Long-term care: how will you fund it?
06th June 2019
Moneywise reviews the ways that you can pay for care in old age and the recently proposed national insurance increase for the over-50s, which is intended to help fund a fairer system
The care system is currently in crisis, with many people forced to sell their homes to pay for care in later life.
As the population ages, more of us will need care support when we are older.
Even though many people save into a pension to cover the cost of living in retirement, many are not prepared for the expensive fees they may face if they need care.
There are currently more than 400,000 people in care homes in the UK and this is expected to rise to 1.2 million by 2040.
Most people who need care will end up paying something toward the costs, but this will largely depend on individual circumstances.
Paying for residential care can be expensive, especially for those who have to sell their property in order to fund it.
Fees are around £600 a week for a care-home place and more than £800 a week for a place in a nursing home, depending on where you live.
According to charity Age UK, in 2016/17 London was the most expensive area to fund a care-home place, at £741 a week, while the North West was the least expensive, at £511 a week.
Funding for care is means-tested by local authorities and could be the biggest cost you face in retirement if your capital and income exceeds the threshold.
When assessing your finances, the council will look at your assets such as your property, savings and income.
Currently, if your assets are more than £23,250 (£28,000 in Scotland and £50,000 in Wales), you will have to pay for your own care, which may not leave you with much left in the pot to pass on to family members.
If your assets are below this figure, you will be eligible for help from your council.
However, your house will not be included in the assessment if you arrange care and support at home or if you live with a partner, child, or a relative who is disabled or over the age of 60.
While it may be tempting to sell, or even give, your house to a relative in order to avoid the full cost of care, this might not be such a good idea.
It could be seen as a deliberate deprivation of assets, and the council could calculate your fees as if you still owned the home, reclaiming the care costs from the person to whom you transferred the property.
Lucy Harmer, director of services at the charity Independent Age, says: “We hear a lot from older people who find it hard to understand the care funding system.
“Combined with the chronic underfunding from government, you can see how people find it difficult to navigate. Investment in the care system is not high enough to provide the quality of care for the number of people that need it, and therefore a radical solution is necessary.
“That is why we are calling for free personal care to eliminate the costs people face, as it will allow them to plan ahead.”
Other options for funding care
If you plan to receive care at home and do not qualify for local authority support, you can use an equity release scheme to fund your care.
A lifetime mortgage allows you to take out a loan that is secured against your property.
You can extract cash in a single lump sum or in smaller amounts over time through what is known as drawdown.
Unlike conventional mortgages, you don’t make monthly repayments – instead, interest rolls up and the loan plus interest is repaid when the property is eventually sold.
Many pensioners are asset-rich but cash poor, and because of this downsizing provides another way to raise funds.
While you may not be able to raise as much this way as with equity release, it is sometimes more cost effective because you won’t have to pay interest. You may also want to live in a smaller home more suited to your needs.
If you don’t want to sell your home immediately, another option is a deferred payment scheme that allows you to delay paying the costs of your care.
Your local authority will pay for your care, which you can repay when you sell your home.
To be eligible the value of your savings and capital – not including your home – must be less than £23,250.
A care annuity, which is also known as an immediate needs annuity, is an insurance policy that provides a regular income to pay for care in exchange for an upfront lump sum.
It is bought at the point of need and designed to cover the shortfall between your income and the cost of care. It is paid tax free directly to the care provider.
The amount you pay is based on your health and life expectancy, and annuities provide an income for life.
However, your heirs won’t be able to claim back any of the money you spent on the annuity.
Start saving young
With no guarantee as to what social-care funding will look like in the future, it makes sense for younger people to start planning for their care early.
Boosting pension contributions can help you to build a savings pot you may need for care later on.
However, the minimum auto-enrolment rate of 8% is unlikely to be enough, warns Steve Cameron, pensions director at Aegon.
He says: “It is very difficult to plan ahead when you just don’t know how much you will need.
“By saving into your pension, once you get near to retirement age and you understand your needs, you can then allocate any savings accordingly.”
Care funding alternatives
With adult social care in the UK currently at crisis point, radical solutions are needed to fund the system sustainably.
Former Conservative cabinet minister Damian Green MP recently proposed a 1% national insurance (NI) hike for the over-50s costing around £300 a year to help fund social care. The winter fuel allowance would also be taxed.
Mr Green argues that the care system should adopt a similar model to the state pension system. Everyone would be entitled to a similar level of support, but individuals would be encouraged to top this up from their own savings or housing wealth.
This would be boosted by the care supplement – a new form of insurance that would pay for “larger rooms, better food and more trips”.
Mr Cameron says: “A 1% increase in NI would be palatable for most people if they thought that in return for that their core care costs would be paid for.
“With the increasing number of people facing social care in later life, the government needs to put in place a stable and sustainable way of sharing costs between the state and individuals, based on their wealth.
“The government’s share needs to be adequately funded, ensuring good quality care across the country, with an end to the current geographical lottery. As our society increasingly enjoys longer lives, this inevitably comes at a cost.”
He says that individuals need to have a clear understanding of what they will be expected to pay if they need care, with a cap on care costs.
“Under the plan, it would effectively be setting a cap on care costs without having to pay anything unless you want to upgrade.
“There needs to be incentives for people to plan ahead for an event that could be 20 or more years into the future.”
Joel Lewis, policy manager at Age UK, says: “It is an opt-in system, so it does not require you to pay in, but will members of the public be willing to pay for care they may or may not need in the future? It is a tough one to predict whether people will do it.
“It is a bit of a strange one to plan for if you are in good health. It would probably be simpler to have savings and a pension pot built up to pay for eventualities later in life.”
Social care green paper
The government is expected to propose a cap to prevent rising care costs in its upcoming green paper. This would limit how much people pay for social care.
Policy ideas it will consult on include more means-testing for care charges, an insurance contribution model, a ‘Care Isa’ and tax-free withdrawals from pension pots.
Rachael Griffin, tax and financial planning expert at Quilter, comments: “One of the many problems with the current social care system is the complexity and uncertainty around the provision from the state.
“Worryingly, people sometimes bank on the public purse to pay for their care or at least part of it. Even those who don’t are left scratching their heads as to how much they need to pay in before state funding kicks in. The whole thing leaves people confused and vulnerable.
“This is nothing new and is something the government has committed to tackling for years. However, to shift the current structure we need the social care green paper, which continues to be talked about as some sort of mythical being that never reveals itself.”
The social care green paper was originally due to be published last year but it has faced numerous delays and remains unpublished at the time of writing.