Funding the cost of care

In this feature, financial planning experts FAS talk about funding Long Term Care and various options to consider.

As we move into later life, our financial priorities often shift, and how to fund the cost of long term care is a concern that is shared by many. This is not surprising, given the rapid increase in the cost of care over recent years, and the financial impact on those affected. According to recent figures from Age UK, the average weekly cost for a place in a nursing home is £1,078, although there are substantial regional differences, and we have come across situations where weekly costs are significantly higher than the average.

Funding options

Local authorities have a duty to arrange and pay for appropriate levels of care, following an assessment of an individual’s needs. If there are significant needs, NHS continuing healthcare may be available, which could cover some or all of the care costs; however, if the individual is not eligible for continuing healthcare, and they hold assets greater than £23,250 (including property) they will be expected to make a contribution towards care costs.

Self-funding care costs can be a daunting proposition, where decisions need to be reached at a time of stress and concern when an individual is moving into care. Our experience shows that seeking independent financial planning advice can be beneficial, in helping families, or Attorneys appointed under a Lasting Power of Attorney, consider the options and agree an appropriate strategy to meet the ongoing care costs.

Financial assessment

When we first meet clients who potentially have care needs, we undertake a full assessment of their capital assets, together with their income sources (e.g. pensions, attendance allowance, investment or property income) to work out the shortfall between the cost of care and other essential costs (such as personal care items and spending money) and their income.

Depending on the level of shortfall, it might be the case that the care costs could be met through income alone, although this is typically reserved for those with significant personal pension or rental income. In most instances, there will be a shortfall between the cost of care and income, which will lead to erosion of capital over time.

Immediate Needs Annuities

One option that can bridge the gap between income and care costs is to purchase an immediate needs annuity plan. This is where capital is paid to a provider, who in turn will pay a monthly level of income that can be used to meet the shortfall between income and care fees. This income is usually tax-free and paid direct to the care provider.

Each plan is individually underwritten, with the single premium payable dependent on the age, health, life expectancy and care needs of the individual. In our experience, the premiums payable on such policies can be very expensive; however, despite this, some may value the certainty that a care fees annuity can bring.

A further factor to consider is that there is no return of capital to loved ones in the event of death of the individual in care, unless a capital protection element is purchased, at an additional cost.

Finally, the reality of how long an individual stays in care needs to be taken into account. The purchase of a care fees annuity could, therefore, potentially only pay out for a limited period of time, leading to returns that offer poor value from the large capital outlay used to purchase the annuity.

Investment options

In many cases, building a bespoke investment plan from capital assets, which aims to limit the erosion of capital due to the shortfall between income and expenditure, can be a prudent approach. Naturally, there are many factors that need to be considered before deciding on an investment strategy, such as existing investments held, the tolerance to investment risk accepted and income requirements. Tax-efficiency and ease of access to funds will also be important considerations.

Cash will inevitably have a part to play in any sensible investment arrangement where care fees are payable. It is, however, important that cash funds remain productive, and held in a tax-efficient manner.

For sums not immediately required, there are other investment options, such as Company Shares, Corporate and Government Bonds and alternative assets, that aim to generate superior returns to those available on cash. This can help stem the rate of erosion of capital, so that funds held can continue to pay for care provision for an extended period, or leave capital to loved ones on death. Keeping an investment strategy under review is also vital, as it is often the case that care needs change over time, and care home fees tend to rise each year.

We recommend that those who are faced with making decisions about how to fund care costs speak to an independent financial adviser, who can discuss the options in more detail.

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