The best way to plan for the cost of care

Most of the research about the risks to your retirement plan focuses on two of the three major retirement risks: investment risk and longevity risk.

The third big risk, which receives less coverage, is the category of spending shocks – spending significantly more than planned. And the cost of care can be one of the bigger spending shocks.

Around 400,000 older people live in care homes (according to the 2018 Laing & Buisson survey), and spending on long-term care is one of the most severe spending shocks that can impact retirees. In our part of the UK, it’s not uncommon for care homes to charge around £80,000 per year; Attendance Allowance and Funded Nursing Care can reduce the cost to individuals by up to £12,000 per year, but even with this, the cost is likely to exceed £5,000 per month.

As with most retirement risks, longevity multiplies the risk; it is, of course, more likely that care will be needed for longer if you live for longer.

In the UK, you simply can’t buy long-term care insurance (apart from in one or two exceptional circumstances), so it’s not possible to pay a premium to remove the risk. As Mrs May discovered, so we shouldn’t expect politicians to solve this problem for us. It seems likely that we will need to rely on our investments, pensions, properties and other assets to cover the cost of our care.

So, it’s easy to understand why so many people worry about how the cost of long-term care could impact upon the legacy they would like to leave to their children.

Are we worrying too much?

Long-term care is generally defined as requiring assistance with normal activities of daily living for more than 100 days. Any period of care lasting less than 100 days is not considered to be a long-term care need and will have a smaller financial impact on the household.

It isn’t clear how long the average duration of a stay in care home is. The LSE put the figure at 462 days back in 2017, but previous surveys have shown the average duration in a residential home as being 841 days, and 528 days in a nursing home. However, the surveys agree that it is rare to live for more than 6 years in a care home.

For most people, the financial impact is only significant, therefore, if they are unlucky enough to require care for several years, so only a relatively small number of people will suffer a long-term care spending shock. However, a lack of planning can create problems as the cost can deplete household assets, or children can feel obliged to make large sacrifices to provide their parents’ care – either physically or financially.

Why You Should Plan Early

Planning for the cost of care is an important part of a retirement income plan. However, it is often overlooked.

Many are unwilling to confront the questions and possibilities related to losing their own independence. No one likes thinking about the possibility they will no longer be able to effectively handle all of the basic activities of daily living. It’s only natural to think that this is something that only happens to other people.

The best approach is to include a plan for the cost of care when you are planning for retirement. It is unlikely that your asset base will grow once you have retired, so you need to be sure that you can cover this spending shock before you stop work, even though you are unlikely to need the funds for 20 years or so. And it may also be more comfortable to consider the potential need for care many years before you need it as it seems less real.

What’s the Solution?

The favourable inheritance tax treatment of pensions makes them a good vehicle to place investments set aside for care costs, whilst many of our clients favour using the family home (which also has some handy tax breaks) as an insurance policy to cover the potential cost. But the solution isn’t to rush to allocate an asset to provide for the cost; as with most retirement costs, the answer is to put together a comprehensive retirement spending plan, which includes a plan for shocks like long term care.

Philip Wise |

Managing Director and Chartered Financial Planner

This guide is for information purposes and does not constitute financial advice, which should be based on your individual circumstances.
Levels and bases of, and reliefs from taxation are subject to change and their value depends on the individual circumstances of the investor.
The Financial Conduct Authority does not regulate some aspects of Trust, Tax and Estate Planning

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