Contrary to many people’s understanding, Roger Marsden, head of strategy for at retirement at Aviva, says long-term care (sometimes called social care) is not funded by the NHS in the same way that health and medical care is.
Local authorities do provide some social care subject to a means test and an assessment of the type of care needed, but Mr Marsden says the level of the means test means it is likely that most people will be liable to fund all or part or the cost of their care.
While pre-funded long-term care insurance was available previously, Mark Stopard, head of product development at Partnership, says it proved extremely difficult to encourage consumers to pay into a policy to cover an event that may never happen.
Therefore, Mr Stopard says the only options currently available are ‘point of need’ products.
He adds care can cost a considerable amount so planning for this is something that people really should consider as they approach and enter retirement rather than when they need to enter a care home.
Stephen Lowe, group external affairs and customer insight director at Just Retirement, says the difficulty with contemplating care costs and the type of vehicle best suited to paying the bill is that the amount of cash needed is unpredictable.
While a quarter of us may spend very little, Mr Lowe warns many people may be required to spend significant six-figure sums and few people put aside funds specifically for care in later life and the market for pre-funded care plans has disappeared.
Mr Lowe says: “If they need to pay for care, people rely on their pension income plus other accumulated savings and investments, which can soon be depleted by care costs.
“Other sources for self-funding are children and the sale of a home if it is no longer needed.”
The main product option in the long-term care market should be an immediate needs annuity, according to Mr Lowe.
Now offered by three providers, for a one-off premium Mr Lowe says an immediate needs annuity provides a guaranteed flow of income until the policyholder dies which, if paid to a registered care provider, is received without any deduction of income tax.
The income can be deferred for a period of time, according to Mr Lowe, helping to reduce the cost of the immediate needs annuity, and can escalate to take account of increasing care costs.
“Care plans (immediate needs annuities) require a lump sum up front and not all the capital will be returned if the individual in care dies in the early months, although there are various options to protect capital.
“The main advantage is that once purchased, the care plan continues to pay for however long the individual requires care, protecting other assets from having to be used in the event of an extended stay.”
Partnership’s Mr Stopard says the great thing with a care annuity is that it will pay all or part of their care fees and can be immediate or deferred, that is to say it starts to pay fees within one or two years of the person going into care.
When care costs are paid directly from general investments, Just Retirement’s Mr Lowe says while this would give a lot of flexibility there are risks, such as poor investment performance that may result in the income falling short of what is needed and potentially depleting capital more quickly.
In many cases, experts FTAdviser have spoken to acknowledge that self-funders are often falling back on the value locked up in their homes to pay for their care.
For those who want to keep the property, Mr Lowe says it could be rented out to provide an income.
If a spouse or dependant is still living in the home, the release of equity in the form of a lump sum or regular withdrawals can also help contribute to care costs. Advisers can turn to our Guide to Equity Release to learn more about these products.
Ultimately, though Mr Lowe says many self-funders sell their homes to pay for care.
Aviva’s Mr Marsden points out there will soon be an additional option as the Care Bill introduces the Universal Deferred Payment System, which will allow some people to secure care fees against their home.
The amount will be repaid when the property is sold, usually when the person has died.
The UDPS will be subject to a means test of non-property assets – the limit is currently £23,250 but at the time of publishing this guide the final limit had not yet been confirmed.
Mr Marsden says advisers should note some local authorities already offer a form of deferred payment system but this is discretionary so it is not available nationwide as the UDPS will be.
Mr Lowe says while from next year all local authorities will have to offer deferred payment schemes and be able to charge interest on the loans, “wealthier people may not be able to access them while they still have other assets.”
Planning for care funders
Typically, Janet Davies, managing director of Symponia, says whatever product is picked as a solution to fund long-term care a client’s investments always need to be restructured.
Ms Davies says it is usual for finances to be simplified at this time with the underwritten quotes for an immediate care plan forming the centre of the whole exercise. The same risk warnings will apply to all long-term care funding products, regardless of the age of the client and/or their intended use.
She says the biggest danger is the open-ended nature of care fees – no one really knows how long care will be needed.
Currently, Partnership’s Mr Stopard says 24 per cent of self-funders deplete their assets to such an extent that they need to rely on state funding so this is a real worry if someone chooses to use existing assets to pay for care.
“Some people choose to move their assets into trusts or investment bonds, which currently are not counted when a council assesses their net worth. This again means that they are reliant on local authority support and have less say in their care journey.”
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