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How will you pay for later life care?

Written by: Sarah Lord
With life expectancies increasing and care costs soaring, pensioners need to think of alternative ways to fund later life care. Here are a few suggestions.

The cost of care in later life has increased significantly over the past 26 years. Recent research from private client stockbroker and wealth manager Killik & Co and the Centre for Economics and Business Research has found that residential care costs have increased by 237% since 1988, from £8,300 to £29,300, while nursing care costs have risen by 259% from £11,900 to £39,300.

With increased life expectancies, many more of us will end up relying on care in our twilight years, but as the soaring fees continue to outpace inflation, the prospects for future pensioners are not looking bright. Indeed with no sign of these costs lowering, pensioners must now focus on finding alternative means of funding.

Who will pay? At whose cost?

It is important to make the distinction between residential homes, for those who have problems living independently, and nursing homes, for the elderly with long-term health conditions. The research shows how the cost of care later on in life is rising at an incredibly fast pace. Those starting their stay in 2016 will face an average total cost (based on average length of stay in each) of £60,700 for nursing care and £72,800 for residential care. Based on current trends, we can predict that by 2035 the annual fee for care will rise to £69,500 and £51,800 for nursing and residential respectively.

The government’s recent initiatives have put an increasing amount of pressure on the care home industry. In 2016, the £72,000 care cap was due to be introduced and designed to ensure a financially sustainable funding arrangement for the sector, however this has now been delayed until at least 2020. But there is a bigger threat to the industry, and that is the introduction of the National Living Wage (NLW), due also in 2016. The care home industry’s workforce is often low paid and mostly over the age of 25 which means that the care sector will be significantly affected by the NLW.

Alternative funding methods

The future of care funding is unclear. With the industry’s social care budget shortfall and the introduction of the NLW, pensioners will be forced to pick up the financial strain as the costs fall predominantly on their ability to self-fund. Indeed, a pensioners’ income alone does not meet the cost of care, as residential care fees exceed the average pensioners’ income by 65%.

There are other alternative ways to fund care later in life though. First of all, 70% of the elderly can bridge the gap using their wealth tied up in property. Downsizing is a good way to free up capital to pay for care in later life should it be required. Alternatively, new pension freedom rules provide greater flexibility as to how pension assets can be drawn, it is now possible to pay for care from pension savings without any restrictions to access. Another possibility is long-term care insurance which may or may not be required however, it removes the possibility of a large future liability but can be expensive.

The future of funding care later in life is uncertain but one thing that we can be sure of is that building care costs into your wider financial planning is hugely important. Having to sell or release equity from your home brings further upheaval at an already stressful time, and it is important to consider how you would deal with the financial implications of care should you need it.

While the rising cost of care is a significant challenge, those who plan for it are likely to find ways to meet it.

Sarah Lord is managing director of Killik Chartered Financial Planners

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