Paul Wilcox analyses whether high care home fees prevent people passing wealth to their children.
Getting older happens to us all, but the potential expense of older age can vary enormously. Research by care fees planning specialist Symponia found a quarter of us will require residential care at some point during our lifetime.
In other words, 25% of us will require care, which means that 75% of us won’t, but none of us have any idea which category we will fall into. Where does this leave our natural desire to provide a financial legacy for our children?
Calculating the cost
Saga suggests weekly care costs are between £603 and £827 – roughly £31,000 to £43,000 a year. A really pleasant and attentive home (more like a reasonable hotel) is likely to cost £1,000 a week or £52,000 a year.
Some advisers suggest people should expect between 10 and 15 years of care, but this seems like an overcautious approach, since the average is probably much less.
The specialists typically suggest the total cost could be 10 or 15 times the annual estimates – at the top end, £520,000 for 10 years’ worth of care and £780,000 for 15 years, plus inflation.
These numbers are used by advisers selling provisions for long-term care – so, you may feel, more like scare tactics than real statistics. So what are the real figures?
London School of Economics research from 2011, based on actual statistics from Bupa between 2008 and 2010, shows the average length of a care home stay was 801 days. Half of residents died by 462 days, while 27% lived for more than three years, with the longest stayer living for over 20 years.
People had a 55% chance of living for the first year after admission, which increased to nearly 70% for the second year before falling back over subsequent years.
This information was combined with data about the weekly cost of a care home placement. At £603 per week, an 801-day expected stay would cost £69,000. At £827 per week, an 801-day average stay would cost in excess of £94,600.
The total average cost for the one in four people requiring residential care, at the higher weekly rate of £1,000 per week, would come in at around £114,000 (before inflation).
These are more modest numbers than we started with, but it all still sounds rather worrisome, unless of course you happen to be extremely wealthy. However, most people will be in receipt of either a state and/or a private pension and will not opt for five-star hotel accommodation.
Based on the numbers above and deducting just the state pension, some of the cost can be met from income. The net cost will be less again for those in receipt of additional occupational pensions.
Family legacies
This does not stop us worrying about the other conundrum of protecting our accumulated wealth to pass on to our families. In reality, the solution is very simple, so long as we plan early enough.
We each have a nil rate band of £325,000 for inheritance tax (IHT) purposes which we can use as soon as we wish to make a gift into a flexible discretionary trust aimed at benefiting our families, but with provisos to support long-term care if necessary.
Such gifts will completely fall out of account for IHT purposes if we survive them by seven years.
The careful wording of such trusts can achieve the best of both worlds – delivering care costs, but earmarking IHT-exempt legacies with any balance of trust assets then remaining, to be passed to beneficiaries free of IHT.
Based on all the research, it would appear that a trust fund commencing at £325,000 is likely to cover the most luxurious of care homes for even the most long-lived.
With current life expectancies, any 70 year-old is likely, on average, to live some 15 years – twice the period needed for gifts to become exempt from IHT. This means tax-free legacies to our families and long-term care costs can be resolved with adequate foresight and straightforward financial planning.
Paul Wilcox is chairman of The WAY Group
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