It is likely that your relative will need to contribute at least a proportion of their care costs. They may not qualify for local authority funding, or want to ‘top-up’ their care fees to ensure the best option for your family. It is difficult to predict how long your relative will need care, and thus long-term planning can be challenging; one in four older adults run out of money when funding their care. Therefore, you should carefully plan how your relative will be able to cover the costs throughout the duration of care. This article will provide a brief guide to how you can get reliable financial advice to support your plans, and an overview of the sources of funding available.
Independent financial advisers
Planning long-term funding for your relative will be challenging – there are myriad options available, some of them involving complex financial products, and they will need to support the potentially changing needs of your relative, over an unpredictable term. It is therefore highly recommended that you hire an independent financial adviser, also known as a specialist fee adviser. They will help to ensure that your funding plan is suitable to your needs, affordable both now and in future, and compatible with your relative’s attitude to risk and financial priorities.
To achieve this, they will go through a fact-finding process to establish the following:
Care requirements:
- Level of care needs and the preferences of the family
- The care that is currently available
- Potential future care requirements
- Projected cost of care
- Location of family and friends
Ability to pay:
- Current income and benefits
- Assets
- Property ownership
- Liabilities that could reduce the value of estate
- Marital status and dependents
As with your care option, it is important you get financial advice which is suitable for you. To make sure your relative’s financial adviser is qualified and will work for your interests, they should be regulated by the Financial Conduct Authority, and have specialist qualifications in long term care insurance: CF8 or CeLTCI.
The cost of financial advice will depend on where you live, the complexity of the situation, and the types of products recommended: you can expect to pay between £75-250 per hour for their services. How this is paid can also be flexible; it may be paid either in instalments or as a lump sum.
To find an adviser, we recommend the following:
- The Money Advice Service have a directory of advisers for retirement planning advice
- The Society for Later Life Advisers (SOLLA) is a professional organisation for retirement planning advisers. They have a directory for their accredited advisers
Funding options
Before seeing a financial adviser, you should consider the options available to your family:
-
- Your relative may be entitled to support from the state.
- Your family could contribute to cover your relative’s costs.
- Your relative’s income from pensions, savings, and investments can help to pay for care. You may be able to increase this through renting rooms in their home, or through selling valuables.
- Cash ISAs and national savings offer low risk deposits. However, with the Bank of England base rate currently at 0.25%, the return on these is very low.
- Other investment products, including bonds, unit trusts and shares, may offer greater profitability in exchange for greater risk. It is strongly recommended you take financial advice before investing in these products.
- Immediate needs care fee payment plans are specialist insurance plans, where you exchange a lump sum for guaranteed income paid out for the duration of your relative’s life.
- Whilst your relative resides at their property, equity release allows them to retain their home whilst releasing funds to pay for care.
The rest of article will provide a brief overview of the final three options listed, including their benefits and drawbacks.
Bonds and other investment products
Other investment products, such as bonds, are medium to long term investments, which can provide a regular income through interest to pay for care fees. However, the rest of the money invested in the bond cannot be cashed out until the end of the bond’s term.
Benefits:
- The return on investment is higher than a cash savings account
- They are safer than many other investment products, and can be diversified through including a range of funds to hedge against risk
- Bonds can both contribute towards money needed for care, and leave a lump sum for inheritance
- Your relative can usually withdraw up to 5% of the original investment amount each year without immediate income tax liability
Drawbacks and considerations:
- You will not have access to the money invested for at least 5 years, unless you take a penalty for cashing in early.
- Returns will vary with the market and may not always cover your relative’s care costs.
- Bonds are usually subject to different charges at the start of term, at the end of term, and annually
- Bonds are tax deferred rather than tax free; when they are cashed in, withdrawals contribute to any profit made by the bonds and taxed as income for the year
The structure of the bond, and corresponding advantages, disadvantages and risks will vary by product. You will therefore need to seek advice from your financial adviser to select the right portfolio of products for your needs.
Immediate needs care fee payment plans
Also known as immediate needs annuities, these plans as a type of insurance that provides regular income, guaranteed for life, in exchange for a lump sum investment up front. The investment costs, an average of £69,000, is based on:
- Income required
- Your relative’s age
- Your relative’s current health status
- Current annuity rates
Benefits:
- Peace of mind of regular income for life
- Payments are tax free if they are made directly to your relative’s care provider, e.g. a professional carer
- Customisable:
-
- You can build future cost increases into the plan
- A capital protection clause can be built in to recover some of the investment if your relative passes away unexpectedly
- Some of the up-front investment can be deferred to a later date
Drawbacks and considerations:
- Your family needs to have the majority, if not all the money ready to invest
- You cannot cancel the plan and recover the money
Equity release
Your relative may decide to stay in their home, particularly if you opt for care at home. Equity release will allow them to stay at home, whilst using the value of their property to provide funds for care.
There are two main types of equity release:
- Lifetime mortgage arrangements involve your relative taking out a loan secured on their home, which does not need to be repaid until the end of the mortgage term. To pay for this loan, interest is added to the loan value, or alternatively you can make payments throughout the loan term.
- Home reversion plans involve your relative selling the property, or part of it, at less than market value. In return, they can stay in their home as a tenant, paying no rent for their lifetime.
Benefits:
- Provides a regular income to your relative to fund care and home improvements
- Allows your relative to stay at home
- A ‘no-negative equity guarantee’ so the debt, including fees, will never exceed the value of the property
- Interest rates are fixed, or capped for lifetime mortgage arrangements
- Your relative could move to another property, which meets the equity release product conditions, without incurring financial penalty
Drawbacks and considerations:
- Interest is charged at a compound rate for lifetime mortgage arrangements, so it increases daily
- Early repayment charges if you want to redeem the mortgage early
- Lots of fees, including fees for administration, legal, valuation, completion of sale, building insurance and financial advice
- Equity release providers should be members of the equity release council. This will ensure they are regulated by the Financial Conduct Authority, and can provide the benefits listed above
Additional resources
For greater detail on this topic, visit the Money Advice Service guide on self-funding.