FOOL'S EYE VIEW
Financial Products To Pay For Residential Care

By Jane Mack (TMFJane)
February 24, 2004

Compare the following quotes. One is from the founder of the welfare state, Health Minister Aneurin Bevan, who, in the Forties, said: "The welfare state will be a cradle to grave system for all". The other is from former Prime Minister, John Major, who, fifty years later, famously talked of 'wealth cascading down through the generations" via inheritance.

Neither of these quotes sits well with the fact that, generally speaking, if you need long-term residential or nursing care these days, you have to be down to your last £19,500 before the state will step in to help financially. Indeed, you may already be aware that the issue of paying for it has become a bit of a political hot potato in recent years.

Since I embarked on my own quest to find out what sort of help was available for my elderly in-laws, I've been surprised by the number of friends who are currently, or have recently been, faced with the prospect of seeking help and information for their own ageing relatives. One thing's for sure - it's expensive.

It's true that if you can show that your primary needs are health needs, the NHS will pay for your entire care package. But, considering the Health Ombudsman received more than 3,000 complaints in the space of six months last year about the restrictive way health authorities have been assessing 'health' needs, it seems many people feel they're being unfairly treated by the system.

Anyway, assuming you are deemed to be 'self-funding' because you've got more than £19,500 and your needs are primarily for personal rather than health care, how do you make the most of your assets and income to pay for the costs of residential care?

If you have income from a state pension, private pension, savings and investments and, possibly, benefits such as Attendance Allowance, you need to find the difference between your income and the actual costs of the care home. There are two main ways of buying a financial product that will pay for this.

Immediate Care Annuity

As you might imagine, this works pretty much in the same way as a pension annuity. You pay a lump sum and in return you get a guaranteed income for life which is used to pay for the care costs. As long as the income from the annuity is paid directly to the care home, it's tax free.

The cost varies considerably as it's dependent on your age and medical health and whether you want the income index-linked. The older and more 'impaired' you are the cheaper it will be and the longer you live the more 'in pocket' you'll be. But, as a rough guide, the Care Funding Bureau suggests a lump sum that is equal to 4 times the annual income payable. So a gross income of £10,000 a year would require a lump sum of £40,000.

With standard plans, you give up the capital in return for the guaranteed income. But, with certain products, you can pay an insurance premium to ensure the income is guaranteed for a certain length of time, even if you die sooner, or which pays out a percentage of the capital invested minus any benefits already paid out. As you might imagine, this aspect of an immediate care plan will be more expensive the older you are.

The advantage of an annuity is that you only buy one when you absolutely know you need it.

Long Term Care Insurance

Considering you can insure yourself against virtually anything these days, it's not surprising that you can buy insurance cover for long-term care costs. You can buy it via a single one-off premium or via regular monthly or quarterly payments.

The first option will be more expensive but you can use this method to reduce inheritance tax liabilities. If you choose the latter option, the premiums will increase as you get older and you may find that, as time goes on, you can't afford them.

If you make a claim you will have to meet certain criteria before the policy will pay out. For example, there are certain 'activities of daily living' such as mobility, washing, dressing and feeding which will test your eligibility for a claim. Depending on the policy, it may not pay out until you can no longer do two or more of the activities. Obviously if you die without making a claim, the premiums are lost.

So, there you go. Neither of the above plans is obligatory and nor do they necessarily provide value for money. It depends on your own circumstances as to whether they're worth considering. I remember reading somewhere that the average length of time spent in a residential or nursing home was two years and that only about 5% of the population ever go into a home anyway. Don't take those numbers as fact but, if true, you might wonder if any sort of insurance or annuity plan is worth paying for.

Besides, you may prefer to invest your own assets to produce the necessary income in which case you can keep control of all your money - although, remember you'll be taxed on what you get from it.

Alternatively, you can do what a growing number of retired people are doing and start S.K.I.ing - Spending Your Kids Inheritance - so that it's all gone before you need residential care. That way you can ensure that Aneurin Bevan's promise comes true even if John Major's doesn't.

But you'd better get your timing right because if you spend all your money before you need to consider the costs of residential care - if you ever need it at all - you're going to have to put up with the consequences of having to live on a very basic income.

The Real Cost Of Caring For Elderly Parents | The High Costs Of Residential Care