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How to pay for long-term old age care

It’s hard to save for an extremely rainy day that might never come. But plenty of FT readers who have seen the sums their elderly parents pay for care spiralling now worry about funding their own needs.

It costs £800 a week for a place in a care home and £1,078 a week in a nursing home, according to data provider LaingBuisson. That’s an increase of more than a fifth in five years, following steady rises over the previous decade.

The average figures conceal wide regional variations, with UK Care Guide, an information website, finding that care in London and the south-east costs up to 25 per cent more than the national average. Readers report even higher fees of up to £7,000 a month, or a whopping £84,000 a year.

Successive governments have discussed increasing financial support but the last such pledge — from Boris Johnson — to set an £86,000 cap on costs for people entering social care has dropped off the political agenda.

Research by Just Group finds that about one in five over-45s have been involved with finding care for a parent, spouse or elderly relative and many found it uncomfortable. Heledd Wyn, a solicitor at Shakespeare Martineau, says paying for care “is less of a ticking time bomb than something that is hitting people hard right now”.

FT reader Clara Westbrook says: “My father, after a long stay in hospital, required care at home for which he received no funding due to his asset level. He began paying for two carers to call four times per day and has moved into a live-in carer set up. My father has been paying around £6,000 a month for care, in addition to separate payments for physiotherapists and cleaners. My father and the entire family are now very concerned about what will happen when his savings of over £100,000 have gone in little over a year.”

So younger people who can afford the time and the money are considering preparing funding for their own long-term care. Jason Witcombe, a chartered financial planner with Empower Partners, says: “People I speak with in their forties, fifties and sixties are very aware that care costs represent a potential drain on their resources in their later years.”

FT Money looks at the best ways to save for care well in advance of paying the bills. And what happens if you haven’t been able to prepare and need cash now?

Line chart of Average weekly fees & CPI, rebased (2008-09 =100) showing The rising cost of care has outstripped general inflation

How much is enough?

First, we need to know how much to stash away. Only people with less than £23,250 in assets, including their home, qualify for local authority-funded care: most others face no limit on how much they might pay over a lifetime.

In 2011, the independent Dilnot Commission estimated that around one in 10 adults aged 65 faced lifetime costs of more than £100,000. Given rising care costs, the government estimates that is now one in seven.

Paying their own way angers many. However, it comes with a silver lining — choice. Mel Kenny, a chartered financial planner with Radcliffe & Newlands, says care homes that rely on local authority-funded residents struggle to make ends meet, with implications for care quality. He says self-funders can opt for better conditions: “Perhaps a care home with a piano player and fine dining. There are some quite remarkable care homes out there.”

Care costs vary widely depending on the type of care needed, where you live in the UK, and the financial resources available. Nursing care is more expensive than residential care and homes providing specialist care usually cost more.

How long might you have to pay? According to the Office for National Statistics, life expectancy for care home residents between 2021 and 2022 ranged from 7.0 years for the 65-69 age group, to 2.9 years at 90 and over for women. For men it is 6.3 years at 65-69 years, dropping to 2.2 years at 90 and over.

Care costs are rising faster than inflation. UK Care Guide, an information website, surveyed the impact of the cost of living crisis on care homes in large cities. It found that in the year to February 2023, average care home fees rose by over 11 per cent (table below) to nearly £46,000 on average, with big regional variations.

Tim Read, director of research at LaingBuisson, says: “Our analysis suggests that in recent years, fee increases can be broadly matched to equivalent percentage uplifts in the national minimum wage, which has been routinely rising faster than inflationary measures.” 

Worse, faced with rising costs and acute labour shortages, care homes are closing just when demand is rising. CSI Market Intelligence says there are around 406,000 beds available nationally in around 9,670 homes. But more than 1,300 beds have gone in the first half of 2023, after a loss of 400 in 2022, with closures outstripping openings by two to one.

It says in 2015 there were 91 beds for every 1,000 people aged 75 and over (90 per cent of the care home population.) As of July 2023, due to a decrease in beds and increase in that population, there were just 75 beds per thousand. 

Adam Hillier, head of care service operations at Legal & General Retail, says: “These costs are likely to increase further and people aren’t planning ahead or making the necessary provisions to access the care they may need in later life.”

Planning for the unknown

If you’re decades away from needing care, there’s an obvious dilemma. Witcombe says: “People don’t know if they will need it, how long they might need it for and what intensity of care would be required.”

As part of care fees planning, professional advisers advise updating wills, setting up power of attorney and inheritance tax planning. But they warn that anyone thinking of giving away their home should tread carefully so they don’t fall foul of the “deprivation of assets” rules. Unlike with the seven-year rule for gifts free of inheritance tax, there are no fixed dates by which a person must make a gift to avoid care cost liabilities.

Useful contacts

The UK care funding system can be complex but there is plenty of free help.

Government website Money Helper has a useful section on paying for care. Charities such as Age UK and Care Funding Guidance can signpost the most relevant help. FT readers also recommend Friends of the Elderly, a charity that helps older people to live well, providing care homes and helping with grants.  

Meanwhile, financial provider Legal & General has launched a free care concierge service, to help people understand their options. Adam Hillier, head of care service operations at Legal & General Retail, says: “A good place to start when looking for financial help is to contact the adult social care team of your local council and ask for a free care assessment.”

For many people specialist professional advice is essential. Solicitors for the Elderly is an independent organisation of lawyers, who provide specialist advice for older and vulnerable people, their families and carers. The Society of Later Life Advisers (Solla) is a not-for-profit organisation assisting older people and their families to find accredited specialist financial advisers. The Solla later life adviser accreditation is recognised as the gold standard in later life financial advice.

Solicitors report that local authorities are alert to people gifting their homes to dodge the bills. But if you are healthy, and could not have imagined needing care at the time of the gift, it may not count as deliberate ploy. 

Taking out insurance earlier in life might seem the answer. However, companies which previously offered care-specific policies pulled out of the market because of rising costs. One FT reader says: “My biggest frustration on all of this is that one can’t take out an insurance to cover these costs. I don’t understand why successive governments haven’t enabled this as it reduces the burden on the state.”

In the absence of insurance, many better-off Britons rely, in the final analysis, on their homes. Witcombe says: “Many will take the view that if they can get their finances into a sound enough position to retire comfortably, including owning their home outright, then if care is needed, as a last resort capital could be released from their property, either through a downsize, outright sale or some form of equity release.”

Equity release products enable owners to generate funds from property without selling it. One FT reader who, together with his wife, plans to use his home to release funds if necessary, says: “We are probably like millions of others.”

Generally, equity release is available to homeowners aged 55 with properties worth £70,000 or more. There are minimum loan amounts, usually around £10,000. Most providers now charge at least 6 per cent interest, according to UK Care Guide, rather more than prevailing mortgage rates.

As Witcombe says: “This approach may mean that children or other beneficiaries inherit less but the alternative approach of retiring much later or spending a lot less to allow you to save for that rainy day is likely to be less palatable. Everything in personal finance is a trade-off.”

Some readers who are emotionally attached to their homes don’t want to move. One reader, planning to make up the shortfall between pension income and care costs, says: “My cunning plan is to keep my house (value £450,000) and rent it out for some £20,000 per year. This way my daughter would have the house when I pop my clogs.” But it’s still not a perfect solution. “The fly in the ointment is tax on the rent from the house at 40 per cent,” he says.

Save if you can afford to

Nevertheless, the ultra cautious with the means to save set aside substantial sums well in advance. One FT reader and his wife in their early sixties are saving £400,000 each, for purposes “including potential life-enhancing medications to preserve memory”. Another foresighted reader in his seventies has £300,000 in index-linked certificates from National Savings & Investments, attractive vehicles which are no longer on sale.

For most, Individual Savings Accounts are a favourite. An FT reader in his sixties says that he and his wife have £500,000 in Isas. “I didn’t ever try to think how much we might need for care but, early on, the Isas became that ‘insurance policy’ in our minds.”

Robin Bailey, an independent financial adviser at Chase de Vere, who works with vulnerable clients, says: “The tax efficiency, accessibility and flexibility that Isas provide mean they are very frequently used in long-term planning, perhaps alongside other cash, investment and insurance products.”  

Others are relying on their children’s good will. One reader says: “My wife and I are in our early sixties and we have gifted Isa investments to our two daughters from their early teens, saying to them, could they please not spend the money but save it in case they need to pay for our long-term care. We know the risks but if this works we have saved them inheritance tax and optimised their Isa allowances which they have not been in a financial position to use.”

For those who don’t even want to think about saving for care, Annabelle Williams, personal finance specialist at Nutmeg, has some advice: “Get over the psychological barrier by thinking of it more in terms of money put aside for your future comfort, giving yourself choice and agency. Focusing on the positives can be more motivational rather than framing it around ‘dignity’ or avoiding the misery of frailty.”

In the end, whatever financial plans are made, discussions with the family are vital. Marie-Therese Connolly, an expert on justice for the elderly and author of The Measure of our Age, recommends family meetings — alone or with professionals — to make the decisions. She says: “It conveys an important message that we’re in this together.”

Consider immediate-needs annuities

One tactic worth knowing about is the immediate-needs annuity with providers including Just, Aviva, Legal and General, and National Friendly. 

Bought with capital, including perhaps the proceeds of equity release, an immediate-needs annuity is designed to cover the shortfall between your income — typically from pensions — and lifetime care costs. 

Importantly, the annuity income is tax free if it’s paid directly to a registered care provider, whether that is a homecare company or care home business. Kenny says the payments can be switched between providers or even paid directly to an annuity holder. “However, it is only payments made to a registered care provider that are tax free, payments made directly to you incur a small element of income tax.”

The price is based on the calculated annual income and the insurance company’s assessment of how long you’re likely to live, based on your medical details. As the capital cost reflects the fact that the funds may be needed for only a short time, they are cheaper than standard annuities. Inflation-protected versions are available at extra cost. 

Lucie Spencer, director of financial planning at Evelyn Partners, says: “Annuity rates have improved recently and therefore these types of plans have become more competitive than they potentially were historically.”

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