In his second piece, Kieron Robertson, Age Space Sussex’s Finance Partner at Concierge Wealth Management, a Later Life Specialist and an Accredited Member of the Society of Later Life Advisers (SoLLA); the organisation which helps people and their families find a trusted and Accredited Financial Adviser who understands the financial needs of later life matters explains the ‘ins’ and ‘outs’ of self-funded care.
How do I pay for care, if I am not eligible for NHS or Local Authority Assistance?
Sadly, limitations on both local authority and government budgets mean many end up having to fund their own care costs and, if your elderly parent or relative is funding their own care, it is also worth noting a Times newspaper report, from November 2017, that claims average care fees had increased by over 9.5% on the previous 12 months so, any decisions on paying for care, should also consider the potential timescale involved.
Aside from the government assistance noted above, or getting in a lodger, the following may represent some alternative solutions for those who own their own property and are faced with funding their own care costs:
- Renting the Property
- Equity Release
- Cash (Deposit-Based)
- Immediate Needs Annuities
1. Renting the Property:
Some may wish to retain their property, for sentimental or other reasons, but you will obviously need to ensure that any rental income (after costs – see below) is enough to cover the shortfall between the costs of care and the present income of the person requiring care.
This way, ownership is retained with any future growth in the property value remaining part of the estate.
However, don’t forget to consider, if there are no other assets, that the required shortfall may not be met by the rental income and, more specifically, that there are other costs associated with renting a property, such as maintenance costs, agents fees, tax as well as tenancy voids to name but a few. Capital Gains Tax (CGT) should also be a consideration if the property is later sold.
It may be possible to combine a DPA (see above) with renting the property.
2. Equity Release:If someone requires (or chooses) care at home, equity release can ensure ownership is retained, as is future capital growth in the property value, with the ability to access lump sums, income, or a combination of the two when needed.
It is not without restrictions though, such as the equity in the property itself, and consideration should be given to the interest being added to the loan (no monthly payments are required, but interest is compounded over the life of the mortgage) and, as a result, that any equity in the property could be significantly reduced over time, especially if property values stagnate or fall.
If the owner later needs residential care, the loan will need to be repaid (usually without penalties) so the property can be sold and, in this example, as principle private residence relief will apply there will be no Capital Gains Tax.
Of course, for those wishing to remain at home, downsizing could be a way to release funds and this may well be an option for someone who now lives alone, in what was the previous family home.
Either way, once a property is sold, what are the options available?
3. Cash (Deposit-Based):
Using cash is simple to administer and would require little in the way of ongoing management other than to ensure there are enough funds to last for the duration of the care required. There is no investment risk as such and, certainly for short-term placements, it offers a guaranteed way to meet care costs with little additional cost.
Remember though that any guarantee, outside of any FSCS limit, is only as strong as the institution offering it so you will need to ensure you place deposit funds within suitably secure accounts, avoiding any institutional overlap (where two or more of the institutions are owned by the same bank etc), as the FSCS scheme limit refers the parent or holding company, not the individual banks themselves.
If the length of stay is expected to be anything other than short-term, you should consider the inflationary risk inherent with holding cash – we all know the diminishing effect inflation can have and it is no different when considering long term care costs as well as the effect of capital erosion by making withdrawals over time.
4. Investment (Asset Backed):
One way to (potentially) tackle the erosive powers of inflation is by using asset backed investments which, historically speaking over longer periods, have kept pace with inflation if not provided greater capital growth and income prospects.
Depending on the individual’s situation, it may also be possible to take advantage of any relevant tax efficient investments or allowances, to create greater tax efficient returns.
Of course, whilst there is the potential that an investment may keep pace with inflation or offer more growth/income, no investment can be guaranteed (not without caveats at least, so please read any appropriate risk warnings carefully to ensure you understand the risks!) and, in periods of low return and/or high inflation, you could still see capital erosion.
It is also important to ensure there is a spread of investment risk and a typical investment portfolio would contain elements of cash, property, fixed interest and/or equity-based investments depending on the investors’ tolerance for risk but, either way, expect to see the value of the investment fluctuate over time.
5. Immediate Needs Annuity:
An annuity is an income paid for the rest of the recipients’ life, in exchange of a lump sum of money. The three main annuity types are Standard, Enhanced and Immediate Needs Annuity and, for the purposes of this piece, we are talking about the last of these, the Immediate Needs Annuity as it is aimed specifically at those who are required to fund their own care costs.
As with traditional annuities, an Immediate Needs Annuity provides a regular income in exchange for an upfront lump sum investment and is designed to cover any shortfall between income and care costs, for the rest of the individuals’ lives.
It is suitable for those receiving care either at home or if they have moved in to a Care or Nursing Home. Also, it’s worth noting that if the annuity is paid directly to a registered care provider, it is paid Tax-Free and, if the individual chooses or needs to move, can be redirected to another care provider.
As the income is guaranteed, there is no investment risk and, if structured correctly, you can eliminate, or at least reduce, any inflationary risk.
The main risk associated with annuities, of any kind, is mortality risk so they may not be suitable for someone with shortened life expectancy. Furthermore, if a change in care needs results in additional costs, in excess of any pre-agreed increase in annuity payments, being required, you should be aware that additional funding may be needed.
This article is provided as an overview of the options available and is not meant as, nor should it be implied as, any specific recommendation to you or your loved ones. Please ensure you take appropriate advice before proceeding with any financial decision.
If you’d like any more financial help or advice, please contact Kieron at Concierge Wealth Management via email: firstname.lastname@example.org or telephone 07840 245 968, or visit www.conciergewealth.co.uk
Do you have experience of helping elderly relatives or friends move into a Care or Nursing home? Share your experience or see others’ advice in our Age Space Forum at www.agespace.com