Planning for care in later life

Planning for later-life care is difficult – most people don’t know whether they will need it; it is vastly expensive; and the costs are open-ended. If you save up and don’t need it, you may be left with a large unused amount of capital on which your heirs will pay tax. While everyone needs some ‘rainy day’ funds, this is on a different scale. There is no perfect solution, but there are a range of options.

According to the EU’s Long-term Care Report, around one-third of adults over 65 will need some form of care, a figure which is rising continually with increased longevity. The European Commission estimates that the number of people in the EU in need of long-term care will increase from 30.8 million in 2019 to 38.1 million in 2050.

It is the union’s fastest-growing area of social expenditure, and government assistance for long-term care is patchy, varying considerably from country to country.

The European Commission estimates that the number of people in the EU in need of long-term care will increase from 30.8 million in 2019 to 38.1 million in 2050.

The huge cost of care

Care is hugely expensive and can be unpredictable. For example, in Luxembourg, care costs can be as low as €1,900 a month, but can rise to €4,500 for a room in one of Luxembourg’s more than 50 senior homes. In most countries there is a safety net such as the National Solidarity Fund, but often individuals are left to fend for themselves, navigating complex systems at a time of crisis and with limited financial resources.

Another consideration in planning for later-life circumstances is that if you save up for long-term care, you might never need the cash, and then see a significant part of that capital consumed on death by inheritance tax.

As an illustration – if someone saves for three years of long-term care, assuming €4,500 a month, or €54,000 a year, that’s a total amount of €162,000. At the highest rate of Luxembourg inheritance tax, that could add an additional €77,760 liability. This not only highlights the importance of learning how to plan and manage your budget properly, but also the need to call on the services of a wealth management expert.

Public provision

The first priority is to understand what, if anything, is provided by the state. In some countries, provision is generous. In Luxembourg, for example, there is a publicly-funded long-term care insurance system, created in 1999.

The system is financed by contributions from employees, self-employed individuals, and a 40% contribution from the state budget. However, in countries such as Spain or the UK, the systems are complex and piecemeal, and individuals only receive state support in limited circumstances.

Finding the capital to self-fund care can be challenging. Investors often need to identify a large and reliable income stream in a short space of time.

Finding the capital to self-fund care can be challenging. Investors often need to identify a large and reliable income stream in a short space of time. Designated insurance products exist for long-term care, whereby individuals pay an annual premium in exchange for financial assistance if they need help with nursing care or day-to-day living.

An alternative is to add a long-term care element to an existing life insurance policy. This can provide welcome reassurance and ensure that an individual’s inheritance is preserved for future generations.

Annuities to pay residential home fees

However, the problem with this approach is that most people don’t know whether they will need care, so premiums may be wasted; and if they do, there may be wrangling with insurance companies to obtain the care they need. However, if this is your preferred route, it will be cheaper the earlier you start.

Most people, however, rely on a combination of existing savings, pension payments, the family home and contributions from other family members. If you sell your home to pay for care, you can buy an annuity to pay residential home fees. The key is to organise the proceeds of your property sale properly. Here too, expert help is highly recommended.

Either can provide an income stream from an initial investment. Annuity rates are far more competitive today than in the recent past, and can be term limited (five or 10 years, for example). If you take this option, you should ensure payments are inflation-adjusted because care home fees will rise over time.

Alternatives include renting out the family home. This can be a useful option if care needs are likely to be temporary. However, any income generated will be taxable, and the expense associated with letting can be high, including estate agency fees and maintenance.

Equity release or savings?

Equity release schemes can also be used to fund care. These create a mortgage lien on the family home, with interest rolled up and payable only on death. This will erode the amount of an individual’s legacy to family members, but will reduce inheritance tax, and equity release can be quick and simple to organise.

Another option is to use savings to pay for care. This may require some financial reorganisation – for example, if savings are currently held in cash, they could be switched into government bonds for a better return.

Existing growth investments could be switched into equity income funds, which hold dividend-paying shares. The money may grow faster than if it was just left in cash, and the income should increase over time. However, you need to be prepared to weather some market volatility.

The only case in which planning for care fees could result in an increase in inheritance tax liability is if people have saved for care costs that they ultimately do not need. However, escalating care needs should prompt a conversation within the family on whether existing planning arrangements are still appropriate.

If the family home is being sold to pay for residential care, for example, could some of the proceeds be gifted to family members to move money out of the estate for inheritance tax purposes?

It is also very important to ensure that your family has the authority over financial resources to be able to pay for your care.

Financial and health decisions

It is also very important to ensure that your family has the authority over financial resources to be able to pay for your care. Many care home admissions are emergencies, and it can introduce considerable stress if your family are not authorised to take health or financial decisions on your behalf.

You should also ascertain the tax implications of any decisions you make. Most countries exempt the family home from the capital tax regime, but if you sell other assets, you should take care about whether you are incurring significant capital gains.

Funding long-term care is expensive and often complex, at a time that may already be highly stressful. Looking ahead and making sure you have a clear plan may appear morbid, but it can make it much easier for family members when the moment comes.