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The care conundrum

Long-term care fees are the elephant in the room of retirement saving: a potentially huge cost that you can't afford to ignore. Rosie Carr explains how to find the money to pay them
The care conundrum

Long-term care fees are the Mount Everest of all bills. Everything else pales in comparison. Yes, school and university fees are high, but you might only pay them for three years or they can be avoided entirely. Saving for a pension isn’t cheap, but it is eased by generous tax reliefs, while your money, and more, is returned to you at the end of your working life. Care home bills, on the other hand, can eat up £50,000 a year for an indefinite period, rising relentlessly. There is no return on your investment, and no tax relief.

Many more of us will face a care fees problem in the future thanks to longer life expectancy, rising rates of dementia and changing family structures. Currently, just under 15 per cent of people aged 85-plus live in a care home, according to healthcare intelligence firm LaingBuisson, but this number is predicted to keep rising.

Putting someone in a care home is rarely an easy decision. Often it comes out of the blue following a fall or bereavement of a spouse. For this reason it is a good idea to have in place a power of attorney, and to discuss your relative’s finances well in advance. Doing all this after the event is complicated, costly and can take a long time to arrange.

Whether the move into care has been planned or happens suddenly, generally it presents a dilemma: where to find thousands of pounds a month from a standing start. According to LaingBuisson, in 2016-17 typical care home fees ranged from £511 a week in the north-west of England to £741 a week in London. Add in an element of nursing care and the costs rise to £776 and £949.

The average stay in a care home is a little over two-and-a-half years. However if your relative has dementia but otherwise is in fairly good physical health she or he might live for many more years.


Will the local authority help?

If your relative has assets or capital (not including their main home) worth more than £23,250, they won’t qualify for any help from their local authority (LA) and will have to self-fund, although exceptions are made where care is required solely for medical reasons, for example because the person has had a stroke. In this case fees should be covered in full by the LA through the NHS Continuing Healthcare scheme and will not be means tested. However, not being able to look after oneself as a result of frailty or dementia won’t entitle you to this free care.

If your relative has savings of less than £23,250 (not including the value of their home) but more than £14,250, they qualify for help and a proportion of their fees will be paid. The balance must be covered by your relative who will be expected to dip into their savings every week/month until they fall to £14,250, at which point the LA should cover the full cost. In the meantime, the amount the LA will contribute depends on three factors:

1. The amount of capital or assets owned. This includes savings accounts and investments including Premium Bonds and National Savings products. Only half of joint savings accounts and jointly owned assets are included in this calculation. The closer to £23,250 your relative’s savings are, the bigger their contribution.

2. Their income. If your relative receives an income such as a state or private pension, they will be expected to contribute the bulk of it to reduce the share the council is paying. They will be allowed to keep back a small personal expenses allowance (PEA). If their income is shared with a spouse, only half of it will be counted. If income, less the PEA, is equal to or greater than the care home fees then they will become a self-funder via income.

3. Whether or not they own their own home and whether or not someone else lives in the property. If your relative owns their own home and lives there alone, the council or LA will want to know if the property is to be sold, in which case your relative would have to self-fund from the proceeds. If their home is not being sold, and people cannot be forced to do so, then the LA will offer a deferred payments agreement (DPA) – essentially a loan whereby it funds fees but secures them as a debt against the property. Interest will be charged on the debt built up. When the house is eventually sold the council/LA will be repaid. The debt can be reduced by letting the property and paying the rental income to the LA.

However, any property owned will be disregarded entirely if someone else, usually a spouse, has been living there, continues to live there and it is their only home. In this situation, the LA will pay the fees based on the amount of assets and as if no property is owned.

Anyone with more than £23,250 of assets will not be offered a DPA as this is only available to those with capital below that threshold.

Your relative might not qualify for LA support at first, but when their capital falls below £23,250 funding can be applied for at that point. This might require a move to a less costly home, or for your relative or family members to agree to make top-ups as most councils limit the amount they will pay.

Where a DPA can be used, it is much better value than equity release (see below) as the interest rolled up and fees will be considerably less, but as with equity release there must be no outstanding mortgage on the property.

Also, note that if your relative has less than £23,250 of assets, and whether or not they own property, they will be entitled to have the first 12 weeks of care home fees paid in full by the local authority.

If your relative’s assets are below £14,250, all the care home fees should be paid by the LA. But, as above, personal income such as a pension less a small amount for personal expenses will be used to offset the cost to the council/LA and a legal charge will be secured against property owned if it’s possible to do this.

To apply for help with costs, you should first request a care needs assessment from your relative’s LA, and then a financial assessment.

Even if you are fully self-funding, you can get state help through the attendance allowance benefit. Attendance allowance is paid to over-65s who need help with normal daily activities (including being hard of hearing or having poor eyesight). It is not means tested and is currently paid at £55.65 a week if help is needed either in the day or at night and £83.10 a week if help is required both in the day and at night. If your relative qualifies for the higher rate that’s worth £4,321.20 a year.


Self-funding options

Assuming your relative does not qualify for state help, you face the tricky task of deciding what to do with their property, how to make the most of any available investments and income and the best ways to cover shortfalls. While you cannot magic money out of thin air you can change the way assets are used and restructure a portfolio to generate an income stream to help cover funding gaps. Your relative may also have to accept that they will have to spend their wealth on care rather than leaving it to children/charities, although it is sometimes possible to achieve both goals. Remember that if you have power of attorney for someone, you must act in their best interests, not in the interest of family members hoping to safeguard an inheritance.

Your first step will be to work out the shortfall between your relative’s post-tax income and the care home fees, and what savings exist to plug this and how long they will last. This may take some time as you search through paperwork and online (you may need passwords) to check for details of bank/building society accounts. It’s worth checking at in case some accounts have been forgotten about as a result of a previous house move. Once you have established how much cash/liquid assets are available, and what state and private pensions are being paid to them, look at other assets starting with any property owned.

You should get an accurate valuation for both a sale and for letting purposes. “Often children have no idea of the valuation of their relative’s property because they do not know the area well,” says Informed Choice’s Martin Bamford, a specialist adviser in later life financial planning.

Property is usually a valuable asset and can be used in three different ways. First, you can use an equity release mortgage to release part of the value of the home for spending on care fees (with the risk that the cash runs out) or reinvest it in investments or an annuity (see below).

Not everyone can use this option as the property must be in good condition, entirely mortgage-free and with at least one homeowner still living there. Strict limits apply to how much equity can be released. A home worth £800,000 could raise £280,000 if 35 per cent of the value is borrowed. You don’t pay tax on the money released. If the remaining homeowner dies, the house would have to be sold and the debt repaid. It is a costly but useful option.

Alternatively, the property could be sold outright. Doing this will typically raise a large sum of capital, potentially more than enough to pay all the fees for a good number of years. Around 40 per cent of families choose to sell the relative’s house. While this solves one problem, it also creates one: how to ensure the cash is protected from a bank collapse. Initially a lump sum of up to £1m of cash will be protected under the Financial Services Compensation scheme (FSCS)’s windfall cover for up to a year and after that it will need to be broken up into smaller chunks of £85,000 (the maximum covered by the FSCS) and spread across accounts.

You could also consider selling to downsize, which would allow cash to be released while an investment in property is retained.

If a smaller property isn’t being purchased, most advisers would strongly recommend that some, or the bulk, of the capital is either invested in equities and/or used to purchase an Immediate Needs Annuity (INA, see box). “There is a huge longevity risk,” says Mr Bamford, and this risk that the money runs out has to be borne in mind if you are considering leaving the money in cash.

A third option is to let the property. This solution works in certain areas. In London and the south-east, yields on some properties can be enough to generate £32,000 a year – before tax. Tax will almost certainly have to be paid on rental income and could even push your relative into a higher tax bracket. You might also have to start completing an annual tax return on behalf of your relative.

Armed with some letting quotes from local agents, you should work out the post-tax profit before committing to this path. You can check personal allowances and tax bands here:

The costs and risks of letting are high. If you use an agent, management fees will eat into the income generated. There is a real risk of rental voids and many thousands of pounds will probably have to be spent bringing the property up to date. Typically you can expect a yield of 3 to 4 per cent of the value of the property. Remember that the capital gains tax situation will change too once the owner moves out, with the shelter of Private Residence Relief lost after 18 months. This means that capital gains tax would be applied to gains made on the value after this.


Turn to the stock market…

In almost all cases, and unless life expectancy is very short, the power of the stock market to generate both an income and capital gains should be considered, certainly where a portfolio already exists or a significant capital sum has been raised from a house sale.

Despite the risks, equities can prevent the erosion of a capital sum through cash burn so that fees can continue to be paid however long the person lives, and to preserve something for family members.

You can probably assume a total return of around 4 per cent gross. Someone with a pot of around £350,000 should generate £14,000 a year in gross total returns. Even with state and private pensions, and attendance allowance if it can be claimed, topping this up, it may not be enough, in which case you might need to raid other assets such as savings accounts or swap them for an INA.

If you have no experience of managing a portfolio of shares and or bonds, a SOLLA adviser can do this for you.

If you are comfortable investing, remember that managing a portfolio to pay care home fees could mean following a different set of rules to the ones you use to run your own portfolio. Ordinarily someone building an investment portfolio could be expected to have a timeframe of 20 or more years, which gives them the scope to be adventurous and to allocate money to areas such as small-caps, interesting ideas and emerging markets. But when a portfolio is being managed for care fees, the time horizon shrinks and all unnecessary risk should be avoided, although the bigger the portfolio the more risk can be taken. You can reduce the chance of risk by selecting good quality blue-chips, and companies with defensive and/or monopoly-type qualities such as National Grid (NG.). And while yield will be vitally important in this exercise, you shouldn’t simply flock to the highest yielding stocks – these carry high risks. Selling some shares from time to time especially where gains have been made might be a better idea. You will need to keep some money in cash, but not too much because it can act as a drag on growth.

If you decide to restructure an existing portfolio, bear in mind that capital gains tax (CGT) liabilities die with the shareholder, so it might not be worth creating a large CGT bill.

Funds can help dilute risk – there are plenty of equity income funds with a bias to defensives and a strong track record. Our annual Top 100 funds report is a good source of ideas.

For ease of management, you might be better off focusing on a small number of funds instead of a large number of individual shares. A FTSE All-Share or global index tracker can play a role too as there will be less chopping and changing required, and costs should be minimal.

Make sure that you relative uses all of their annual Isa allowances.


After 2020

No one likes the idea that on top of the indignity of being unable to look after ourselves in old age, paying for care could cost us our homes and every asset we own, leaving nothing for our nearest and dearest. It’s the unfairness of this double blow that drives people to argue that the financial burden should be shifted from individuals to the state.

But the government is stumped on this question, largely because of the cost implications. The last major enquiry into care funding led to the Dilnot Commission proposals in 2011. These were that a cap should be put in place so that no one would have to pay more than £72,000 towards their care, and anyone with assets of less than £100,000 wouldn’t have to make any contribution. Currently if you have assets of more than £23,250, you have to pay all your costs. The proposals were approved, but have been put on hold until 2020.

In the meantime the issue was raised again this year in the general election campaign, with a Conservatives proposal that people should pay all the cost of their own care until they were down to their last £100,000. This was fair, said the Tories, as it would prevent the rich from having their care paid for by younger, poorer taxpayers. But the policy went down badly and was scrapped. For now the only 'agreed' plan is the Dilnot one, but don’t get too excited about the idea that your care costs will be capped at £72,000. Even if the Dilnot plan does see the light of day, the cap of £72,000 only applies to the care portion of care home fees, but the largest part of care home fees are the residential costs, ie board and lodging, which means the relief will be limited.

For now, you are on your own …