How can you plan and pay for long-term care?

Many of the goals we save and invest for are aspirational or enjoyable: retirement, holidays or a new home. Yet others are more of a necessity, a preparation for the uncertain or unexpected.

Care home fees fall into the latter camp, and with costs for later life care running into the tens of thousands of pounds a year it is very important to consider the possibility of requiring it and the options available.

Long-term care planning in seven steps

1. Find out how much residential care costs

Unlike healthcare, social care is rarely free, and it is usually expensive. So it’s no surprise many people are concerned about how they would pay the fees if they ever needed care services or to move into a care home.

The average annual residential care home fee across the UK is around £57,000 a year according to the Office for National Statistics (ONS), but they vary a lot depending on where you live and the level of care required. Homes in London are dearer, for instance, and if you need specialist care you can expect higher fees.

The ONS estimates there are around 370,000 care home residents in England, 37% of whom ‘self-funded’, meaning that they pay for care completely by themselves. The overall number of people requiring care is expected to grow as the UK population ages.

2. Seek help with care home fees if you need it

Who pays for long term care when the self-funded option is not financially viable? Most people who need home care or residential care in later life will have to pay some or all of the costs themselves, but there is some help available from your local authority.

However, the system can be complicated and is strictly means-tested. It is important to note that if you are supported by local authority contributions, rather than self-funded, your choice of care home is likely to be much more limited. Essentially, the situation is: If you choose your own care, you pay. If you opt to receive local authority care, you pay until you run down your assets.

If you use local authority support, and if your income is not sufficient throughout your period of care, your capital is used at least until you are down to:

• £23,250 in England and Northern Ireland
• £50,000 in Wales
• £28,500 in Scotland
  

In England, for example, if you have savings of more than £23,250 or you own your own home, you will usually not be entitled to state funding to pay for a care home. If your capital is between £14,250 and £23,250, you’ll get some help from the local council, but you’ll still need to contribute towards the fees. Below the level of £14,250 no capital is used to pay for care, but you will be required to contribute a small amount from income.

There are guidelines in place outlining how retirement income and assets are used to fund local authority care, including various safeguards. For example, for the purposes of means testing your home is disregarded if it is still lived in by your partner or a qualifying relative. Insurance bonds can also be ignored. For personal pensions there are limits as to how much of the pension can be taken each year to pay for local authority care; if you are married half your private pension income is excluded. Personal possessions, including works of art and antiques, also generally don’t count.

There are also special rules governing the intentional reduction of assets known as ‘deprivation’. If your local council believes you have deliberately done this to avoid paying care home fees, they may still calculate your fees as if you still owned the assets. In general, two elements are considered. Firstly, whether you knew at the time that you needed or may need care, and secondly whether paying for care was a significant reason for giving assets away or reducing savings.

3. Stay up to date with changing legislation

Care home rules could change in the future. The previous Conservative government’s 2021 Vision for Adult Social Care proposed the introduction of an £86,000 cap on the amount anyone in England will need to spend on their personal care, though it excluded related costs such as accommodation and food. This was expected to take effect in 2025. However, the current Chancellor, Rachel Reeves has jettisoned the policy, So the current system endures for time being, but remains, as always, subject to change.

4. Find out if you're entitled to care home benefits

A good start is to find out to what extent you qualify for the State Pension if you haven’t already. As well as this, in certain situations involving physical or mental incapacity you can claim state benefits that help contribute to the cost. Attendance Allowance is available to people over State Pension age who need help with personal care at home or in a care home, provided they meet the eligibility criteria. It is based on the level of care and is not means-tested. Those under State Pension age and receiving other disability benefits, such as Personal Independence Payment (PIP), will generally continue to receive them if a care home is required.

If care needs are primarily health-based, you may qualify for free care, regardless of income and capital. This is known as NHS continuing healthcare (CHC), arranged and paid for by the NHS and provided in a hospital, care home or a person’s home. However, the rules and processes for qualification can be time consuming and far from simple.

5. Think about how you’ll pay for care over time

There are a wide variety of options for paying for care and your financial adviser can select the right investment combination for you and your family, taking into consideration your specific circumstances and level of risk that you are comfortable with.

The ideal scenario is that guaranteed income from your pension schemes and the State Pension covers all or close to all, of the care cost. If not, if you have savings, investments or property, the combined income from these assets on top may meet a significant portion of your bill. The usual aim is to maximise your income for meeting costs while, as far as possible, preserving your original capital, in order, for instance, that as much as possible can be left to your children.

Here things can become complicated as, like virtually all expenses in life, the cost of care goes up over time. Although a typical care home stay lasts only a few years, in many people’s situations a large chunk of the costs must come from capital rather than income. This is where working with a financial adviser to model different scenarios and the cashflows from assets, as well as weigh up different financial products that can be utilised, can chart a firm plan of

Sadly, for some there can be some difficult and emotional decisions to make. Selling the family home may make a significant contribution towards costs but it can be psychologically challenging knowing it is no longer there to go back to. However, if you do sell your home, you may be able to invest some of the capital raised to ensure the funds last longer.

In terms of financial products available, options include an ‘immediate needs’ or ‘immediate care’ annuity, which is a type of insurance policy that provides a regular, tax-free income in exchange for a lump sum, rather like a standard retirement annuity. They can also be set up on a deferred basis – with a starting date in the future – to help increase the income achievable. Annuities have a high upfront cost, and they are not always suitable, but their rates have become more attractive recently as interest rates have risen, and they can offer peace of mind that your money won’t run out.

For those planning further in advance, an investment bond for long-term care can be an option. This is a long-term investment that contains a life insurance element. Income is tax free up to a certain limit, and you can potentially leave behind a lump sum to your children. Your financial adviser can talk you through the pros and cons of using these products and ultimately provide a recommendation that suits your needs and risk that you are happy with.

If you want to find out more around this topic, check out my article: How to invest after retirement

6. Decide if you’d want to sell your house to pay for care

Some people wonder ‘should I sell my house’ when it comes to long term care planning, though it’s not the right choice for everyone. If you own your own home but don't have enough money elsewhere to pay care home fees, you can request a deferred payment agreement from your local authority.

This is effectively a long-term loan to meet the costs, secured against your property. The council pays your care home fees and you don't have to repay it until you choose to sell your home later, or after you die. This can be a useful option if you don't wish to sell your home, or if you're finding it difficult to do so.

You could also consider a lifetime mortgage to release equity in a property, but the interest terms may not be as favourable as an agreement with the local authority.

7. Consider financial advice to help manage care home fees

When considering how to pay for long term old age care and conservation in later life more generally, it is vital to seek regulated financial advice at the earliest opportunity to ensure that you’re prepared for a broad range of eventualities. Remember, decisions take time and that can be in short supply if care is required suddenly and assets are being depleted.

It is also vital to consider who makes your long-term care decisions in the event of your mental incapacity. Crucially, a Lasting Powers of Attorney (or Continuing Power of Attorney in Scotland) should be in place so that a trusted individual can take decisions on your behalf. An LPA is a legal document that lets you appoint one or more people to help you make decisions or to make decisions on your behalf. You should ideally appoint younger attorneys who will not themselves be old if you go into elderly home care, and if you already have this in place you should discuss your preferences with them.

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