At Magenta we regularly get asked about the costs of long-term care and how this can be budgeted for.
Whilst these are straightforward questions, the answers are unfortunately not.
For example, it depends on what type of care, for how long the care is required, and what level of assets or state assistance will fund it.
In this blog, we want to provide stats and context, so that you better understand how it may affect your finances or those of someone you care about.
There is no getting away from the fact that full residential nursing care can be very expensive and can deplete your assets quickly if you have a high enough level of assets to pay yourself.
However, a relatively small number of the elderly population actually live in residential nursing care homes at any one time. Far more people either receive some form of care at home or live in a residential home without any nursing care. Both of which are significantly less expensive than full residential nursing care.
Approximately 418,000 people live in care homes (Laing and Buisson survey 2016) in the UK. This is 4% of the total population aged 65 years and over, rising to 15% of those aged 85 or more.
However, there are around 4 million older people (40% of people aged 65 and over) who have a limiting long-term illness or disability, and it is estimated that this will rise to over 6 million older people by 2030. These are statistics from the MHA (Methodist Homes), which is a charity for those living well later in life.
From these numbers we can see that the chances of having a life limiting long-term illness or disability later in life are reasonably high, but the chance of going into full residential nursing care is low.
Along with there being a low chance of going into full residential care, various bodies of research suggest that the average stay in a care home is around 2.5 years, which is often shorter than many people think would be the case.
Our Financial Plan Assumptions
In the financial plans we produce for our clients, our starting assumption is a care cost of £60,000 per year, increasing by 5% per year, lasting for 5 years.
To be clear, this is a pessimistic forecast of the length of time you could be in care, given the average is found to be half this. Despite this, we have historically looked after clients who have been in care longer than 5 years.
The £60,000 cost we assume is for full residential nursing care, which is the most expensive possibility. The inflation assumption is consistent with increases seen across the board according to Laing and Buisson research.
Even though life expectancy has levelled off in the last few years in the UK, the expectation is that life expectancy will increase due to a variety of factors.
Because of this, more people are likely to end up in care in the future, and of course it is impossible to know whether you or a loved one will end up in care.
Those in retirement have to make a conscious choice: keep some assets back for later life (such as pension pots or savings) for possible care costs or spend throughout retirement without keeping money back for care and hope it doesn’t happen!
The first approach is likely to give you more flexibility and freedom to choose which type of facility you live in and may mean you do not need to release equity, downsize, or sell your home to fund your care.
The downside, however, is that you may never need care, or not to the extent that it will cost as much as you have kept back, and this ends up passing on to the next generation, with inheritance tax due, depending on how much it is.
The second approach would see your hand forced in some way or another if you need expensive care. You may need to sell some assets to pay for care, or if you cannot do so, end up in a care facility chosen by the local authority. The potential benefit to this approach (for a lot of people) is that it could be mostly or fully funded by the state, rather than you personally.
However, the major downside is that you lose control over the place you receive that care, both geographically and the quality of the facility.
Ultimately, there is no one right way to account for potential care costs in your financial plan, if at all. When we discuss this with our clients who are in retirement, we regularly remind them the impact it could have on their finances using the assumptions mentioned earlier. This enables them to understand the impact it could have and what can be done.
If you would like to read more about this topic, we have written a couple of other blog posts about this topic in the past, which you are can read here:
Contained within these blogs are external links to charities and associations that specialise in providing care advice.
Please feel free to talk to the team at Magenta about this if the cost of care is or will affect you and/or your family and friends. We look forward to speaking to you.