Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
What are the options to fund care?
Funding care costs became a key topic in the recent general election, with different parties pledging money or proposing reviews into how to fix the problem of care funding.
However, it’s a problem that’s been kicked down the road by continual governments, as the costs are high and there’s no easy solution.
Until there are any major changes by the Government, you will typically have to fund your own care if you have savings or assets worth more than £23,250.
The average care cost is £39,000 a year, or £52,000 a year if you need nursing care, according to LaingBusson. This means if you’re in care for 10 years the costs can reach more than £500,000 – or double if there are two of you.
The average stay in a care home is 2.5 years, making the average cost at current prices £97,500 for just care, or £130,000 for nursing care.
But how do you fund these costs, and what’s the best use of your money?
Rent your property
Usually older people tend to have large property wealth that’s mortgage free, even if they don’t have lots of cash assets. You property won’t be counted if you partner continues to live in it while you move into care. However, if that’s not the case you could use the property to fund your care.
Some will want to try to hold onto the home for as long as possible, so they can pass it on to their children or other family members. However, you need to think about whether preserving wealth for your children is practical.
One way to keep the property untouched is to rent it out rather than sell it. It depends on the size of the property and where it is as to whether that will cover enough of your costs or not.
You also need to think about the condition of the property and any decorative or maintenance work that might need to be done to get it up to scratch to put on the rental market.
Also consider the costs of any tax that might be due on the rental income, of a managing agent running the property and how you will cover any vacant periods.
Much like a pension annuity, you can get an annuity that pays for care fees. Assuming you’re going into care imminently, you could use an ‘Immediate Needs Annuity’. In exchange for a capital lump sum, an insurance company will cover the shortfall between income and the cost of care, paying a tax free regular amount directly to the care provider. It’s tricky to work out exactly how much this costs, as the insurance company will base it on each person’s circumstances, including life expectancy, current rates and GP reports.
The main advantage of these products is certainty and peace of mind – the shortfall could be covered for the rest your life and it will safeguard other family capital and pension income. The downside is that the capital sum needed up front might be too large, and access to that money is lost once the contract is set up.
You’ll need to use a financial adviser to get this type of annuity, and the Society of Later Life Advisers has a directory of accredited advisers that you can contact and search based on your postcode.
Use your investments or pension money
If you have a considerable sum in your ISA or SIPP you could use your investments to generate a sufficient income to fund your care costs. However, you’d need a considerable sum if you’re going to try to meet the entire cost from this pot.
For example, you’d need a pot of almost £1m to be able to take the entire £39,000 annual cost of care from it, assuming a 4% income rate.
However, most people will have other sources of income, from the state pension to other company pensions, or perhaps rental income from buy-to-let properties, so the shortfall you need to meet might be smaller.
A rule of thumb of how much income you can generate often used is 4%, but you can decide whether you switch your investments to income-generating funds and stocks or you just invest the portfolio for growth and skim off any increase in value each year to fund your care. There’s more information available here.
Can I sell my home to my children?
Often people hope they can keep their house in the family, and in return get their children to help pay the cost of care. These arrangements can get tricky, and you need financial and legal advice before doing it.
Some parents would like to sell their home for a low value to their children, in order to get it out of their estate for the purposes of working out whether they need to pay for their care. As well as many tax issues it’s likely this would be considered ‘deliberate deprivation of assets’ and the sale would be disregarded by the local authority.
However, you could sell your home for full market value to your children in order to give you a lump sum to fund your care, if you wanted to keep the house in the family.
You need to think about whether your children want to take on the property and if they’re able to pay the full value for it. If they already own a home they would be liable to the extra stamp duty surcharge too, which is an additional 3%.
Equity release options
Equity release allows you to use some of the value you have in your home without having to sell the property. With some plans you effectively sell a percentage of your home, at less than market value, in return for a lump sum, which could in turn be used to fund care. You can sell additional portions of your home over time to release more money.
Another option is a lifetime mortgage, where you borrow money against the equity in your home and it’s then repaid (plus interest) when the house is sold or you die.
Equity release often gets a bad name, as some of the interest charges can be eye-watering, but it can be a good option for some. Just make sure you get advice to ensure that you are getting the best value and are aware of the shortcomings of the product.
Ask the local council
One option if your house is the main source of your wealth is to ask the local authority for a ‘deferred payment agreement’. It’s offered under certain circumstances, but means that effectively the annual costs of care are paid by the local authority and accumulate and that money is taken when the house is sold after your death. It’s effectively like equity release, but with much lower fees as it’s offered by the council.