planning in place, ensuring that if care is needed, you’re covered. But more importantly, you should ensure that you are not holding back from enjoying every moment of your retirement.
If you’d like to talk more about planning for your specific situation, we’re here to help! If you already have the benefit of working with Astute and have questions after watching this, please don’t hesitate to get in touch with your financial planner. If you’re new to us, you can get in touch with us here: https://www.videoask.com/f6b4a6ot3
Feel free to reach out, and let’s make sure your financial future is bright and secure!
