No getting away from it, paying care home fees is a nightmare. They are ruinously expensive – usually costing around £500-£700 per week. You often need the money fast – many go into care after a medical emergency; and you can’t plan for them because you don’t know if you’re going to need them.
It’s a big problem: Around 135,000 people are admitted into care every year, a problem that is growing with ever-greater longevity. Families are often forced to find funding with little warning and often, over a long period of time. Although there is some non-means tested help from the Government, including the attendance allowance and the personal independence payment, most families may need to resign themselves to meeting the lion’s share of the £40,000 annual fees.
Obviously this is currently a huge political hot potato and we expect to see change moving forward. Whatever your politics, the current system is broken.
So what options do people have?
Using existing investments
If someone going into care has existing pensions and ISAs, these can be used to pay care home fees. In general, people won’t need a lot of additional income once they are in a care home, so almost all their existing income can be used to pay for fees.
It may be that any ISAs or other investments aren’t currently held in income-paying investments. They may be held in cash, for example, and with savings rates at record lows, you could probably generate a higher income putting it somewhere else. Of course, this will probably mean putting the pot into higher risk assets, such as the stock market. This can be uncomfortable, and undoubtedly there may be some variability in the capital. However, it could offer a better income and greater protection against inflation in the longer-term.
Using the family home
Selling the family home is one option to release capital. Two caveats: it may take time and you can’t do it if Uncle Bob is still living there. Many people also want to pass their home to their family through inheritance and therefore see a sale as last resort. With this in mind, you could consider:
Renting it out
If the house is in a reasonable state and someone can be persuaded to manage the letting process, renting it out is an option (or renting out a room if someone is still living there). You need to consider estate agent fees and general upkeep, so don’t bank on bagging all the profits.
Equity release plans may be another option for those who want to hang onto the family home. In essence, they provide a cash lump sum in return for a loan secured on your house – like a mortgage, but without the monthly repayments and only repayable when the homeowner dies or when the property is sold. You can then use the lump sum to buy a care home fees annuity, such as those mentioned below, or invest it to generate an income. The problem with all equity release plans is that the interest rates can be relatively high (around double that of a normal mortgage) and interest starts to build up from the moment you take the loan.
There are three main types of equity release: a lifetime mortgage, a draw-down lifetime mortgage and a home reversion plan. Draw-down mortgages allow you to take the cash bit by bit. This means that you don’t pay interest on the whole lot all the time, which many people prefer. With a standard lifetime mortgage, you get all the borrowing at once. Some people will need to do this, but it can be more expensive.
Home reversion plan are where you sell all or part of your home in exchange a pot of cash. The rest is left for you or your relatives and the owner can still live there if they happen to come out of care.
Using a lump sum
Investing to generate an income
Chances are, at the end of this process, you’re going to be left with a pot of cash that you need to invest to generate an income. There are two ways to do this. You can aim to invest the lump sum in income-generating assets, such as shares that pay dividends, or bonds that pay interest, or you can buy an annuity of some kind.
That advantage of investing to generate an income, is that usually, you’ll have some left at the end. However, the income you can generate will be lower and is not guaranteed as it is with an annuity.
Annuities for care home fees are usually called ‘immediate needs’ or ‘care home fees’ annuity. Like a normal annuity, this pays a guaranteed income for life to cover the cost of care home fees and the price depends on factors such as age, health and current annuity rates. These have an advantage over conventional annuities, in that the income is tax free if it is paid directly to the care provider.
There are two main providers of care annuities: Just Retirement and Friends Life. Partnership Assurance says each policyholder was priced individually according to their health. “Most applicants will have had recent contact with their doctors or other clinicians and there will be good, up-to-date medical records,” said Nigel Barlow, a director at Partnership. “So we are very unlikely to need anyone to undergo a medical.”
He said the average client aged 85 could expect to receive an annuity paying between 11% and 20%, based on their health. The income paid out by the policy would rise in line with general inflation. As such, a £100,000 sum would buy inflation-linked yearly income of between £11,000 and £20,000.
Put it the other way around, if someone aged 85 going into a home wanted their annuity to meet yearly fees starting at £15,000 and then rising each year by the rate of inflation, they would pay between £78,000 and £111,000 for their policy, depending on their health. If they were aged 90 on going into the home, with the same income requirements, they would spend considerably less – between £62,000 and £86,000. Got it? Good.
The inflation applying to care home fees tends to outstrip wider inflation, and most specialist advisers recommend buying a policy in which the pay-out rises by more than inflation every year. “In our experience, 5% is nearer the real long-term inflation in care fees,” said Andrew Dixson-Smith of Eldercare Solutions, an independent advice firm specialising in care fees planning.