BLOG: Long term care – The elephant in your financial plan

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Written by:
14/09/2014
Maike Currie Associate Investment Director at Fidelity Personal Investing discusses an often neglected part of financial planning - budgeting for long term care.

Why do you invest? Different people will have different responses to this question but chances are that most of us will include the importance of a comfortable retirement in our answer.

But even those who have diligently saved and invested to ensure comfort and contentment in their golden years, too often forget or simply ignore a huge potential outlay which they could face in their old age: care home fees.

Today the cost of care is the biggest concern for those over 70 with the average level of pension savings unlikely to be enough to cover any long term care requirements, in addition to retirement income needs.

Why is care fee planning catching so many people off guard? Well, besides the fact that few of us like to think of ourselves going into long term care in our old age, there are number of other reasons: As we can now expect to live for 20 or 30 years beyond our selected retirement age, it becomes more likely that we will need specialist care in our later years.

Moreover, research compiled by the Institute and Faculty of Actuaries shows that while life expectancy has been increasing, healthy or disability-free life expectancy for both men and women has not nearly kept pace, leaving more people needing long-term care. Estimates are that one in three women and one in four men aged 65 today is likely to need care.

Even more relevant for long term care is the number of over 85s, which is expected to more than double in the next 20 years. Meanwhile, incidences of dementia are rising. It is forecast that the number of people in England and Wales aged 65 and over with dementia will increase by over 80 per cent between 2010 and 2030, to 1.96 million.

If these figures all make for very depressing reading – don’t worry, there is some good news. Under the government’s new Care Bill, a cap on care costs will be introduced to prevent people paying more than £72,000 towards their own care.
But while the care cap offers a safety net that will prevent individuals from facing catastrophic care costs, it will not replace savings as the key means of paying for care.

The cap only applies to local authority-set care costs – it does not take account of daily living costs or top-up care costs. With, or without government support, it makes sense to plan for the unforeseen cost of care, not least because there is no specific savings product for care home fees. If you are not yet retired, start by drawing up a financial plan, which includes the potential cost of care.

The good news is that this year’s Budget changes, allow you much greater freedom as to how you use your pension savings, enabling the money to be used for other purposes. Even if you end up not needing the money, saving something extra into your pension for the possibility of long term care, will mean the added bonus of a bigger pension pot.

You could also choose to use your annual ISA allowance for this purpose. You will have instant access to your savings when you need it, which you can draw tax free. Look at investing in funds with strong yields and low volatility. These can help ensure you have a regular income that can help with the burden of care fees, while not eating into your original capital.

UK equity income funds offer the security of a reliable income with the prospect of some capital growth, which can help maintain the inflation-adjusted value of your savings. Funds included on the Fidelity Select List of top-rated funds are the Artemis Income Fund, Liontrust Macro Equity Fund, Fidelity Moneybuilder Fund, Henderson UK Equity Income & Growth Fund and the JOHCM UK Equity Income Fund.

If you are in the unfortunate position that you or a relative needs care immediately, there is the option of an immediate-needs annuity. This type of annuity pays out a guaranteed income for life to help cover the cost of your care fees in exchange for a one-off lump sum payment.

But remember that if you die earlier than expected your family will not get any money back, although some policies do offer an option to safeguard the capital in the event of early death.

If you would prefer a carer in your house, equity release is one option. This allows you to raise capital against the value of your property and means you do not have to move out of your home. But equity release schemes can be notoriously complex, set-up costs are high, and it is a very concentrated investment strategy. If things go wrong, you could risk losing the income you were bargaining on, along with your family home.

An alternative, and possibly more diversified approach, will be to downsize your property – something many retirees choose to do any way – and invest the capital released in a balanced portfolio of funds within a tax-efficient wrapper such as an ISA or SIPP.

Whichever option is most relevant to you, do not ignore the issue of care. No-one wants to spend their final years with little choice as to how or where they are cared for. Planning ahead and putting some savings away now, will give you peace of mind. It will also ensure that you are not a financial and emotional burden on those nearest and dearest to you.

Maike Currie is news and investment content editor at Fidelity Worldwide Investment.

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