Author: Stephen Phillips, 30 January 2007.
There are two sides to every coin and on the “other side” of increasing life expectancy is the likelihood that more and more of us will require long term care later on in life as we become no longer able to look after ourselves. Throughout the UK the average cost of care is £526 a week - that is more than £27,000 a year – if nursing care is required.
There are, of course, regional variations but East Anglia is a little above the national average and
funding long term care is going to be a challenge for many people; if you spend just three and a half years in care, the cost could be nearly £100,000 and that is without allowing for inflation between now and when the need for care arises, and beyond.
The problem is that while nursing care is generally (meant to be) covered by the state, all other costs are subject to means testing, so above a fairly modest level (about £20,000), individuals will probably have to fund most or all of the cost themselves. For those with parents already approaching the need for full time care, this can be of concern right now.
One good thing is that rising house prices mean many older people have considerable equity within their homes and this can be used to pay for long term care. During the last ten years, average house prices have almost trebled from £62,453 to £186,954, according to Halifax Bank of Scotland. From one perspective this growth can be seen as being adequate to cover the cost of long term care for some years.
However, there is no guarantee that the money will last out, or that costs will not escalate to an unmanageable level – and if there is a surviving partner when the need for care becomes critical, then the house cannot be sold as it is still required. So relying on the home to
fund long term care may not be an option.
One alternative to selling the home is to use an
equity release or
lifetime mortgage scheme. However, here are downsides to the different schemes on offer and you should certainly seek professional independent advice before going down this route. Some schemes are poor value indeed.
For many people, it will be their pensions and investment arrangements that are ultimately used to meet the cost of long term care. Using an unsecured pension at retirement (rather than purchasing an annuity) whereby a lower level of income is taken at retirement in order to leave more in the fund for use later on is perhaps an option. However, the maximum income that can be drawn is 120% of the annuity rate at the time, so unless the fund is very large, this may be inadequate.
In addition, the rules change at age 75, when long term care is more likely to be required, and an alternatively secured pension must be used. This is currently subject to a maximum income of 70% of the annuity for a 75 year-old, although this is set shortly to be increased to 90%, with a minimum of 65%.
It may therefore be easier to consider using other investments (including the tax free lump sum under any pension arrangements) in order to generate an income to cover the cost of long term care. It is important to consider the most appropriate investment strategy, since volatile and high risk investments are unlikely to provide the stability necessary to provide a reliable income stream.
You should always
seek independent financial advice before making any decision regarding your finances.
LIFETIME MORTGAGES. TO UNDERSTAND THE FEATURES AND RISKS, ASK FOR A PERSONALISED ILLUSTRATION. NOTHING CONTAINED IN THE ARTICLE SHOULD BE CONSIDERED AS GIVING INDIVIDUAL FINANCIAL ADVICE. IF CONSIDERING EQUITY RELEASE, THIS IS A LIFETIME MORTGAGE AND YOU SHOULD SEEK A PERSONALISED ILLUSTRATION.
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