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The end-of-life bill that could reach £300,000

We were all very proud of her longevity and the wonderful life she lived. But her story is also interesting in financial planning terms because her six years in full-time residential care were significantly longer than we expected - and significantly longer than the average stay. Fortunately, the costs of the home were just about covered by her income, with family supplementing every now and again. But many people won't be so financially fortunate.

Long-term care is the one big bill that many fail to consider or provide for. Jane, the subject of this week's Portfolio Clinic, is planning for her retirement in four years' time and has been advised to model her cash flow into retirement, factoring in inflation and the potential cost of long-term care.

But does she really need to? Remember the much mooted £72,000 cap on care costs? Wasn't there a promise from David Cameron that you won't have to sell your house to pay for care?

Unfortunately, these flagship policies proposed by the government have been postponed until at least 2020. Local authorities are finding themselves far short of the funds required just to keep the system running, let alone extending the help available.

The first of the flagship policies of the Care Act 2014 would have meant that patients would not have to self-fund any care costs beyond the cap. The second would have increased the upper limit on the means test to total assets of £118,000. However, the public money that this change would have required was instead diverted to the day-to-day running costs of the social care sector, at the request of council leaders.

So, for the foreseeable future, most pensioners will have to use private wealth to pay for a stay in care. The means test that determines liability for care costs considers wealth as well as income, and those with little income may well find themselves liable to pay anyway. Anyone with over £14,250 in assets (including their house) is liable for at least part of the cost of care. This is paid in the form of a weekly 'tariff' contribution of £1 per £250 of assets above the threshold.

Sarah Lord, managing director of Killik Chartered Financial Planners, says: "Ultimately we can't know years in advance whether or not we will need long-term care in later life. But why leave such an important issue to chance? These costs should be taken into account as part of wider family financial planning."

Let's take a closer look at those costs. A report from Killik & Co this week found that the average yearly cost of residential care homes in 2014-15 is £29,300. Residential homes are for those who have problems living independently, but nothing that requires medical treatment. This was the type of home that my grandmother was in - she needed help with dressing and bathing and wasn't very mobile.

Nursing homes for the elderly with long-term health conditions are more expensive. Killik & Co found that the average yearly cost of a stay in a nursing home in 2014-15 was £10,000 more expensive at £39,300.

Then you factor in the average length of a stay in a care home, which is about 15 months and the average total bill is between £60,700 and £72,800, depending on whether you need residential or nursing care.


When are you likely to need care?

The average age is 82 years for residential and 85 years for a nursing home. If you're retiring at 65 today and looking 20 years into the future to 2035, when you're most likely to need a care home (not everyone will though), Killik & Co projects that these bills will be £101,414 and £121,365.

There are some scarier figures, too.

The report found that residents of a care home who are among the 10 per cent longest stayers end up paying £268,000 and £243,000 for nursing care and residential care, respectively. Killik predicts that those who are admitted in 2020 and are among the 10 per cent who stay longest will pay £300,000 and £273,000, respectively.


Ways to pay for care

Downsize to a smaller home on retirement and earmark the capital released to pay for care in later life should it be required. It's an option that many retired people consider, but won't be for everyone - you may not want to leave your family home.

Consider selling your main asset - the family home - at the point of need to realise capital. However, it's really important to note that if the care recipient's partner remains in the house, if the stay in the care home is temporary, or if a relative who was caring for the person moving into care lives in the house, this asset will be excluded from the means test.

Women on average have to plan for higher care costs. Living longer and entering care later means they have a higher chance of going into care without a surviving partner. In this case it is harder to avoid selling the home, as homes that are still occupied when one resident goes into care are not counted in the means test.

The pension reforms introduced in April 2015 allow you to draw on your pension fund as and when required. This will enable people with substantial pensions to draw on this resource for care fees.

Immediate needs care annuities are one way to cap the cost of long-term care. Like an ordinary annuity, they are an insurance contract bought with a lump sum or 'premium' that pays out a set amount for life. While an annuity income is used to fund retirement, immediate needs care annuities are used to pay for care specifically.


Putting care fees in perspective

All this has to be balanced against being too cautious and not enjoying your retirement. For many people with no dependants, the ideal is to reach the end of life with just enough to pay for your funeral but no more.

Those who want to leave a legacy for children or grandchildren will have to be realistic about balancing the need to leave an inheritance with paying for any large care fees bill.

It's best to have a conversation with your children and grandchildren to discuss what will happen. Many people choose to be discreet about their financial affairs. Few people like their friends or family to know how much they are paid each year, or how much they have saved or invested. But you don't have to go into huge detail if you don't want to. The conversation could be as simple as: "We've earmarked the house for you, but if we need care then we'll have to sell it."

While you're having these important discussions with your loved ones, make sure that you put a Lasting Power of Attorney (LPA) in place. This is a legal document that gives the person or persons of choice the power to deal with an individual's affairs. These trusted people will then become legally appointed attorneys and will be able to use these documents to act on the person's behalf whenever necessary.

There are two types - the property and financial affairs LPA covering money and property matters, which can be used at any time and even made temporary use of, and the health and welfare LPA covering healthcare decisions which can only be used if people lose mental capacity.

Dean Mirfin, technical director at Key Retirement, said: "There is still a huge need for more people to be made aware of the importance of having an LPA in place, particularly now that financial flexibility is open to all and more of us will be managing our finances into later life.

"Numbers affected by dementia are set to double over the next 25 years and it's essential that families avoid a costly and time-consuming court process. LPAs should be regarded just the same as wills and be part of all people's financial planning for later life and the risks of incapacity that it unfortunately brings.

"Anyone who is exercising the pension freedom or has a drawdown equity release scheme is totally exposed to having their money trapped or frozen if they do not have LPAs until the Court of Protection appoints attorneys."

Applications to the Court of Protection for those who don't have LPAs can be time-consuming and costly - in some cases a solicitor may be appointed and their ongoing fees added to the bill - with all costs taken from the estate of the person who has lost capacity. The process of appointing a deputy can take many months and sometimes years. Plus, the appointed attorneys may not be those people you would necessarily have nominated and therefore trusted yourself.


Cost of care by numbers

NumberWhat it represents
£29,300Average yearly cost 2014/15 of residential care homes
£39,300Average yearly cost 2014/15 of nursing care homes
£60,700Average total cost for starters in nursing care homes in 2016
£72,800Average total cost for starters in residential care homes in 2016
£101,414Average nursing care home cost forecast to  2035
£121,365Average residential care home cost forecast to  2035
£268,000Rise in costs for the 10% of residents longest in a nursing care home from 2016
£243,000Rise in costs for the 10% of residents longest in a nursing care home from 2016
65Percentage of residential fees exceeding pensioner income
70Percentage of over 65 with sufficient wealth to cover nursing home costs
69Percentage of over 65 with sufficient wealth to cover residential home costs
£33,800East England average cost of care
£24,232North East England average cost of care

Source: Killik & Co


Average age and length of stay in care

Average age8681
Average stay18.7 months10.8 months

Source: Killik & Co