On its own, the thought of yourself or a loved one going into care in old age isn't an easy thing to cope with. Throw money worries into the mix, and the prospect becomes even more difficult to digest.
But the reality is this. One in three of us will spend our final years in a residential care home, and the Institute and Faculty of Actuaries' (IFoA) latest figures show a vast realm of "hidden" care costs that are not covered by the government cap - so we'll have to pay them ourselves or go without.
The cap was designed to prevent people paying more than £75,000 towards their own care, but the IFoA says we will have to shell out an average of £140,000 before the government will help foot the bill, with some people expected to spend £250,000 before receiving help.
This is a cost that will wipe out the entirety of most savers' wealth. The average retiree only has pension savings of around £30,000. The costs are so staggering that some financial advisers are recommending people shouldn't bother making provision for care, and should instead enjoy life while they can. Rick Eling, a financial adviser at Sanlam Bank, says: "I don't tell a lot of clients to make special arrangements for long-term care in advance, because if they are in a position where it's going to wipe out their savings anyway, the government will pay once they go beyond a certain point. And there are so many variables, it's impossible to tell them how much to save."
However, savers with considerable wealth can find their estate being seriously eroded by care costs if they don't plan ahead, with some financial planners warning the cost of elderly care can amass to a seven figure sum in the worst cases. Nicola Bywater, a financial planner also with Sanlam, says the most heart-breaking aspect of her job is hearing from elderly people who have lost a lifetime of hard-earned wealth because they have underestimated the cost of care.
She said: "If you're someone who is used to having choices in life, you don't want to get to old age and find you can't afford to choose how or where you are cared for in the final years of your life. Planning ahead and making sure you have enough to cover the worst eventuality will give you choice - as well as peace of mind."
Ms Bywater warns that care home fees are spiralling much faster than people realise, making planning more difficult. Most of the care homes she has dealt with are nudging their fees up by 5 per cent a year, which is well above inflation, she says. This means a residential care home that costs £40,000 a year today will cost £48,620 a year in five years. And because people are now living longer, many only begin to need care in their late 80s, which means an even more inflated cost when it eventually comes.
If you are planning for long-term care
There are two ways to pay for care in old age. It can come out of income - or it can come out of capital. If you have regular pension income, Ros Altmann, former pensions adviser to the government, suggests setting aside some of it for care - and using your Isa allowance to make additional contributions.
If you are paying out of capital savings, care costs could gobble them up faster than you think, according to Richard Watkins, financial planner at Close Brothers, who says that even for wealthy people, care bills are "likely to be very painful". Having your money invested in funds with healthy yields and with reduced volatility could give you a regular income from your capital which could help preserve your money for longer.
We like Newton Global Higher Income (GB00B5VNWP12) - which provides a 4.3 per cent yield and is one of our Top 100 Funds. The fund's objective is to achieve increasing annual distributions, together with long-term capital growth from investing, predominantly in global securities.
Strategic bond funds could also give you a steady income that could supplement care costs. They are more nimble and diversified than traditional bond funds and can shorten their average duration - a way of minimising volatility - which is why advisers tend to prefer them. We like the TwentyFour Dynamic Bond Fund (GB00B5LHHR01), which covers the "full fixed income gamut". It's currently paying a 5.7 per cent yield.
If you're not planning - hang onto your home
If you've decided to enjoy life while you can and keep your fingers crossed that your elderly care costs will be minimal, a big worry for you is likely to be losing your home. Make sure you are aware of the following rules, which mean you do not have to sell your home to pay for care:
• If your spouse lives in the home;
• If a child aged under 18 lives in the home;
• If a disabled person lives in the home;
• If you are in care for less than 12 weeks.
