Recent 'research' by various specialists suggests that costs for a decent standard of residential care in old age, should you need it (not everyone does of course), will crucify all but the wealthiest of us.
For example, recent research by care fee planning specialist Symponia stated that one in four of us will require residential care at some point during our lifetime. In other words, 25 per cent of us will require care, which means that 75 per cent of us will not, but none of us have any idea which category we will fall into. Not helpful.
Taking the above statistics into account, where does that leave our natural desire to make provision for some financial legacy for our children?
Let us take a look at the shock and awe projections by Saga, the leading ‘grey pound’ specialist. The company suggests that weekly costs are currently running somewhere between £603 and £827, which works out at roughly £31,000 to £43,000 a year. Move up a gear or two and a really pleasant, attentive home (more like a reasonable hotel) is likely to cost more like £1,000 per week or £52,000 a year.
Some advisers suggest people should be expecting between 10 to 15 years of care, but this seems like an over-cautious approach, since the average is probably much less (less than three years in fact. However, the specialists typically suggest the total costs could be 10x or 15x those annual estimates – at the top end then, £520,000 for 10 years’ worth of care and £780,000 for 15 years, plus inflation.
Hold on a minute though. These numbers are those sometimes used by advisers selling provisions for long term care – so, you may feel, more like scare tactics than real statistics.
If we turn to London School of Economics (LSE) research from 2011, based on actual statistics from health insurer Bupa from 2008 to 2010, length-of-stay information was then combined with information about the unit (for example, weekly) costs of a care home placement to calculate expected costs of care for people newly admitted to care homes:
• At £603 per week, an 801-day expected stay would cost £69,000*
• At £827 per week, an 801-day average stay would cost in excess of £94,600*
• So, the total average cost for the 1 in 4 people requiring residential care, at the higher weekly rate of £1,000 per week, would come in at around £114,000*
*All before inflation
Based on the LSE numbers above and deducting just the state pension, which most people will probably receive, some of the cost can be met from income. The net cost will be less again for those in receipt of additional occupational pensions.
The solution is simple; so long as we plan early enough. We each have a Nil Rate Band of £325,000 for inheritance tax purposes, which we can use as soon as we wish to make a gift into a flexible discretionary trust aimed at benefiting our families, but with provisos to support long-term care if necessary.
Such gifts will completely fall out of account for inheritance tax purposes if we survive them by seven years.
Such trusts have been available for several decades and are well known and accepted by HMRC. However, the careful wording of these trusts can achieve the best of both worlds – delivering care costs, if and when they are needed, but earmarking inheritance tax-exempt legacies with any balance of trust assets then remaining to be passed to beneficiaries free of inheritance tax.
Based on all the research on care costs, it would therefore appear that a trust fund commencing at £325,000 is likely to cover the most luxurious of care homes for even the most long-lived.
Paul Wilcox is chairman of The WAY Group
