Long-term care advice

Unfortunately the chances of needing care are pretty high. Figures from the International Longevity Centre UK’s (ILC-UK) 2014 Factpack show that, at age 65, one in five men and one in three women are likely to need some form of care in the future.

And this care can be expensive. While prices vary around the country and depending on requirements, the average cost of a residential home is £29,016 a year according to the ILC-UK, with this figure rising to £38,376 for a nursing home.

Cruise or care?

While the probability of needing care may be high, the likelihood of someone planning ahead for these costs is relatively slim. “Most people do not want to think about the possibility of being ill and needing care in later life,” says Kay Ingram, divisional director of individual savings and investments at LEBC Group.

Instead, she says, the focus for many people reaching retirement is on spending the money enjoying themselves while they are still fit and healthy. “Many retirees think that after about 10 to 15 years of good health they will morph into people who rarely go out and therefore need less income,” she adds. “But this is rarely the case and, even if they are less active, they will find that other costs demand a similar level of income.”

Also helping to ensure that planning for future care costs is off the retirement radar is the fact that the market for pre-funded long-term care plans has evaporated.

Although a handful of providers were active in this market back in the late 1990s, a combination of lack of demand and uncertainty about risk meant they soon stopped marketing their pre-funded plans.

Today, the long-term care market is focused largely around immediate needs annuity products from Friends Life, Just Retirement and Partnership. Deferred options are available, where the plan pays out after a period of anything from one to five years. However, these are designed to provide a safety net to individuals who already have care needs rather than someone considering the possibility of needing care in the future.

Spending risks

Making provision for possible future care fees may be off the retirement planning agenda for most clients, but there are several risks to those taking this approach. First, without the cash to pay fees, choice of care is restricted.

On top of this there is a risk that a client may not qualify for state support if they have depleted their pension pot. The Department for Work and Pensions has highlighted the implications of reducing a pension pot too quickly.

It states that ‘if you spend, transfer or give away any money that you take from your pension pot, DWP will consider whether you have deliberately deprived yourself of that money in order to secure or increase your entitlement to benefits’. Where it finds this is the case, it will treat the individual as if they still had the money when it assesses benefit entitlement.

A similar stance is taken by local authorities when determining whether someone is entitled to financial support with their care fees. Its assessment looks at whether an individual has intentionally reduced their income or capital, with the disposal of property a key area of concern.

Time for advice

Given these risks, many are calling for care funding to be part of retirement advice. “It is good that people have the freedom to do what they want with their pension funds but there is a lack of consumer awareness around care funding,” says Thomas Kenny, head of technical pricing at Partnership. “The Care Act 2014 creates a simpler system but it is still confusing.”

Adding to the confusion is some of the rhetoric around the provisions in the Care Act. Although the £72,000 cap on care fees has been trumpeted by the government, individuals will need to pay significantly more than this before they reach the cap, after which there will still be ongoing costs to meet.

For example, based on averages, Partnership calculates that a care home resident would need to spend £148,585 before reaching the cap and that, even then, they would still need to meet annual costs of between £12,000 and £17,212.

Further, while the length of time it will take to reach the cap varies around the country, Partnership found that the average was 5.1 years. As the average life expectancy of someone going into a care home is around two and a half years, very few people will find themselves reaching the cap.

New market

Given the need for individuals to consider their long-term care funding requirements at retirement, there is a growing appetite among advisers for new products to make it easier to take care of future care costs.

But a return to the days of pre-funded long-term care plans seems unlikely. Steven Cameron, regulatory strategy director at Aegon, says there is no demand for this type of plan. “Why would anyone put aside a significant premium for something they might not need? The new pensions freedom rules create the ideal means to fund long-term care: someone can set aside the money within their pension and, if they do not need it, it can be left inheritance tax free.”

Although this means the old style plans are unlikely to return, at least for now, other forms of care funding options are creeping into the market. For example, a handful of insurers including VitalityLife, Ingenious Investments and Zurich are adding a care option to inheritance tax planning products.

For example, VitalityLife’s LifestyleCare Cover product, which was launched last November, is a whole-of-life plan that pays out on death or serious ill health that leaves the policyholder permanently incapable of looking after themselves.

The policyholder preselects how much they want to receive – up to 100 per cent of the sum assured – if they need care and any remaining sum assured is paid on death. A cover protector option can also be selected to ensure the full sum assured is paid on death, even if there is an earlier claim for incapacity.

Regulatory restraint

These moves are welcomed by Brian Fisher, long-term care marketing manager at Friends Life. “These types of product help to put care fees funding on the agenda and will satisfy clients concerned they might need care,” he says. “I would also like to see this principal extended to other protection products but this is stifled by regulation. It bugs me.”

Certainly the current regulation around long-term care advice does not encourage the development of this type of hybrid product. As an example, adding this option to a plan for a 35 year-old might only add a couple of pounds to the premium, in much the same way that legal protection is added to a home insurance policy. But an adviser would need to have the CF8 qualification to sell this type of product.

Mr Fisher adds, “This style of product used to be available but no insurer would develop it now when there is no real distribution channel for it. I would like to see this change.”

Whether or not regulation is relaxed to enable care funding options to be brought to a wider market, it is unlikely that a new set of care funding products will be developed in the next few years. But, although consumer demand may be low, it is essential that, given the changes in the pension arena, advisers, insurers and the government highlight the importance of planning ahead for all manner of costs in retirement, including care fees.