The rising cost of care

Nigel Hare Scott discusses how equity release can be used to pay for long term care

Many of us as parents will have breathed a sigh of relief after paying the last invoice for our children's school fees. Having made the decision to go for private education rather than the state system and then gone through an exhaustive selection process to find the most suitable school, you may have asked yourself: "How am I going to pay for all this over the next ten to fifteen years?" Furthermore, you will have been aware that the inflation rate for school fees has invariably been above the prevailing retail price index. Thus, after the final term, you may also have asked yourself: "How did I manage to pay for it?" The answer, in many cases, will have been 'by extending the mortgage', in other words - using the equity in the home.

Little did we think that another commitment with striking similarities is often just a few years ahead. The process begins when it becomes apparent that your parents can no longer cope on their own. The statistics are pretty frightening evidencing plainly that the odds are very much on that you will be faced with this situation. The growth in the number of people aged over 80 is expected to expand by 29% over the next ten years from 2.7 million in 2006. There are now more pensioners than children in the UK, and the over 65s are the fastest growing age group. In 20 years time, it is predicted that over two million people will need social care support.

The 'second childhood' in the dictionary is defined as 'the time in an old person's life when he or she starts to suffer from memory loss and confusion or senility.' At this time, a choice once again has to be made between the private sector or the alternative state system, and then there must be another careful selection process for the most suitable home. A major difference this time is that the state will not normally pay for anything other than a contribution towards nursing costs. In this regard, and as with school fees, the cost of living for the elderly has been far above the prevailing inflation rate.

Daunting prospect

Paying for social care for an unpredictably long period is a daunting prospect, particularly for those of us who are relying on an inheritance to repay mortgages which were taken out, at least in part, to fund those school fees. Applicants for state funding support have to go through a financial assessment and means testing, and there is no chance of getting help if your parents have capital exceeding just £22,250. The inspectors from the local authority have the right to go back indefinitely to check that no assets have been given away knowingly - this is called 'deliberate deprivation.' Many elderly people are now obliged to sell their homes to meet the cost of care.

Earlier this year, it was revealed that the Government is considering making every adult obligated to take out private insurance to cover the cost of care. Taxpayers would have to pay up to £1,200 in premiums every year while working and would then receive financial support if they have to move into a nursing home in later life. It is acknowledged that the existing state system is unfair, under funded and too complex.

All is not lost. As with planning for school fees, it is already possible to prepare in advance for care costs. There are long term care insurance schemes which can be pre-funded by lump sums or regular payments in case care is needed in the future. Alternatively, care can be paid for by lump sum immediately via an annuity purchase. A major drawback with both schemes is the rising cost of care, and the drain, which any type of funding makes on the value of the estate.

There is also another way. Equity release has in recent years become a means of providing the required finance. With an appropriately tailored plan, it is possible to release funds on a drawdown basis to pay for care in your own home, which is normally the first step taken as it is cheaper and preferable for many elderly people. It is also encouraged by the social services. Increasingly, spouses are using equity release if their partner goes into full time nursing care. As an additional option, equity release can be used to raise a lump sum to pay for pre-funded or immediate long term care insurance.

Practical considerations

In the currently depressed housing market, elderly homeowners are finding it difficult to sell their properties in order to pay for a nursing home. In these circumstances, it is not practical for them to enter into an equity release plan to pay the costs temporarily because such plans come to an end when the homeowner goes into permanent long term care. In other words, it is not normally possible to have an equity release plan if you are not resident in the property. There is a product development opportunity here for providers to relax their criteria whenever this situation is hindering an aged client from receiving the care, which is urgently needed.

As financial advisers, we can expect to get more calls from consumers anxious to secure the retirement needs of their ageing parents in their second childhood. Using their home as a means of achieving this objective could be the way forward, mirroring how we used our own homes to fund those school fees.

REFERENCES:

BUPA care homes guide

Moneymadeclear (FSA guide)

ABI guide to long term care insurance

www.statistics.gov.uk

www.ageconcern.org.uk

Daily Telegraph 01/01/09.