You are here:

Retirement: Funding long-term care

Created:
30 May 2008
Written by:
Peter Temple

Paying for long-term care is an issue we all have to address eventually. The elderly are living longer, thanks to advances in medical science and more sophisticated treatment that can keep people healthier for longer.

Advertising

But, like it or not, eventually some form of care becomes necessary. Nor can this growing body of elderly people necessarily rely on their children to act as carers. The children of the over-85s may themselves be passing 60 and prone to greater infirmity, or else be managing on meagre pensions.

It follows that, for those who have it, housing wealth will have to be partially recycled to pay for professionally provided care. For those without money, awareness of social benefits available will be crucial.

High costs

Even for the relatively affluent, the cost calculations are brutal. Nursing home costs vary depending on the degree of care that residents require. For those requiring constant supervision, costs run at upwards of £3,500 per month, even for something fairly basic, and perhaps even more in the London area. Outside London, carers provided by private domiciliary care organisations cost a minimum of £9 an hour. This means an elderly person requiring three visits a day, seven days a week will pay around £800 a month.

There are some offsetting factors. There is a tax-free, non-means tested attendance allowance, for example. This ranges from £41.65 a week for those who need frequent help with personal care during the day or night, to £62.25 a week for those who need help round the clock. 'Personal care' denotes those who need help getting up, moving around, getting washed and dressed, and going to the toilet. Help with shopping and housework is not included. There is normally six-month delay before the allowance is paid. And do the sums and it is unlikely that the attendance allowance will cover anything more than a fraction of the cost of care.

For those in long-term residential care, state and personal pension payments are also used to mitigate the charges: those in long term residential care keep about £20 a week from their own income for their personal needs, the rest goes to offset fees. Most experts believe that care costs will typically rise by significantly more than inflation, while pensions and social benefits are likely at best to be index linked.

This means that for many elderly people, money has to be found to pay for the bulk of care charges. State and local authority help only kicks in if an elderly person's assets, including their home, are worth less than £21,000. Even then the amount of care required, and how much will be paid towards it, is decided by the local authority. Often those with savings of between around £12,000 and £21,000 are obliged to pay a modest amount towards the cost of care.

Power of attorney

It generally falls on relatives, normally the adult children of an elderly person, to arrange care and sort out the financial mechanics of paying for it. One of the most important tools for dealing with a situation like this is arranging for children to have power of attorney over their parent's finances.

An enduring power of attorney is usually drawn up in conjunction with a family solicitor and signed by the individuals involved. It allows those granted the power to exercise control over the elderly individual's bank accounts, investments and other assets in the event that he or she becomes physically or mentally incapable of managing these assets personally.

Incapacity in this sense can include conditions such as Alzheimers or other forms of dementia, incapacity following a stroke, or a prolonged stay in hospital during which household bills might need to be paid, and a range of other circumstances.

While problems can arise in persuading an elderly person to sign on the dotted line, or in siblings agreeing among themselves that such a move is necessary, the step needs to be taken before the problem arises and requires a degree of foresight on everyone's part. Once signed, the agreement can be invoked as it becomes necessary, in effect allowing children to treat their parent’s bank account as a joint account, and signing cheques and paying bills as necessary.

How to pay for care

So far so (relatively) simple. It is at this point that the decisions get trickier. The problem with high-cost long term care in essence is how to arrange an individual’s assets to make up the inevitable shortfall between pension and perhaps investment income on the one hand, and care costs on the other, without unduly depleting the assets and capital left for family to inherit when the time comes.

Moves to avoid having to pay for care by deliberately reducing assets, perhaps through gifts to family members, are viewed with intense suspicion by the authorities. The state is as keen to have individuals pay for care out of their savings, if they have them, as their relatives are to avoid it.

That suspicion is particularly intense if gifts are made a short time prior to payments for care being required. The longer the time that elapses between these transfers or gifts being made and the time that long term care is needed, the better. But there is no certainty here. Typically at least three years should elapse between gift and care. Even after that time, however, if it appears that the gifts have been made with avoidance of cost rather than simple generosity in mind, then the authorities will almost certainly seek some restitution. They will spend a lot of time looking into the family finances to recoup what is considered appropriate.

If transfers are made to children or grandchildren, the risk that some of it may be clawed back means it is essential that any capital received in this way is ring-fenced and not spent, since it may need to be repaid at some future date. Setting up a separate account and investing the cash in stable income-producing securities is probably the wisest course.

If money is transferred and used in this way, any payments back to the individual should be non-contractual and irregular in nature. Transferring £10,000 of an elderly person's savings into an investment account into their adult child’s name and then paying the interest earned back on a regular basis, for example, counts as a 'reserved benefit', and should be avoided. Any arrangement that involves reservation of benefit is likely to be challenged after the event, even if it dates back more than three years before care is required.

Property options

Considerations like this aside, for the reasonably affluent it often comes down to deciding how to make use of a property that may no longer be required, or which may be too large for husband or wife whose spouse goes into long-term care.

With the notion that property prices can only go up embedded in many people's minds, relatives are often reluctant to sell or release equity from a property asset, for example if an elderly individual moves out of their own home into long-term care. The decision is not straightforward, however. Even if other resources are used to pay for care, money must be spent maintaining and securing an empty house if its value is not to deteriorate. With flats and owner-occupied sheltered housing this problem is less important.

Downsizing, and perhaps moving from a house to a 'sheltered' purpose-built retirement flat, can not only release capital, but also lengthen the time that elapses before the more expensive types of long term care are required. The downside to this is that, because of their specialist nature, the market in sheltered housing tends not to change at the same rate as the property market as a whole. Moveover, sheltered housing residents have to pay hefty service charges for exterior and common parts maintenance and the provision of an on site warden.

One solution to this is for the elderly to combine a move to sheltered housing with renting rather than buying. Girling Retirement Options is the main company offering this product. It rents out purpose built retirement flats on assured tenancies.

An assured tenancy (as opposed to an assured shorthold tenancy) allows the tenant to rent the property indefinitely, subject to giving one month's notice of a move. This provides much greater security and allows an elderly person to release their housing wealth and invest it to cover the rent and provide extra income. It also makes the process of a move into a nursing home at a later date a less hassle-free process all-round, since there is by then no property to sell.

Rents are calculated to include service charges, ground rent and water rates, and are indexed to the retail price index (RPI) subject to a ceiling. Those who have observed the process at work say that Girlings tends to drive a hard bargain when it comes to negotiating a price for a retirement property it is buying. The company, for its part, says that an arm's-length independent valuation is generally used.

Owned by former McCarthy & Stone director Peter Girling and his family, the company now has more than 2,000 tenants nationwide. Mr Girling says: "We find that people selling a property and renting like the idea that they can control their own destiny. It gives them a flexibility that a property owner just doesn't have."

Downsizing, if necessary to a rented property, is often a preferable alternative to using equity release to free up capital, because some equity release products may limit the freedom to move properties should that become necessary. They can also be an expensive way of securing borrowing. And whatever its merits or demerits in other respects, equity release can only be used if one of the owners of the property is permanently resident there. This would rule out, for example, a widow or widower needing to move into long-term residential care using equity release to finance such a move.

Even if equity release can genuinely be contemplated, the products usually bear relatively high interest rates, and in many cases have hefty arrangement fees and penalties if the loan is repaid early, for example if the occupier dies or moves into a residential care home and the property is sold by their relatives or a deceased estate.

A simpler, but often forgotten, route for a single elderly person to fund a move into long-term care is simply to rent out the former home on a shorthold tenancy and to earmark the rent to pay for care. This avoids having to sell the property immediately and allows the owner and their heirs to take advantage of any future increases in property values. To the extent that this does not completely cover the shortfall between income and the cost of care, other savings and investment income can be used to bridge the gap.

Special annuities

Special annuity products are also available for the same purpose of bridging the gap between income and care costs. These work back from the shortfall that has to be met and, taking into account the age and state of health of the individual concerned, calculate a precise lump sum payment needed to buy the required monthly income. When the annuitant dies, as with all annuities, the capital stays with the company providing the contract.

In general, insurance companies offering products like this are canny at predicting precisely how long an individual in long-term care is likely to survive. Inflation-proofing an annuity like this to cope with increases in nursing home charges is also particularly costly. Jamie Ware, at Churchill Investments , a Somerset-based independent financial adviser (IFA) company specialising in financial advice for the elderly, observes: "There is usually only one winner in any annuity calculation: the insurance companies rarely get it wrong." This usually means that the individual concerned, and their heirs, are against the idea of an annuity.

Perhaps the best option, at least according to Mr Ware, is to make sure that advice is sought from an IFA who adopts a fee-based approach. This will ensure that the most appropriate product is chosen from a list of options provided, rather than the one that provides the IFA with the most commission.

Consulting with an IFA and commissioning a report on the various options available to solve the particular financial problem being posed might cost a few hundred pounds in fees, but may very well save more in commission charges and avoid getting locked into an a financial product that is either inflexible or inappropriate for the individual’s ongoing needs. "We need", says Churchill’s Mr Ware, "to get away from an approach that focuses solely on flogging products. Where the elderly are concerned, it is particularly detestable."

MORE ABOUT ANNUITIES...

Retirement: Income drawdown

  • Back to top

Win £1,000 or a golf weekend

Enter IC's Fantasy Portfolio competition for the chance of winning £1,000 or a luxury golf weekend, courtesy of ETX Capital and Celtic Manor.

Enter here for your chance to win

Advertorial Feature

Take control of your investing with CFDs

Have you ever watched a move in the markets that you saw coming, but you weren't able to exploit?

by Dominic Picarda

Advertorial Feature

Spread your risks with spread trading

With so many big moves in the world's financial markets, there have seldom been more opportunities around for spread traders. Isn't it time you joined them?

by Dominic Picarda