Avoiding the crisis

Vanessa Owen discusses how equity release can be used to fund long term care

In just the last six months the UK's ageing population has become almost a concept of popular culture, with official figures showing that, for the first time ever, there are more pensioners nationally than under-16s across the UK. Suddenly Britain's population and demographic trends are not just concerns for the Government, research experts and policy advisers, anyone with ageing parents needs to be aware of the implications that the expected improvements in mortality present.

Barring a catastrophic change in projected mortality improvements, in just fifty years we can expect today's nine million over-65s to inflate to around 19 million, increasing from 16% to 24% of the total population. Currently for every pensioner in the UK there are four 'workers'. By 2060 on these assumptions it will fall to just two. Pause for a moment to ponder the implications. Mind blowing? Public services, health care, pension provision, housing, long term care.

Perception or reality

When it comes to funding for long term care, clearly there is no silver bullet. Government ministers have warned that funding for the elderly could contribute to an annual £6 billion shortfall unless radical action is taken. In May 2008 Gordon Brown launched a major consultation into the funding of social care, asking how the Government, families and taxpayers should share the costs, and admitting that a 'radical reform' is due. He stated that 'too many people fear the prospect of selling their homes and using assets which otherwise they would pass on to family members'.

Interestingly Brown inferred that pensioners still view their homes as their castles, and that elderly parents remain keen to pass on an inheritance to their children and grandchildren.

However, while parents may be keen to pass on an inheritance our own research suggests those attitudes are changing and many children don't want the money!

Three quarters of the adult children we spoke to made it clear they would prefer to care for their parents in the comfort of their parents' own home, rather than their mother or father being placed into a care home. Children are also less likely to expect that they should safeguard their assets to pass on an inheritance than has been the case in the past. Over half of adult children (51%) we spoke to stated they do not expect to receive an inheritance from their parents or in-laws.

What is clear is that adult children are demonstrably committed to looking out for their elderly parents and in-laws. Those adult children supporting parents were, on average, spending almost nine hours each week, including travelling time, helping out!

Parents' attitudes are also changing, while previous generations may have been reluctant to use 'the children's nest egg' to improve their standard of living during retirement or pay for home help and assistance, now increasingly quality of life is the priority.

In parallel the perception of the equity release industry is improving. The work that equity release providers, their industry trade body Safe Home Income Plans (SHIP), and specialist advisory firms have been doing to improve perceptions are, at last, starting to pay off. The signs are there that key influencers, including the consumer press, recognise that releasing equity is a sensible option to be considered. With the most recent estimate suggesting that over 65s have £726.4 billion worth of equity in their homes, now is the time when families can really start to see the benefits of releasing equity, and how much more comfortable, and affordable, it could make as a solution to help pay for care at home.

Changing property usage

When looking at funding long term care it is important to put aside the attitudes of the past and recognise that a property is an asset just like any other.

Currently the average residential home costs around £500 a week rising to £700 if nursing care is required.

In England only those people with assets of less than £13,500 will have their fees paid in full - and that figure does include the value of any relevant property owned. People with assets of more than £22,250 will have to pay their care home fees in full unless they meet certain medical criteria, which means that very quickly any proceeds from a house sale can be whittled down, not to mention the traumatic experience of a parent having to leave their home.

In the context of an equity release scenario if we assume someone aged 75 with mobility problems living in a £260,000 property. It is determined that they require adjustments to the property changing the bathroom fittings and installing an intercom to allow them to answer the door without having to get up quickly. Alterations are also required to the kitchen. Total cost £13,000. Our client has £91,000 equity available to them through a lifetime mortgage, however in this case they release the initial £13,000 the need and set a guaranteed 'credit limit' of a further £26,000.

This £26,000 is used to fund the ongoing costs of care in the home.

A home help coming in for two hours each day, to help with personal care and domestic assistance, costs in the region of £840 each month. So the £26,000 is used to fund 30 months of support drawn on as it is required. And, our client still has not spent anywhere near the maximum amount we would have lent.

Compare this with the alternative of selling the property and our client entering a home and it makes economic as well as emotional sense.

Keeping everyone informed

What is fundamental throughout the whole process is the involvement of any children. If everyone understands what to expect there are no nasty surprises. It is also crucial to ensure financial and legal advisers engaged in the process are fully conversant with the products that are available, so that the optimum solution is recommended.