Paying for Long Term Care
It is important that you seek specialist care fees advice as the cost of care can amount quickly and eat into your capital. Careful consideration towards the provision of your care fees and how best to manage them in the beginning can pay rewards in the longer term, by helping to ensure your money lasts for as long as possible.
Paying for care yourself
Funding your own long term care may seem like a daunting endeavour. However, many thousands of people all over the country are in a similar position. There are a variety of strategies to help you pay for your care: these might include family assistance, renting, borrowing options as well as drawing money from your savings.
Few people will be able to pay for long term care purely out of their pension and other regular income; it is important that you maximise all of your available assets to create a steady stream of income to pay for care.
If you are going into care and have no dependants, then your own property could be rented out to create an income which can help cover the costs of your care. A property may have been sold and so a lump sum is available. This could be invested in the likes of government bonds, shares, investment trusts, ISAs and other financial products which pay out regular returns to help pay for care. You may well need to consult with a specialist financial adviser to help decide on suitable investments and devise a plan based around your assets and care needs.
- You may be able to retain your capital, and only use the returns it generates to pay for care.
- You may be able to retain your property, and pass it on to the next generation, with careful planning.
- You cannot predict the returns from investments, so the income produced may not cover the cost of care fees.
- Some investments carry risk; you may find you lose far more than you gain.
- You have to pay tax on income paid out from most investments, not from ISAs.
- If you live for an extended period there is a real possibility there will be insufficient capital to continue funding your care.
Using your property to release funds
Most equity release schemes are designed for customers who want to stay in their home. These may be appropriate for you if you require care in the home or where one spouse needs residential care but the other continues to live at home. Money released can be taken as a single lump sum or as regular withdrawals. You can use the money to help pay for care directly or to create an investment which will then pay out income to help cover the care fees.
There are long term care plans which do allow you to use the equity in your house to fund the purchase of the plan even if you have to move out. This allows you to avoid selling your property and generate extra income through renting the property whilst you are in care.
There are two main types of equity release schemes available: lifetime mortgages and home reversions.
Lifetime mortgage (currently available to homeowners over 55)
- With a lifetime mortgage, you take out a loan against the value of your property.
- No regular repayments of interest or the borrowed capital are required. Instead interest is added to the loan which usually has to be repaid on the eventual sale of the property on death, or when a surviving partner moves into care.
- If you live alone and want equity release to allow you to move into residential care, then only a limited number of providers may be willing to help.
Home reversion (currently available to homeowners over 65)
- With a home reversion scheme, some or all of the property is sold to the home reversion provider in return for a cash lump sum together with a rent-free lifetime lease, ensuring that you can stay in your home for life.
- If you live alone but want to move into residential care, then Home Reversion Plans may not be available to you.
You will need to seek specialist financial advice to help you decide if equity release is right for you. Advisers can be found at www.yell.com under ‘equity release’. Your adviser may possibly recommend providers that are members of Safe Home Income Plans (SHIP), as they have a strict code of conduct and safeguards for your protection.
- Equity release can create a lump sum or income to help cover your care fees.
- No regular payments of interest or capital are required.
- You and/or your spouse can normally still live in the property, rent-free, for life.
- You will not be able to release the full value of your property.
- You will not be able to pass on the full value of your property to your heirs.
- Unless you use the money to purchase an Immediate Needs Annuity, money could run out leaving you to find alternative ways of paying for care.
Buying a long term care plan
This is the method of using a lump sum of cash which you have available to buy what is known as a ‘Care Plan’ from a specialist provider. The company which provides the plan in turn offers to pay out money to help fund your care fees – for as long as you live. There are two options when it comes to care plans; the main difference is whether you need care funding now (Immediate Funding) or in the future (Deferred Funding).
- These plans guarantee to pay out money to help fund care fees for as long as you live.
- If the plan pays out directly to the care home, then the payments are free from income tax.
- In order to pay out money to help cover care fees for life, these plans require a lump sum to be invested.
- If the person in care dies early into the plan, the estate may receive less than the original capital invested.
Is a long term care plan right for you?
If you need to go into care now or in the near future, you may wish to consider an immediate funding long term care plan. With this type of care funding plan, payments from the plan to you or your care provider start immediately and continue for the rest of your life. Should you die early into the plan, the income payments you receive may be less than you invested. The level of payments from the plan depends on a number of factors, but mainly:
- How long you are expected to live.
- The level of interest rates in the economy.
Immediate funding long term care plans may include a money-back guarantee, offering to pay back some of the lump sum used to buy the plan if you die within the first six months. Further capital protection of your lump sum can be provided for a further upfront payment.
Before deciding if a long term care plan is right for you, you may wish to consider these factors:
Long term care plan costs
A care plan will guarantee a specific level of income to help pay for care fees for the rest of the individual’s life. The cost will depend on:
- The health of the individual – Reduces the cost depending on the severity of the condition/illness.
- The age of the individual – Generally, the older the individual the cheaper the plan although this will be taken into consideration with their health status.
- The cost of the care home fees – The Long Term Care Plan cost will rise in line with the care home fees.
The average cost of a care plan is £85,000, which is a sizable amount of money, but when compared against an average annual nursing care home fee of £37,000 this initial investment represents just two years’ worth of fees. You should speak to a specialist care fees adviser for more specific information on costs and suitability of Long Term Care Plans.
Care plan features to look out for
Long term care plans can come with additional features which may suit your particular situation. These include:
- Index-linking – Some plans may offer to link the level of regular payments they make to you or the care home to the rate of inflation so they keep pace with the changing cost of living.
- Escalation – You may be able to request for the payments the care plan provider makes to increase by a fixed amount each year, say 1-8%, to help cover any future rises in care costs.
- Money-back guarantee – This guarantee ensures that a percentage of the lump sum originally paid to the care plan provider will be returned if you die soon after buying the plan, typically within six months.
- Capital protection – An additional element can be arranged to return some of the original lump sum you paid to the care plan provider to your estate or beneficiaries whenever you die.
Tax benefits of long term care plans
- Income tax – If money paid out by the long term care plan goes directly to a Care Quality Commission (CQC) registered care home or other care provider, there is no income tax to pay on it. You can opt to receive these payments yourself – for example if you no longer need residential care – but you will then have to pay income tax on it.
- Inheritance tax – By using your money to buy a long term care plan you will be reducing the value of your estate which may help with inheritance tax planning. This can be a complicated area for which you should seek financial advice.
Please note that all statements with respect to taxation on this website are Partnership's understanding of current taxation legislation. The rules governing taxation are subject to review and can change. Tax will depend on individual circumstances.