A guide to self-funding long-term care
Paying for care can seem pretty daunting. Other than buying a house, it’s probably one of the biggest financial decisions you’ll have to make. However, we’re here to help you make the right decisions. So, you’ve established you need to pay for some or all of your care out of your own funds. You are what’s known as a self-funder. That means your assets and savings make you ineligible for funding from your local authority. Another reason you might be self-funding is if you want to
enhance your level of care, or need to make up a shortfall.
The best place to start is to get a better idea of what your total likely costs of care will be and whether you qualify for any state benefits that could help you.
Am I eligible for state benefits?
Before you start dipping into pension pots, savings or investments there are a number of state benefits that you may be eligible for, not all of which are means tested:
- Attendance Allowance – you may be able to claim an Attendance Allowance if you have a disability that means you need someone to help with your care.
- Pension Credit – if you’re over the state pension age and on a limited income Pension Credit could give you a helpful top-up.
- NHS Continuing Healthcare – if your primary need is ‘healthcare’ the NHS is responsible for fully funding your care whether in a hospice, a nursing home or care home, or your own home. There isn’t a defined list of eligible health issues so ask your GP or your social worker to arrange an NHS Continuing Healthcare assessment.
- Council Tax Benefit – if you live alone and move into a care home you are exempt from paying council tax while your home is empty. All you need to do is inform your local council.
What are the main ways of paying for care?
Funding long-term residential care can be very expensive and it’s important to seek independent financial advice before making big decisions. The main ways of paying for care include: downsizing by moving into a smaller home, equity release (home reversion plans and lifetime mortgages), long-term care insurance and using savings and investments.
So what are the pros and cons of each of them?
If you live in a house that’s bigger than you need, selling your home and moving into a smaller, cheaper property could free up funds to pay for care.
Downsizing has advantages, including living in a smaller home (or in sheltered housing) that’s more accessible and easier to maintain. Moving to a new area could even reduce your care costs.
However, it can be stressful to sell a family home and usually won’t free up as much money as equity release. It can also mean you end up leaving a smaller property to your family.
If you have paid off or have nearly paid off your mortgage, equity release schemes can release money that’s tied up in your property.
There are two ways of doing this:
- Lifetime Mortgages – lifetime mortgages are loans secured on your home and repaid at the end of the term when your property is sold, when you move, pass on, or move into a care home. You can take the loan amount as either a lump sum or in smaller drawdown amounts. When your property is sold and the loan is paid off, any remaining funds are paid to your family. Of the two forms of equity release scheme, this is by far the more popular.
A fall in house prices could mean the property was worth less than the outstanding loan amount, leaving families struggling to make up the shortfall. Now, most mortgage companies offer a ‘no negative equity guarantee’ which helps to avoid this. Nevertheless, as with home reversion plans, you should seek professional advice from an independent financial adviser.
- Home Reversion Plans – with home reversion, you sell all or part of your home to a home reversion company for less than its market value in return for:
- A cash lump sum,
- A regular income or,
- A combination of the two.
Long-term care insurance
- Pre-funded long-term care insurance – previously easily available, this form of insurance is now difficult to find as it is no longer widely sold. However, if you took out a policy in the past you may be able to make a claim for your care costs.
- Immediate needs annuities – typically purchased with a lump sum (usually from a pension pot) an immediate needs annuity guarantees a regular monthly income to pay your care costs until you pass on. Opt to have the allowance paid directly to your care home and the income is tax free, helping you to make your money go further. The level of income depends on your age, health, life expectancy and the level of income you will need.
Savings and investments
If you’re fortunate enough to have savings and investments, this is a simple way to pay for long-term care. It also ensures you can stay in your home and pass it on to loved ones as an inheritance.
However, the value of investments can go up and down. Care costs can also increase, particularly if you need to go into a more expensive nursing home. If you’re planning to use investments or savings to fund your care it’s wise to take independent financial advice.
What if my money runs out while I am in a care home?
If your capital falls below £23,250, your local council could pay for your care. Ask for an assessment a few months before this is likely to happen to ensure there’s no shortfall.
Deferred payment agreements
If you want to use the value of your home to pay for your care, a deferred payment agreement allows you to delay paying your local authority for care home costs until you die or your property is sold. This legal agreement usually comes into operation after 12 weeks of care. Most local authorities will only allow you to use between 70 and 80 percent of the value of your home in this way.[i]
Learn more about different long-term care options and their typical costs so you can build them into your financial plans.
The information on this page was sourced between June - October 2020. Information on this site does not constitute any form of advice, representation, or arrangement by us and you take full responsibility for making (or refraining from making) any specific investment or other decisions. You should take independent financial advice from an adviser who is registered by the Financial Conduct Authority.
[i] Source: Money Advice Service