Written by Karen Bryan
You may believe that you have planned for a comfortable retirement. Ideally, you will receive income in retirement from a variety of sources such as the State Pension, personal or occupational pension, investments and cash savings. If you have paid off your mortgage, it may look as though your retirement income is generous enough to leave a decent disposable income after paying living expenses.
But have you thought about the impact which care home fees could have on your finances?
According the Money Advice Service (MAS) the average annual UK care home fee is £29,270, rising to £39,300 if nursing care is required.
Any income which you receive, such as the state or personal pensions, benefits and interest on savings, would be used towards paying your care home fees. If your income doesn’t cover the full fees, then your assets would be assessed.
In England, if you own assets e.g. property or savings valued at more than £23,500, then you will be liable to use these assets to pay towards care home fees. However if your home is occupied by your spouse, partner or a close relative aged over 60 or under 60, the value of the property will be counted as an asset at the time. But the care home fees will be deducted from that person’s stake in the property once the property is sold.
According to the NHS, the number of people with dementia will have increased to around 1 million by 2021. With around one third of people with dementia living in residential care, it could be a good idea to think about how you would fund dementia care.
One option, explained in a Telegraph article, is to buy a care annuity. A standard annuity is most commonly bought with your pension savings. You pay your pension pot to an insurance company. The insurance company then pay you a guaranteed amount per year as income in retirement.
A care annuity is a specific type of annuity in which the person going into care pays a lump sum to an insurance company to buy the care annuity. The insurance company then guarantees to pay the care home for as long as the person who bought the annuity lives there.
A care annuity has a tax advantage, in that if the payments are made directly to the care home, there is no deduction of income tax.
As with all annuities, it’s a bit of a gamble. If the person buying the care annuity lives for many years. then the payouts by the insurance company will exceed the lump sum paid out to buy the annuity. If the person buying the care annuity dies soon, then the insurance company will profit.
The Telegraph article estimates that the average cost of a care annuity, which would cover care home fees. would be around £100,00. The purchaser would have to live to 5 to 7 years for the purchase to have been a good financial deal.
With the current average time spent in a care home around two years, it doesn’t sound like a winning investment.
But the alternative of spending all assets until there is only £23,500 remaining on care home fees, is none too alluring either.