How to save for care efficiently

How to save for care efficiently

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Care in old age and the associated costs continue to be an area of concern for those planning their finances for retirement. With costs often in the tens of thousands of pounds annually, it may be one of the biggest expenses that needs to be factored in. However, the uncertainty of whether it’ll be needed and how to save could mean you’ve yet to take steps to ensure potential care is part of your financial plan.

According to research, the number of people aged 85 and over needing 24-hour care is set to double between 2015 and 2035 as life expectancy and the population rises. The good news is that more people are recognising that care should be part of their retirement planning and are prepared to put money aside just in case. 

A new survey from AIG Life found 48% of adults would back paying into a special fund for care in later life, which could be left to family when they die, making it the most popular of six options. The other proposed options for paying for care were:

  • Pay more Income Tax (34%)
  • Pay a social care tax after a certain age (31%)
  • Pay more tax on assets or property (25%)
  • Increase the retirement age (24%)
  • Sell property once you reach a certain age (20%)

People are often realistic about the potential need for care; just 11% are confident that they will not need any support in old age. On average, people expect they will need some form of care after their 76th birthday.

Alison Esson, Propositions Manager at AIG Life, commented: “Increasingly, people are living longer and more people will see their 100th birthday over the coming decades, which is likely to mean demand for care, even if it’s just a little help each week to look after your home.”

How much will care cost?

When thinking about how to save for care, the first question is, how much is enough?

First, it’s important to understand who pays for care:

  • In England for the 2019/20 tax year, if your total assets, including property, are worth more than £23,250 you will be responsible for meeting all care costs. If your total capital falls between £14,250 and £23,250 your local council will fund a portion of the costs, whilst you’ll make up the shortfall. If your assets are worth less than £14,250 the local council will cover the full amount. This means that most of us will be responsible for paying for our own care.
  • In Wales for the 2019/20 tax year, the thresholds are different. If your saving or capital assets, which may include the value of your home, exceed £50,000 you will usually have to pay the care home fees in full. If your total assets fall between £24,000 and £50,000, you may have to pay a portion of care home fees. Capital that falls below £24,000 is disregarded.

How much care costs will depend on where you live and your needs. However, as a general guide, Paying For Care states the average cost of a residential care home in 2017/18 was £32,344 per year. If nursing care is required, you can expect this to rise to £44,512.

Of course, not all forms of care mean moving into a care home. You may find that you’re able to live independently for the most part but could benefit from having someone come to your home at set points. This type of care will often be charged per hour and, again, will vary depending on geographical location, but you can expect it to be around £15 per hour.

What are your options when paying for care?

When paying for care, you essentially have two options, use your income or capital.

If your pensions or other sources, such as investments, will provide you with enough income to cover care home fees, that is an option that will preserve your capital. However, keep in mind you’d likely need an income of over £600 per week to pay for care home bills.

The other alternative is to access capital you’ve built up over your life. One way to do this is through selling property or entering a deferred payment scheme with your local authority, which may then take the money owed once your house is sold. But the research above indicates using property to pay for care isn’t a popular option, and you may want to leave it behind as an inheritance.

So, how should you save for care?

You could, of course, build up a nest egg in a savings account, such as an ISA (Individual Savings Account). Yet, the drawback here is what will happen if you don’t need to use the capital. If your estate is liable for Inheritance Tax (IHT) it could mean a hefty reduction in how much you leave to loved ones.

There are three key options that can allow you to save for care and pass unused funds efficiently on to loved ones. However, these solutions aren’t right for everyone and it’s important to examine your personal finances and goals when creating a financial plan that considers care.

  1. Earmarking a portion of a Defined Contribution pension may be an option for you. Money that remains in a pension can often be passed on tax efficiently. Should you die before the age of 75, your beneficiary will not be taxed at all so long as they withdraw the funds within two years. If you die after the age of 75, withdrawals may be subject to Income Tax but not, crucially, Inheritance Tax.
  2. Using a trust to hold assets that can pay for care costs is also an option. Assets placed in a trust are outside of your estate for Inheritance Tax purposes and you can specify what will happen after you pass away too. You can also stipulate how the income or capital is to be used by trustees, providing you with some protection should you no longer be able to make decisions due to ill health. Trusts are complex and often decisions can’t be reversed so it’s important to understand all the pros and cons before proceeding. 
  3. Long-term care plans are also an option if you’re worried about paying for the cost of care. This is a type of insurance policy that can cover the cost of assistance should it be needed. It may be used to cover care services in your own home or pay for care home fees. You will need to pay ongoing premiums for the insurance policy. If this is an option you’re considering, it’s important to fully understand what the policy would and would not cover if care was needed, some are more comprehensive than others.

If you’re worried about how to save up for potential care bills, please get in touch. It can be a challenging issue to tackle, but creating a solution that considers your personal situation can give you confidence and security in the future.

Please note: The Financial Conduct Authority does not regulate advice on tax, trusts or estate planning

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.

Please note that the information provided in this article was correct at the time of publishing.