Later Life financial planning
Later life financial planning
Each year around 70,000 people are forced to sell their homes to pay for long term care. One in three women and one in five men will eventually need long term care.
Unfortunately, for those affected the Government believes the state cannot afford to meet all the costs of caring for the elderly and they are expected to contribute. This contribution is expected to rise sharply in the future.
Those who can afford to consider private sector solutions might think it prudent to do so.
Under new rules you do not have to sell your home immediately to pay for care but in most circumstances you will be expected to do so eventually unless you have made other arrangements.
If a person who is in a residential or nursing home care stays until their assets fall below a capital threshold, excluding the value of their home, the council will start paying for the cost of the care but a charge will be placed on their home. That charge means the home will have to be sold once they die so the council can recoup the cost of the care from the proceeds. There are exceptions; for example; where the home is occupied by the person’s partner or relative aged 60 or more.
There are solutions, which aim to help those who can afford to make some provision against the cost of long term care. These fall into two categories: those you buy in advance and those that help you meet the immediate need for care.
The financial consequences of doing nothing could be substantial. At present, it costs about £300-£400 a week for a place at an average residential home while nursing home fees range from £20,000 to more than £50,000 a year but are typically around £30,000. To have someone visit your home will cost you around £12 an hour and there are high costs involved in home alterations where necessary.
You can pay for long term care in advance by taking out insurance that will pay out if the need arises. However, there have been criticisms of these types of policies. They often include high charges. They need not to be regulated, so it is important to deal with companies you recognise who have valuable reputations to protect.
Against this, the cost of insurance for someone in their late sixties would be a lump sum of around £10,000 or a monthly premium of £80 a month. This would provide an income of up to £1,000 a month towards care fees.
Of course the price of the long-term care plan would be less if you took it out at an earlier age but most people in their late 50’s and early 60’s are more interested in keeping hold of their pension lump sum and income to ensure a comfortable retirement.
Unfortunately, people only think about the problem when it arises and then selling the home is often the only option. Even then there are choices to be made.
At this stage, you can buy a product, which may be either insurance-based or built around an impaired life annuity. Annuities are a means of converting a capital lump sum into a guaranteed regular income, which will be paid for the life of the investor or for an agreed shorter period. In both cases you will hand over a lump sum in exchange for a guarantee of extra income which, if paid direct to the care provider, will be tax-free. It can also include a degree of inflation proofing, so it should continue to meet the additional income needed to pay for care. In most cases, not all the proceeds of the sale of the home will be needed to buy the necessary product, so the balance can be invested and the inheritance is effectively regenerating.
What should you do about Financial Planning in later life? Here are some options
Bert and Liz
This is the story about Bert and Liz, a retired couple. They had three children, John, Janet and William. John was a doctor, Janet was married with children and William was an unsuccessful gambler. Bert and Liz had wills gifting the estate to the surviving spouse and then to the children equally.
Bert and Liz wished to raise cash to help William clear his debts. Janet wanted Mum and Dad to move in with her so that she could look after them. The problem was Janet’s home was too small to accommodate Bert and Liz and she needed to build an extension. William and Janet were encouraging their parents to sell their house. Janet needed the money for the extension and William wanted to pay off debts.
Bert and Liz came to see me for advice. They were interested in downsizing and moving in with Janet. They felt obliged to help William with his financial problems but had concerns. Firstly, they wanted to know how a sale of their home would affect inheritance tax. What if the move to Janet’s home did not work out? If Janet divorced or got into financial difficulties, would they become homeless as a result of divorce or bankruptcy proceedings? Bert was worried about paying for long term care if Janet could not cope and he or Liz had to go into a home. Further, they wanted to do right by their first child John. They could not afford to make a lifetime gift to John. Gifting to William and Janet would mean John would receive a lower share of their estate when they died.
I advised the couple not to put their names on the deeds to Janet’s property. If they went into care the local authority would point to ownership of the house as evidence they had capital available to pay for their care. However Bert was not happy about his name not being on the deeds. He wanted to be independent and would feel vulnerable if Janet wanted them out of the property.
A solution was found. I prepared a deed of trust between Bert, Liz, Janet and her husband. The trust gave Bert and Liz a share of the sale proceeds and the right to live in the house until they died or left permanently. Their capital was protected because it was not available to pay for care. A clause was put in the deed whereby if the living arrangements did not work Bert and Liz could recover the money they invested in the house. The trust also helped to protect their capital against claims by creditors in bankruptcy proceedings or by a spouse in divorce.
To provide for John, the trust said he would receive his parents’ shares in the property on the death of the survivor. Bert and Liz also made new wills gifting their estate to John to take into account the lifetime gifts to the other children.
With regard to inheritance tax, the gift to William was potentially exempt from tax, and will not be subject to death duty in seven years time. The money given to Janet will be subject to inheritance tax so long as Bert and Liz enjoy the benefit of living in the extension. The parents did not have to pay capital gains tax when they made the gifts because the money was raised from the sale of their home and any capital gain is exempt under the main residence relief.
You can contact Solicitor Michael Stennett on 020 8920 3190 if you have any questions about this topic, or why not attend the free advice clinic that takes place at Stennett & Stennett, 4 Winchmore Hill, Southgate, London N14 6PT (opposite Marks & Spencer) on the first Wednesday in every month.