Care Home Fees – Financial Planning
It might seem like an unusual topic, but this concerns our final years – paying for a care or nursing home. It’s also a particularly emotionally-charged subject of financial planning to talk about, and there’s a lot of behavioural and human errors and misconceptions around it.
Entering a Care Home Because You Can’t Cope at Home
It’s typical that it’s the surviving spouse who goes into a care home. They’ve managed at home as best they can when their partner dies, but eventually they get to the point where they need further help to look after themselves.
For many months or years leading up to this point, they may have had carers visit them at home to support them with general tasks and personal care, but now they need a greater level of care.
I often get involved in this, where my clients are the children of someone who needs to go into a care home. Sometimes, a lawyer is appointed as a deputy when there are no obvious relatives to help.
Some Quick Facts
· The care sector in the UK is worth £15.9bn
· There are 410,000 residents at 11,300 care homes
· Around 95% of residents (beds) are provided by the independents – the for-profit and charitable sectors
· 5% of the market is made up of local authority care homes, for those who have no money and can’t afford to pay for care
· The average cost of care is £44,0000 for a self-funder
· The average cost of care is £33,000 for a local authority tenant
The Difference Between Self-Funding and Local Authority Provision
Self-funders are those with assets and don’t need to rely on the state pension. Those that do rely on it have their costs covered by the local authority, but the disadvantage of that is they have no say over where they move to, and the home may not be of a high standard.
The Test for Self-Funding
The test is very simple, and looks at a fairly low number. If your assets are worth more than £23,250, you have to pay the bill. This includes cash, investments and money from the sale of your home. Below this amount, the local council will foot the bill. This includes cash and the income from the sale of house.
When I deal with these situations, 75% of the individuals are female, so in the example we’ll look at, let’s assume an 85-year-old woman needs to go into a care home, and a Power of Attorney arrangement is in place as the children need to make the financial decisions on her behalf.
When a parent has to go into a home, the children are thrown into the deep end, because it’s often the first time they’ve had to deal with these government departments, care providers, financial advisers and so on, and it can feel overwhelming. Don’t worry, because it’s overwhelming for everyone and you’re learning something new.
The average cost for the care homes I come across is about £50,000 per home. Occasionally, it’s a little less, but it can often be a lot more and it sounds like a big, scary number.
Myth One - £50,000 is now the Total Cost of an Individual’s Life
When they were at home, the individual may have been spending £15,000 to £20,000 a year, on bills, food, personal items and luxuries. When they enter into a care home, this is their new total costs – they don’t have to pay council tax, buy food or toiletries – it’s a job lot. When you hear the number £50,000, it does sound very high. But, if you consider that they’ve been paying £20,00 to run their homes, it’s gone up by £30,000. It’s this extra amount that’s important when it comes to financial planning.
Let’s look at an example:
Our 85-year-old lady has to go into a care home, so what are the costs? Assume the care is £48,000 with £2,000 for petty cash, which covers haircuts, treatments, gifts and so on.
The older the person gets, the less petty cash they need. When they first go into a home, they seem to spend more than they do after they’ve been at the care home for five years.
We need to offset that with the income our lady is receiving, so we can identify the income (expenses) gap. She receives a state pension of £10,000 a year, and an annuity (lump sum pension asset turned into an income for life) of £5,000, and a final salary of £8,000. She also receives Attendance Allowance from the government of £4,000.
It’s important to note that anyone in a care home is eligible for the Attendance Allowance and it’s non-means-tested. The quick way to think of it is that millionaires are entitled to it, and assets don’t restrict access. When something is means-tested, they test your income and assets.
The total of this is £29,000, and if we apply a small amount of tax, the net amount is £25,000. We can see that we have a gap of £25,000, which is an intimidating number. However, this is only looking at income and expenses.
Taking Assets into Consideration
Let’s assume that our lady has just sold a house or flat, and cleared £300,000. She has £200,000 in savings, and £100,000 in old-style investments. She has a total estate or net worth of £600,000. This isn’t uncommon for anyone in areas where house prices are high, such as London or the South East.
At the beginning, the gap is £25,000, but we can assume that it will increase, because the care costs will probably increase by 5% a year. In this situation, we’ll assume that the lady lives for another 10 years – unlikely but not impossible.
If this happens, the family will need to find £250,000 from her assets to cover the gap for those 10 years. The lady has £600,000, and if we apply inflation against care costs (these are often very high), another £100,000 will be applied over the decade, totalling £350,000 of her assets.
Myth Two – Having too Much Cash
Let’s say our lady has £200,000 in cash at the time she needs to go into a home. Had she invested this, the sum could be considerably higher. I frequently find elderly people with too much money in cash.
We know that inflation is the silent tax of the financially misinformed. People looking to avoid risk keep their money in cash, and then get hammered by the silent killer of inflation.
Money is only purchasing power, so the mistake I often see is not investing properly leading to the point of going into a care home, although of course, there are obvious exceptions such as ‘it didn’t make sense to invest’.
But generally, had they invested at age 65 or even 75 and made their money work harder, they’d be in a situation where the care costs wouldn’t have such a detrimental effect on their estate.
Myth Three - Elderly People’s Health Declines
Quite often, people are very frail by the time they need extra help, and they’ve been barely managing at home. When they move into a care home, it’s like a five-star hotel, and their health often improves.
I’ve heard families frequently say, ‘Mum’s in a bad way and I don’t think she’s got long left’, but this is when they’re at home, or even in and out of hospital. Once they’re in the care home, their health picks up. This is usually because they’re eating regularly, they’re warm, there’s a community around them and they have a purpose again.
Understanding the Income Gap
In our example, the gap is £25,000. There is another option to just letting the money run out – a financial product to explore. The technical term is an Immediate Need Care Annuity, or a Care Annuity for short. This provides a lifetime income for the elderly person in exchange for a lump sum of cash.
The child or lawyer of the elderly person needs to approach a financial adviser, who will in turn approach the insurance companies who offer the care annuities. They will then assess the person via a medical and health report.
It’s likely that an insurance company would say, “In order for us to give you an income of £25,000 for the rest of the individual’s life, we’d require a lump sum of £125,000.”
This sounds like another scary number, and it is! It’s also very much dependent on the person’s age, health issues and life expectancy. The combination of these things will change the numbers.
To pay £25,000 tax-free for the rest of our old lady’s life, the insurance company wants £125,000. If you understand how yield works, that’s a 20% yield. You give them a lump sum and they provide a 20% return for the remainder of the person’s life.
Benefits of a Care Annuity
1. The care annuity plugs the income gap for life. From an income/expense point of view, buying it ensures that the client is bulletproof for life, barring any unforeseen circumstances, although that’s unlikely.
2. It protects the remainder of the estate for the next generation, which is very important.
So, our elderly lady has assets of £600,000. If £125,000 was removed from that, there would be £475,000 to pass down to the next generation. You can think of it as an insurance policy if you like.
The maths would show that the break-even point is in four and a half years’ time: so if you give an insurance company £125,000, they pay £25,000, as well as the inflation increases at 5%, to a registered care provider, the break-even is 4.5 years in.
If the individual dies in year one, it’s been a bad deal, but if the person fortunately lives for 10 years, that would have cost £350,000 rather than £125,000, as we saw above.
Once set up, the plans cover the individual for life. It’s a simple X for the insurance companies, because they’re placing bets on a large pool of people, and they get it right on average, plus their profit.
However, the family have what I call a concentrated bet. It’s a one-off, and they’re contemplating paying £125,000 lump sum for a £25,000 annual rising income.
In our scenario, should the family take the risk, the money would run out in approximately 10 to 15 years. It’s not unheard of that an 85-year-old lives to 95 or 100, although unlikely. However, taking out the policy leaves £475,000 for the next generation, as well as peace of mind every month.
The Behavioural Quandary
For the family to continue to pay the care costs for mum or dad, there’s an emotional dilemma. From a financial point of view, they want their parent to pass away, so the money does not continue to be depleted.
But emotionally, they want mum or dad to stay alive if they’re in a stable situation. But the longer they live, the less money there is to pass down to the next generation. Whereas, buying a care annuity also addresses this issue. Once you’ve bought it, you know that the income is set for life. You’re delighted that mum or dad lives for a long time, because the income gap is closed.
Other Points to be Aware of
1. You can mix and match the numbers for a care annuity. You may want to plug the whole gap or half and half it. Rather than spending £125,000 for £25,000 per year, you may decide to spend £62,500 and take an income of £12,500 and cover the gap with cash. With the care annuity, it’s not all or nothing.
2. When there’s more than one child involved and they need to make the decision of buying the care annuity, they think about the cost in terms of sharing it between them.
For instance, if the gap is £150,000 and there are three children, it’s costing them £50,000 each (from their inheritance). This seems to soften the blow, makes it seem less and acts as a form of mental accounting. Although behaviourally incorrect, it leads to a correct financial decision.
3. If someone has a huge estate, for example £5m, they may decide to buy a £125,000 care annuity. If they don’t, it’s likely that the taxman will tax their estate above their allowances at 40%, so it becomes a no-brainer to take the annuity.
I have a calculator on my website for working out the income and expenses gap.
4. You need to know your numbers, because the local authority, care home and financial advisers will all ask for these. The more organised you are, the better.
· Be as financially organised as you can
· Don’t get yourself into a mess by over-complexity or over-precision
· When you approach this stage of your life, ideally, you’ll have someone you can trust to help you, so learn to trust the right people early on
· You don’t want to become a burden on your family or the government
· Live below your means, and understand where financial investment returns come from - equities
· Disciplined investors are rewarded
· Seek professional advice – you need an adviser with specific knowledge of care costs
· The financial impact isn’t as great as the media makes it out to be. Just do some planning