This is part five of a series on how you can plan and pay for social care costs in later life.
Part one explores why your social care needs probably won’t be funded by the state.
Part two decloaks the social care funding means test. How does it treat your assets and what’s excluded?
Part three identifies the key social care thresholds. These tipping points decide your funding fate.
Part four unpicks how to estimate social care costs using available data.
This post is a case study showing how my retirement plan copes when one of us goes into a care home. I hope the thought process proves useful to anyone facing these choices, or who wants to stress-test their own finances.
Oour previous post explained how to estimate a ballpark number for your social care costs. With that number in hand, you can test your expected retirement finances.
Can your plan withstand the shock of you – and/or a loved one – needing long-term care?
I’ve tested my own finances as an example. The exercise gives me hope we’d survive, should we need to. But not in the way I expected.
Social care cost case study: my assumptions
For my stress test I’ll model the financial shock of me going into a care home. Meanwhile Mrs Accumulator will hold the fort in our real home.
Let’s assume I’m 85 when I go in. My chance of needing residential care increases drastically at that age.
- The average life expectancy for an 85-year-old male care home resident is three years.
I’ll model what happens over six years because:
- The average life expectancy for female residents is currently four years. Modelling extra years will be useful for female readers.
- There’s a chance I could hang around annoying people for longer anyway.
Care home cost inflation is 5% a year.
I’ll use today’s figures for my expected retirement income, care home costs, and the social care system. These are the best proxy I’ve got for what could happen later in life.
However, I’ll use the new social care thresholds and cap proposed for England from October 2023. I live in England and I have to assume this shake-up will be closer to the truth than the current bands.
The UK average self-funded care home cost is around £40,780 per year. That’s according to the process we examined in our article on estimating the cost of care.
Reminder: this guesstimate is for someone who does not qualify for state funding.
For simplicity’s sake, I won’t customise that figure by my region for this case study.
I won’t look at the worst-case cost scenario, either. (Think £68,694 for dementia care in a south-west of England nursing home. I’ll model that one on a dark and stormy night when I truly want to scare myself.)
The social care financial assessment
The means test assesses financial resources held in my name, plus 50% of anything held in joint accounts.
Because Mrs TA needs a place to live, our home is not on the line in this scenario. It’s not sucked into the means test so long as she stays there.
The means test classifies my resources as income and capital.
In the crazy, budget-necrotising world of social care, those terms don’t refer to the standard definitions of income and capital.
- Learn how this applies to you in part two: how social care funding works.
State support is wiped out if I have too much income or too much capital.
Let’s look at my social care scoreboard.
Income
This is made of two components in my case.
- £300,000 defined contribution pension – my half of The Accumulator household’s pot.
My plan is to drawdown approximately £12,000 inflation-adjusted income per year using a 4% sustainable withdrawal rate.1
We’ll soon see that local authorities aren’t much interested in the 4% rule. They can claim my income is far higher.
- £9,628 a year full State Pension.2 Hopefully the State Pension is still a thing when I’m 85.
That’s it. That concludes the voting from the income side of my finances.
My net income is therefore £19,816.
Capital
- £100,000 in stocks and shares ISAs. This is from the 25% tax-free lump sum (I will have) carved from my SIPP.
I intend this pot to deliver £4,000 a year in tax-free income. But it becomes a liability when viewed through the lens of social care funding. I’ll explain why below.
Our only other capital asset is the house. But that’s disregarded from the means test, because Mrs TA wants a roof over her head. (Get her!)
If Mrs TA goes into residential care too or passes away, then the house is fair game.
Capital over £100,000 immediately rules out state support in England from October 2023. Currently the social care thresholds are meaner in England. They are different again in the other home nations.
Capital under £20,000 theoretically rules in state support. But that’s only after most of my income is deducted from the care home cost. We’ll come back to this.
Between those thresholds you’re in the netherworld. You might be eligible for some funding. But it’s fast whittled away by every chunk of your capital in this grey zone.
I have £80,000 in the threshold sandwich.
That doesn’t bode well for my chances of getting support.
Means test says “no”
Because I’m not ruled out for state support on capital grounds, the system shifts to rule me out on income grounds.
The cost of my care home is £40,780 if I have to fund it myself.
But the maximum funding available is £29,128. That’s the cost the local authority would pay for the same care – due to its superior buying power.
The system doesn’t care that self-funders pay a 40% higher premium on average than do local authorities.
If my means-tested income is over £29,128 then I’m footing the entire bill.3
- My actual income is £23,816, including my ISA withdrawal rate.
- But my means-tested income can be assessed as £56,489.
[Rubs eyes in disbelief]
Surely there’s been some kind of mistake?
Sadly not…
My means-tested income has been inflated by two mechanisms:
- The tariff income penalty levied on my £80,000 ISA capital caught between the social care threshold jaws.
- Lifetime annuity rates that can be used to assess my pension income, instead of my chosen drawdown.
Open market annuity quotes indicate the income for an 85-year old can be assessed at a much higher level than would be generated by my sustainable withdrawal rate.
Income payable towards care home fees: a quick aside
Regardless of your capital situation, your income above £1,295 a year goes towards your care home fees.
The sliver you keep is known as the Personal Expenses Allowance (PEA).
- If your means-tested income minus the PEA4 is less than the local authority’s care home cost, then the council will make up the difference.
- Should your means-tested income be higher than the local authority cost (plus the PEA) then you’ll pay the whole bill.
- If your actual income is less than your social care costs then it’s all consumed bar the £1,295 allowance.
The care cap could eventually come to your rescue in England. However even that’s a long shot. See below.
Tariff income calculation
Between the social care thresholds, every £250 of capital (or part thereof) adds £1 per to your means-tested income figure.
My tariff income works out like this:
£100,000 (ISAs) – £20,000 (lower threshold) = £80,000.
£80,000 / £250 = £320 per week tariff income added to my means-tested income.
That’s £16,640 in year one (as opposed to £4,000 ISA income I’d expect to withdraw).
£16,640 tariff income added to my net income of £19,816 catapults me far beyond the boundary for support.
That boundary is £29,128 (local authority care home price) plus £1,295 (Personal Expenses Allowance).
Because I’m now classified as a self-funder, my care home bill will actually be £40,780.
I don’t have the income to pay those social care costs. So I’ll end up running down my ISA assets to square the circle.
Still, once I’m below £20,000 in capital, tariff income ceases to be a problem. (That shouldn’t take long at those prices.)
The thornier issue is how my defined contribution pension is valued by the local authority…
Lifetime annuity income calculation
Social care guidance allows local authorities to calculate your pension pot income as:
the maximum income that would be available if the person had taken out an annuity.
This applies once you reach State Pension Age. The local authority can get an annuity estimate from the Government Actuary’s Department or your pension provider.
To see how that plays out, I checked the annuity rates. Reminder: I’m an 85-year-old male with a pension pot of £300,000. I used the Money Helper annuity comparison tool.
The tool comparison flashed up an income of £38,860 for a level annuity with no protection whatsoever.5
In other words, the income wouldn’t rise with inflation. Worse, if I popped my clogs the day after signing up, the annuity provider would bank every penny from my pension pot. Mrs TA wouldn’t get a thing.
That looks like a bad bet for a guy with a life expectancy of three years.
Add the £38,860 annuity to £16,640 tariff income and my means-tested income soars to £56,489.
I have no chance of state support until I tailor my finances to the means test.
Is there a better alternative?
If you can’t beat them, join them. At age 85 an annuity probably will provide a better income than my prudent withdrawal rate rules.
I just need to buy one that takes care of Mrs TA, too.
Annuity protections that provide for partners, the kids, and other beneficiaries mean I won’t match that £38,860 quote.
That’s fine because:
- If I buy an annuity then the local authority must count that as my income.
- They can’t cook up some shady max income that I don’t actually have.
Sacrificing annuity income for partner protection looks like a good trade-off when my life expectancy is foreshortened.
I can secure a £22,346 income from an escalating annuity bought with my £300,000 pension pot.
The income rises with RPI-inflation – handy if I linger – and will pay the same escalating amount to Mrs TA if I don’t.6
Inflation-protection, partner protection, a far higher income versus drawdown – the much-maligned annuity has a lot going for it once you reach a certain age.
Value protection options also enable you to rig your annuity to pay out a lump sum to your family to sugar the pill of your passing. That limits the threat of the annuity company snaffling all your capital should you prematurely push up daisies.
There’s also an immediate needs annuity. This is designed specifically for paying long-term social care costs. The main advantage is your income is tax-free: if it goes straight to a registered care provider.
I haven’t researched these products yet. They may well be better for value for money than the annuities I looked at.
(Monevator contributor Planalyst tells me that a financial adviser would normally recommend an immediate needs or deferred care annuity to deal with social care ahead of other annuity types.)
It’d be worth thinking about annuitising the ISA assets, too.
Beware of Catch-22s
There are other SNAFUs to investigate such as:
- Raising income slightly, only to lose benefits and worsen your overall position.
- Blundering into a solution that has an unexpected tax sting.
Financial barbed wire like this is hard to untangle.
Paying your social care costs is one of those times it’s probably wisest to seek expert financial advice on your situation.
Other options worth considering include partial annuitisation, or drawing down my pot at an accelerated rate.
So where does that leave us?
The case study must go on! So let’s assume I go into the care home having bought an escalating annuity.
By purchasing the correct protections, Mrs TA and I are better off. And we eliminate one of the means-tested income problems.
The other problem is tariff income. That solves itself by year five. See this fun snapshot of my care home years:
Assumptions
- Self-funded care home costs rise by 5% annually.
- Local authority care home costs, Daily Living Costs, State Pension, and Personal Expenses Allowance all rise by 3% annually.
- Social care cap, social care thresholds, and Personal Allowance – no annual inflation rise.
- RPI-linked escalating annuity – 3.5% annual rise.
- My life expectancy is three years. But I’ve modelled six years because I hit the social care cap towards the tail of year five. Who would want to miss that?
Here’s a link to my social care costs spreadsheet. Try running your own numbers.
The edited highlights
My ISA capital is obliterated by my self-funder costs in years one and two.
Capital falls from £100,000 to £20,000 by year three. The proceeds of this pay my care home fees for the first two years.
Tariff income is out of the equation from year three. I qualify for around £2,440 of state support from then on.
I’d aim to keep my ISAs as close to £20,000 as possible. Capital below that lower threshold isn’t captured by the means test. Anything above weighs me down with tariff income at a penal rate.
My actual income isn’t enough to pay for the care home in any year. Hence I drain the ISAs early on. I rely on some state support after that.
From year three, I’m no longer a self-funder. I pay the local authority’s care home price thereafter. That price – minus my assessed income – is the level of state funding I get, until the social care cap is reached.
My assessed income is my net income minus the Personal Expenses Allowance – once I’m no longer dogged by tariff income.
That leaves me with £1,373 income to spare in year three, plus a dribble of ISA income. That’ll all be gobbled up by hidden charges, top-ups, Mrs TA’s gin problem and so on.
Off-stage, the switch from self-funder to state-funded status could be a problem if the local authority and my chosen care home can’t do a deal.7
The local authority doesn’t have to pay my care home’s price. It can offer me an alternative home it declares is more suitable and cost-effective.
I’d be welcome to stay where I am if I could afford it. As I couldn’t from year three, I’d be at the mercy of the local authority’s decision.
What happens to my income?
Yet another grey area is what happens to the income I’m not spending on care homes (years one and two) because I’m burning my ISA capital on the fees instead?
I assume I can ship it to Mrs TA to pay the bills back at base without being accused of deprivation of assets. (That’s social care system speak for: ‘you’re diddling us’.)
Perhaps then Mrs TA could use some of that income to grow her ISAs?
I don’t think I’d be depriving the local authority of capital or income. My capital is paying fees and my income will be the same next year.
But I’m no expert. I’d really want specialist advice before making any such move.
My spare income could also pay for top-up care. I might go for this if the local authority and I disagree on my needs. I suspect I have a higher opinion of myself than the council does.
One thing that I should not do is stick the extra cash in a bank account. It’d only get counted as capital at the next assessment.
Hitting the social care cap
The social care cap cavalry arrives towards the end of year five.8
It’s sobering to remember my last year on this Earth is projected to be year three, according to the life expectancy data.
And also that government headlines imply your care costs are state-supported once you hit the magic £86,000 mark.
My social care costs will reach about £175,000 before the cap puts a leaky lid on it.9
If this same level of ‘protection’ applied to birth control, I’d be a father of five by now.
Progress to the care cap is delayed by all the exclusions. Namely: the self-funder premium, Daily Living Costs, state funded payments, and top-up fees.
My state-funding shoots up in year six once the cap closes. I go from £2,545 to £21,711 in support.
I’m only responsible for the Daily Living Costs once I’ve hit the cap. I can almost cover that with my State Pension.
Hitting the cap leaves me with more disposable income – £20,619 instead of £1,457.
We’ll put it towards a new exo-skeleton for Mrs TA. Hopefully that’ll keep her out of the care home.
House money
If the house comes into play then our capital shoots sky high. We’ll pay full self-funder fees from its value until we reach the cap.
In that case, we’d need to check the merits of a deferred payment agreement versus commercial equity release versus selling it.
Those we leave behind
My main concern is that Mrs TA has enough to live on while I’m living it large in the care home.
Simply put, an individual can’t live as cheaply as two.
The Retirement Living Standards research suggests that a person living on their own needs 68% as much as a couple. As opposed to 50% as much.
The Retirement Living Standards’ £30,600 ‘moderate’ band is a good proxy for our standard of living. A single person needs £21,000 a year to maintain that heady lifestyle.
Assuming Mrs TA’s income* mirrors mine, it stacks up like this:
- £12,000 @ 4% withdrawal rate from £300,000 pension pot.
- £4,000 @ 4% withdrawal rate from £100,000 stocks and shares ISA.
- £9,628 full State Pension.
- £23,816 total after tax.
Mrs TA scrapes over the £21,000 line, thanks to her State Pension.
To cover her without that headroom, we’d be looking at equity release or annuitisation.
That wouldn’t be such a hard decision for us because we don’t have kids. There’s no need to live like poor church mice at such a grand old age.
++*Monevator minefield warning ++ In a futile effort to streamline this case study, I glossed over an important reality. The bulk of The Accumulators’ joint pot is in my name. You can assign 50% of your pension income to your spouse or civil partner so it doesn’t count towards your means test. But you’d need to do that when you were still healthy, and a sub-50% share isn’t disregarded from the test. So how does that work if your pot is less than 50% bigger? And your partner needs, say, 40% of your income to pay the bills? I guess you could fork over 50% anyway, and make it work together to establish a prior pattern of spending before the forensic accountants inspect your bank statements. But who organises their finances like this? Unmarried couples must also watch out. As usual, they don’t benefit from the same financial protections.
Stress test passed
The good news is that our retirement finances can deal with the social care costs racked up in this case study. Assuming my starting assumptions are accurate.
Yay!
I’m heartened by that. Because we’re hardly operating at the luxury end of the market.
Of course I haven’t modelled every nightmare scenario. Nor even the more likely one – needing care in the home.
Perhaps that can be my new hobby.
The short version: higher costs simply burn up my ISA faster, and increase state support thereafter as my income is swamped by higher fees.
If the house is mean-tested then its value saves the state stepping in until I hit the cap.
The main benefit of greater resources is paying for a higher standard of care than the basic state package.
A high income can also be used to protect your capital assets (such as the house) from being chewed up by fees. Once the cap is hit then your house is safe.
Anyone who triggers a high proportion of state support from the outset will take much longer to hit the cap. Because state funding does not count towards your cap target, you could be left subsisting on the miserly Personal Expenses Allowance for years and years.
If your income is too low to meet the Daily Living Costs then they could consume your home’s value. Those costs are never capped.
Better plan for care
The standout takeaway for me is the system’s eye-gouging complexity. This is not something anyone should have to cope with while in failing health.
So long as social care remains in this patchwork state, I think it’s worth planning ahead of time.
My dream scenario is that we agree this is no way to carry on as a society. The cost of long-term social care is the UK’s worst lottery. None of us know if we’ll be left holding a losing ticket.
A risk of catastrophic outcomes for a minority is best handled collectively. Hopefully we’ll agree to create a proper safety net. One that protects everyone from a bad roll of the social care dice.
Next post: Planalyst runs her rule over various financial products that can help pay for social care.
Take it steady,
The Accumulator
Bonus appendix: social care funding – the diagram
This flowchart graphically simplifies the complexities of the social care system. It will help you follow this series:
- The reality is a little more nuanced. But I’m simplifying a few aspects in a vain attempt to stop this case study imploding. Blame the byzantine absurdity of the social care system. [↩]
- 2022-23 figure. [↩]
- After deducting the Personal Expenses Allowance from my income. [↩]
- The PEA is slightly more generous outside England and is called the Minimal Income Amount in Wales. [↩]
- The annuity was a single guaranteed income product. [↩]
- It’s a joint income annuity that pays 100%. [↩]
- It’s possible I could qualify for local authority rates before year three. This is a North Sea sized grey area. I’ve assumed I remain a self-funder in years one and two to keep things less murderous than they already are. [↩]
- For sanity’s sake I haven’t modelled the exact moment I hit the £86,000 social care cap. [↩]
- If I assume the social care cap rises at an inflation rate of 3% I won’t hit it until some point in year six. Your outgoings before the cap is ‘officially’ reached are worse if you self-fund for longer, for example because you have more in capital. [↩]
> They may well be better for value for money than the annuities I looked at.
regular annuities – no, no, no. Seriously, if you are an 85-year old requiring residential care then go to a SOLLA financial adviser. An immediate needs annuity is much better value, and the income is tax-free if paid to a CQA approved care facility. But the main win is the percentage return rate is vastly improved because it is an impaired life annuity, you have to give them your medical records for them to be able to qualify the risk, though there is space for interpretation on that.
I know that IFAs have a bad name on this site, but seriously, you are in the end-game. You can eat the IFA fees for a few years, in return for access to some of these products that are only sold through IFAs, because the annuity firms like Just Retirement don’t want exposure to the greedy children suing them (the IFA takes that risk through indemnity insurance)
> A risk of catastrophic outcomes for a minority is best handled collectively.
yes and no. There is a cogent argument to be made as to why should the poor pay more tax to shelter the inheritance of rich people’s kids to spread this risk. Regardless of that, although at the moment you can’t long-term insure against these risks, it is possible. This is a great series, but I have to disagree that this would be the right solution in the end-game. You just can’t ignore some of the specialist products about care costs for those rich enough to be able to pay them.
> The average life expectancy for female residents is currently four years. Modelling extra years will be useful for female readers.
I think this is much more significant than you allow for. According to
https://www.mha.org.uk/get-involved/policy-influencing/facts-stats/
just under a quarter of care home residents are male. This is immediately obvious if you go to a care home, and I know people who have worked in this industry who confirm that, as well as the stay for women tends to be longer. While it’s no doubt politically incorrect, historically men have tended to marry partners younger than themselves on the whole, certainly in the generations now in care homes, and there is some argument that these wives consumed some of their health looking after their husbands who became infirm earlier than them, and there is the statistical bias that women tend to live longer than men anyway
Whatever the reason, this is less likely to be a problem for you than for Mrs TA, statistically, and there is an argument to be made that this should feature in your financial planning more.
None of that is to take away from absolute chapeau for looking at this tough scenario. No plan survives contact with the enemy, and the care finance environment you will face will not look like it does now. Some of the specialist solutions you only get to see if you are involved with this sort of thing for a relative, but for God’s sake don’t DIY this, because some of the solutions you can’t buy as a retail customer.
Fascinating debrief and agree with ermine, hats off the field work.
But how will you deal with this practically when you get closer to needing a care home. Your cognitive functions will almost certainly have substantially reduced….. can you can even get dressed 🙂
Got a uncle who recently passed away in his mid 90’s who kept telling me he was putting his money in Lloyds shares as he wanted his money to be safe in a bank. It was not worth trying to explain the risk / reward 🙂
Do you think you can automate it all? This is why the annuity in some circumstances is a great idea in theory.
I often wonder about life expectancy of women v men – is it possible we will see changes in a decade or two to reflect the fact that many in the cohort of women just retired or coming up to retirement will have experienced similar working lives as men, in contrast to previous generations who did not. I think we have to be careful not to assume genetics explain the proportion of women who live longer compared to men. Perhaps there are other factors at play? Just a thought.
@ TA – thanks for a great series. A complete nightmare.
I believe another factor is (or was?) NHS care in a Care Home. Maybe you covered this earlier? When my father was diagnosed with Lewy Body Dementia, my Step Mother spent three years (of course) arguing with the local authority about what portion was NHS funded and what were “hotel” costs he’s be liable for. When the final decision came after 3 years he must have heard because he promptly died. She showed me the file and it was 3″ thick. (Not sure why the anybody should have paid for anything as he was a Norwegian citizen who hadn’t been resident in the UK for 40 years…)
I agree with @Ermine – why are we tip-toeing around potential inheritances? Let’s just get real and say you self-fund until your 50% of assets falls to £200,000? £300,000? Yes, keep deprivation of assets rules and stuff, but the idea I can cleverly hide my assets and tax payers will pick up the tab is cr*p.
Great series of articles and I am very much looking forward to the next.
I am curious about this part “You can assign 50% of your pension income to your spouse or civil partner so it doesn’t count towards your means test.”. This is not something I have ever heard of before. How does one go about doing that? What are the rules, etc?
@Seeking Fire, “But how will you deal with this practically when you get closer to needing a care home.”
You cannot. You absolutely need to rely on family, friends, or professional advice if you have nobody who can competently deal with the complexities of it all. If you do not have help you will be robbed blind by the care system. I have witnessed a number of times the lengths that faceless (and those with faces) bureaucrats will go to to avoid the LA’s obligations. The NHS continuing care lot are just as bad.
My advice would be to be very careful in your dealings with the LA. For example try to avoid exercising a choice when selecting one home that the LA offer over another, or they might say due to you exercising a choice, they will only pay for the cheapest on offer and you or your family will need to make up the difference. Put the onus back on the LA by asking “Which is the most suitable home?”.
Keep all communications and write up notes following meetings or phone calls, then get the LA to agree with the notes as to what has been said.
You really need someone looking out for you when receiving care as well, whether in your own home or a care home. The care is much more likely to be provided properly if the care providers know that the person they are caring for have friends and relatives who are prepared to be highly vocal to unreasonably difficult.
@Brod, @Ermine, there are risks of negative inheritances too. If you have an elederly relative at risk of being moved to a cheaper home with lower quality care because they have run out of money, there is emotional pressure for the family to keep up the payments.
> say you self-fund until your 50% of assets falls to £200,000? £300,000?
@Brod I believe there is some movement towards that in the social care cap though we will need TA to deconstruct it into what it really means in practice, since it defines care as opposed to what you called ‘hotel’ costs.
More widely, inheritance is the poison that pollutes the whole end-of-life well deeply. It ain’t the kids’ inheritance until the parents and dead and buried and the old age care and the funeral paid for. Its perfectly reasonable to liquidate the parents’ home to look after the last survivor. Dynastic wealth is already socially regressive, though given that a third of the land in England is still owned by the dynasties that were given it by William the Conk a thousand years ago there’s obviously no appetite for change. As for parents that grizzle about flippin’ death taxes – well give your money to your blessed kids while you’re alive and enjoy seeing them benefit. Go on. Knock yourself out. Giving significant amounts of money to people you care for is an easy win if you’re rich enough. Try it sometime. You feel warm and fuzzy inside, and you get to see the smile on someone’s face that you care about. JFDI, I really do recommend it, it’s the best bang for the buck of anything I have paid for. And if you brought your kids up to have values, then perhaps they won’t leave you in the shit?
FWIW I have had the experience of trying to qualify capital and care costs. I consider myself reasonably sophisticated s an investor, I retired early and increased my capital after retirement. The FI/RE conundrum is simple compared to that nightmare.
I took one look at that and it scared the living shit out of me, I knew that I didn’t know. Where the hell do you start – the yearly costs were more than I have ever earned in annual salary! So I looked up SOLLA and checked out a few. The guys I eventually engaged on my mother’s behalf, Swallow, were great. I engaged them not just because I was totally out of my depth to qualify the risks, reliability and rewards. I measure fairly bonkers on the risk appetite score, which is totally inappropriate for widows and orphans, but also specifically to make sure that there was no risk of the principal-agent problem. Swallow’s job was to make sure that my mother’s assets were used for her benefit, and if nothing gets left afterwards, well, that’s all fine and dandy. I wanted specifically no part of that decision-making, other than finding competence, because I have seen too many greedy kids, and I wasn’t raised to be one of them.
It is through this experience that I encountered the purchased life annuity/immediate needs annuity. Swallow made decent money, I couldn’t afford them for my finances though they are undoubtedly more competent than I, because I hope to live long enough for fees to matter.
But realistically, I couldn’t see their fees being paid for long enough for it to catch up with my mother. They did well qualifying that she didn’t need a PLA to guarantee the entire amount, it was most but not all. The return rate was about a sixth (ie Just Retirement would start to lose money if she lived six years or more from inception). Just got a great deal, they profited about a third on the principal – technically it was a lousy financial investment for my mother, but it was terrific value for money for the peace of mind. I computed the annuity return using TA’s calculator and she would have got a 7.3% ROI on the capital as an annuity. Compared with 16.6% in reality. And you get to pay tax on an annuity but not a care-needs one if it’s set up right.
Although it was my mother that educated my teenage self into the difference between the net asset value and the price of an investment trust, so she had smarts enough for investment 40 years ago, by the time push came to shove this was all lost – observing the psychological regression of a parent it a ghastly experience, although I would not really say that my mother lost capacity, it’s more intellectual horizon and situational awareness that faded out. It was my role to look through Swallow’s fan charts and risk computations and reports each year and translate all this crap into ‘Mum, you got enough to live to 100’. I needed to translate the term ‘annuity’, which was anathema to Mum because she thought it would burn her capital, into the word ‘insurance’ 😉 People get weird and irrational as their world closes in.
I was never able to convince her to buy the damn optical aid she dithered about when the first one failed, even though I told her she was good for the money, just throw the old one out and get another for a few grand.
It also highlights another issue for women, which seems to be that they seem to spend a longer time in ill-health in later life. I don’t know any men that ended up in a care home, but I know two women that did. Sure, the plural of anecdote isn’t data, but the gender imbalance is obvious as soon as you enter the doors of a care home.
But before this ends a counsel of despair, the odds of ending up in a care home are low – about 4% of those over 65 rising to 15% of those over 85
https://www.mha.org.uk/get-involved/policy-influencing/facts-stats/
and the proportion will be lower for readers of this blog. Because you tend to be male, and also you are a lot better off than most Britons. So celebrate your good fortune, and open your minds to paying for independent advice should you take the 1 in 5 bullet – to suffer those odds you first have to live to 85, which is 15 years past your three-score years and ten
Another excellent analysis from TA, but I also agree with most of the points that ermine makes in (1). A few observations building on this:
– While I agree with ermine that buying a conventional annuity at 85 when entering a care home may not be the best idea, I think the rate you use in your analysis is too low. If you need care in a care home you will undoubtably have one or more medical conditions that will enable you to get a better rate with an impaired life annuity – even if you don’t need any specific nursing care for these.
– As ermine says, you will get better rates with an immediate care needs annuity through a SOLLA adviser. The payments are tax free when made directly to a care adviser. However, as far as I know, and unlike a pension annuity, you cannot buy these from a SIPP without extracting the money from it and paying any tax that results from this extraction. You are therefore probably condemned to using mostly your ISA capital for this. It may be that a combination of an impaired life (pension) annuity from the SIPP and an immediate needs care annuity from the ISA is the optimum way forward. Again repeating ermine’s point, professional advice from a SOLLA adviser at this stage would be essential.
– You can achieve a certain amount of capital protection in case of early death in the care home by buying a deferred care needs annuity rather than an immediate one. My mother had this type of annuity, deferred for two years, and although she died after only eight months in the home and so did not come anywhere near getting her ‘money’s worth’ (except through peace of mind), the outlay on the deferred annuity was only half that for an immediate annuity. The cost of either, accounting for the extra self-funding outlay, is roughly equivalent if you survive the two years.
@Naeclue (#6):
I have long suspected such shenanigans may be rife, thanks (really!) for confirming my fears!
@DavidV, I agree that an immediate needs annuity is most likely the way to go. I have not tried to flesh out the details of our own plans, but we are expecting not to qualify for state help should we need care. On that basis, I was thinking of keeping a sufficient amount in our ISAs/Cash savings to buy immediate needs annuities, supplemented by payments from SIPPs. I would not like the idea of paying higher rate tax on my SIPP withdrawals, so I would make the ISA sufficient to pay for the immediate needs annuity, whilst keeping SIPP withdrawals within the basic rate tax band.
This only needs to work for the first of us that needs to go into a care home, since care for the second of us (or if we both go in together, as happened with my in-laws) can be funded by selling our home.
As I say, not fully fleshed out yet and maybe running done the ISAs at the expense of SIPPs and paying higher rate tax on SIPP withdrawals to fund care, should it be needed, might work out better in the end.
For a straightforward life expectancy calculation, purely an average but useful perhaps for those who feel fit and well and are not yet “in their dotage”, take a look at https://www.ons.gov.uk/peoplepopulationandcommunity/healthandsocialcare/healthandlifeexpectancies/articles/lifeexpectancycalculator/2019-06-07
@naeclue (11) Your plan seems sound to me. I would only suggest that you include deferred care needs annuities as well as immediate ones in your investigations. From my sole experience of my then 93-old mother, now deceased, who had a deferred care needs annuity, there seems to be no financial downside in event of longer than expected survival and a gradually decreasing element of capital preservation (for the heirs) in event of shorter than expected survival.
Didn’t Boris Johnson claimed he had “solved” the conundrum of paying for social care? About as true as most other things he says.
I think the bottom line seems to be that it is (a) complicated and (b) impossible to avoid paying the majority if you are a reader of this blog who has made provision for their retirement.
As @Brod points out, there is also NHS Continuing Care if you qualify for it. I got some experience of this, being the main family interface when my father-in-law needed care (also Lewy Body Disease). With a lot of digging around I was able to identify the criteria they assessed against, and present the assessing social worker with evidence on each. Whether it was due to me or not, he got it – though things went downhill and he died six months or so later. I do cynically wonder if the real illness criterion isn’t a short life expectancy.
Thanks @TA for all your work on this series.
@Jonathan B, I had a relative on NHS Continuing Care. She was only expected to live about 3 months, but she got better! After a year, the NHS said they wanted to reassess, but she died before that happened.
Thanks for considering the female perspective when drafting this series! I suspect the order of likelihood for ending up in a home goes something like 1)single/widowed woman 2) single/widowed man 3) married woman 4) married man. Because women live longer, and single people don’t get free care. But I’ve also read that the male/female life expectancy gap has closed a little. The problem is also that if – male or female – you spend time caring for other family members instead of earning, your own ability to save for old age can take a hit. Often at time (mid-late career) when the modellers expect you to be adding to the pot.
I’ve always been a bit bemused by the inheritance arguments that surround this theme. I can see why it’s relevant, but wanting to leave stuff to the kids is surely not the only reason for pooling risk?
For example, I accept that someone goes into a home, their own house, if unoccoupied, might be sold to pay for it. Just as if you had sold your house and moved into rented. And I don’t think offspring have a “right” to an inheritance at the taxpayer’s expense. However, some houses (outside the SE!) are not actually worth that much, so there is still the risk of “running out”. And the issue then is not just will the local authority step in, but where will they put you if they do? What sort of care are you getting for these eye-watering sums? Are the fees reasonable, given the costs to the care home? And if you don’t have relatives/friends able to check on you, how will you be treated behind closed doors?
The point of insurance would be like with any other insurance. You’d want to insure for decent quality care and tackle a risk of catastrophic costs that you may or may not need to pay. Not necessarily to do with kids. After all, we have tax-funded healthcare, and nobody says, “this is about parents who get expensive illnesses trying to protect the kids’ inheritance”.
Perhaps – if people are concerned about taxpayers’ funding inheritances – the insurance could be optional. I think in some countries there is a mix of compulsory/optional top-up insurance for old age care.
@ Haphazard there was some thought that the government action to cap care costs would help make this market insurable ahead of time. The problem with insurability was the modest but not low risk and the wide variation in costs if the risk showed up. The government cap would made the variation in costs bounded at the upper limit.
> Are the fees reasonable, given the costs to the care home?
I didn’t feel they were outrageous. The really high costs tend to be associated with medical complications needing a high level of intervention at random times. There is a sliding scale from assisted living/sheltered housing which isn’t that expensive at all all the way to the care with medical assistance, but in practice people aren’t users of the latter for many years. Even a non-SE house would probably do the heavy lifting…
> how will you be treated behind closed doors?
I saw two facilities. One was sheltered housing, which in my view was not enough for my mother’s needs and I said to her that while I respect her desire for self-determination it would not be enough in the long run. But she did get a couple of years out of that, by buying extra care assistance. The other was residential care, not quite nursing but almost. In neither of these did I observe anything that troubled me, and the atmosphere was good, indeed better than some places I have worked 😉 But clearly as a self-funder these were not local authority places. Towards the end the care home was sold to a private concern, and I would say that things were starting to slide in terms of facilities and activities, though Covid happened at the same sort of time and really didn’t make running a care home easy, how the hell they kept it out still beats me.
I know two people who have worked in (different) care homes. The work is poorly paid. One says she didn’t mind the work, which had its own peculiar reward in that you could make a difference, it was the management that she couldn’t stand and left for that reason.
Maybe I have spent too much time on the moneysavingexpert forums, where I have seen far too many people get into a right huff when they are introduced to the concept of ‘deprivation of assets’ applied to their creative schemes to make the taxpayer pick up the tab for parents’ care costs so it can protect their inheritance. It makes a fellow cynical about the human condition in general and the lack of integrity combined with blatant avarice in particular. Then there’s the Tory press chelping on about death taxes. FFS, absolutely nobody pays tax when they are dead, exactly what are the bailiffs going to do, knock on the coffin? It’s the beneficiaries who pay the tax, not the dead. It is slightly depressing to do the SA tax return for someone who is dead, but HMRC seem to want to simply see evidence of the effort being made. I screwed up by not attaching a couple of pages when I sent the form, but it was supporting info, it didn’t change the numbers and HMRC haven’t chased me for it and it’s been a while. Either way they aren’t going to be troubling my mother!
One thing that could be added to this from what I’ve seen on MSE is if you are going to get a retirement flat, rent it, since selling these seems to be a protracted affair and the inheritors of the estate are often most distressed at the valuations they realise – it’s a buyers’ market. They also get to pay service charges and the ilk while they look a buyer, though an empty flat needs no personal care…
@Jonathan B (14) Naeclue (15) I think my late mother may be the ultimate example for short life expectancy being the criterion for qualifying for NHS Continuing Care. She had been admitted to hospital from her care home and after about two weeks the consultant told me her condition was terminal and that it would be best for her to return to the care home for end-of-life care. It took two days for this to happen while oxygen and an appropriate bed was installed in her room. In the meantime the hospital and care home, without any intervention by me, had arranged for Continuing Care funding for her final days. (I think the care home administrator did get me to confirm some details over the phone before final approval.) The Continuing Care funding was in place by the time she returned to the care home where she survived for just two more days.
A good way of getting your head around immediate needs annuities is to read the common application form used by IFAs for the major providers, available at https://www.aviva.co.uk/adviser/documents/view/cfpqc.pdf
With two providers, you can both increase at RPI and allow 75% of the premium to be paid to beneficiaries on death for example.
@Alex (19) It is encouraging that there are now four providers of care needs annuities. In June 2018 there were only two – Aviva and Partnership (the predecessor of Just, I believe). For my mother the cheaper quote for all options explored was from Aviva.
Thanks to Ermine and others for the recounts of personal experience.
I’m about to go through some of this with regard to my parents. Not care home costs for now, thank goodness. But it’s a real eye-opener on what to look out for.
Perhaps the answer with regard to quality is to offer to volunteer for your local care home. That way, you can see for yourself how it is run…
Just a small thing but care home fees can vary considerably depending on where it is in the country. London and Edinburgh for example, are expensive. My mum went into a care home in Falkirk, a bit cheaper than Edinburgh, but the fees were still £4k a month. I’m not sure amen immediate needs annuity can cope with that level of fee. In the end, my mum passed away 2 years into her stay.
@ David V and Ermine – As I understand it, David, you’re correct. You can’t just buy an immediate needs annuity with funds *inside* your pension as you would a pension annuity. Which would mean a daunting tax hit getting the funds out.
That raises two important points about the case study: the complexity meant I wasn’t hoping to get a perfect solution. This isn’t advice. My aim is to illustrate the issues that need thinking about using my finances as an example. Hence I referred to immediate needs annuities as a good option to explore but ran out of time to dive into the detail for this article.
I suspect, if I ran the numbers again, I should probably buy an immediate needs annuity with my ISA funds at the outset plus get the pension annuity using the bulk of my SIPP. Especially as the council can assess me as drawing an annuity-level income from my SIPP even if I’m not.
More importantly, Ermine, I think you’re spot on when you say this is one moment in life when you should definitely seek professional financial advice. That point screamed out at me when I finished the post but I don’t think I made it forcefully enough in the copy.
A side-point, is those annuity rates suggest that anyone mostly existing on SIPP funds, should almost certainly think about annuitising at least some of it late in life. I can get a much better deal that way than hobbling along with a 3-4% SWR or whatever in my dotage. As you both pointed out, I probably undercooked the potential income by not getting into the enhanced / impaired life annuity weeds.
@ Naeclue – re: 50% pension income disregard. See:
https://www.gov.uk/government/publications/care-act-statutory-guidance/care-and-support-statutory-guidance
Annex C
Para 46:
(b) Where a person is paying half their occupational or personal pension or retirement annuity to a spouse or civil partner who is not living in the same care home, the local authority must disregard this money. This does not automatically apply to unmarried couples although the local authority may wish to exercise its discretion in individual cases.
@ All – Thanks to all for the support and encouragement. This is probably the longest, most convoluted post I’ve ever written, so thank you for hanging in there.
@Tammer (22) You have to apply virtually every penny of existing income, ensuring that Attendance Allowance has also been claimed, to the care home fees. The care needs annuity is then used to fund the shortfall. For most people this will, inevitably, be from part or maybe all of the proceeds of the house sale.
I keep banging on about this, but anyone following this path should investigate a deferred care needs annuity rather than an immediate care needs annuity. In my mother’s case this was half the cost of the immediate annuity (two year deferment), and as she died only eight months into her stay, some of the saved outlay was still left for her estate.
How much is Dignitas? I hope that when I reach that stage in life that euthanasia is legal in the U.K. I’d rather be dead than in a care home, and think individuals should be allowed to choose.
@ David V – Just mulling over your exhortation to buy a deferred care needs annuity. In the case study, I could have made my ISA funds stretch further by buying a two year deferred annuity as you suggest.
Effectively, that makes my excess capital / tariff income problem disappear. I can’t access the income for 2 years but am then likely to qualify for state support immediately.
If it’s not counted as deprivation of assets then this option looks like an excellent use of my ISA funds, especially if I can buy capital protection as you note.
Buying this type of annuity after you know you’re going to live in a care home surely can’t count as deprivation of assets. Otherwise the product would be useless. Did you come across this issue at all when acting on behalf of your mum?
OK, so instead of this approach of taking out your full 25% tax-free lump to move into ISA wrapper
“£12,000 @ 4% withdrawal rate from £300,000 pension pot.
£4,000 @ 4% withdrawal rate from £100,000 stocks and shares ISA.”
Can you not use UFPLS withdrawals instead, so only crystallising say £16,000-16,800 annually with around £4000 of that being 25% tax free lump sums and only 12,000-12,800 taxable income?
Seems to be just as tax efficient, unless hitting the pension LTA is a concern?
> “If this same level of ‘protection’ applied to birth control, I’d be a father of five by now”.
Show off 🙂
@TA (26) When I was acting on behalf of my mother, it was of course under the existing rules. The amount of care fees income she was was purchasing for two years hence was above the £23,250(?) income limit for local authority support, so the financial adviser warned us that she would never qualify for this no matter how much her capital depleted. I assume that the social care cap under the proposed new rules will ensure that some support is eventually available.
With a deferred annuity you are not actually buying capital protection. It is just that with only 50% of the outlay that would be needed compared to the immediate annuity, you are retaining the other 50%. You are, of course, then spending this on care fees until the annuity starts paying but, in the event of early death – as with my mother, the unspent portion of that retained 50% is left for the estate.
The quotes we got for immediate care needs annuities did include capital protection but, I seem to remember, it was relatively limited – only six months I recall. So, as my mother died after eight months in the care home, and seven months after the annuity purchase, her estate would not have benefitted. The adviser’s report said the deferred annuity was the better option if capital protection in event of early death was a consideration. When I made the decision to go for this the adviser told me informally over the phone that only a very small proportion (I think she said 5%) went for the deferred option although she agreed that I had made the best choice. I can’t imagine that this was a biased remark as my choice would have halved her commission on the annuity sale (we had paid for the report separately)!
As I have mentioned earlier, had my mother survived the full two years until the deferred annuity started paying, the decision between an immediate or deferred annuity would have been cost neutral within two or three hundred pounds.
I think both annuity types did include one month capital protection for no additional cost, but only the immediate annuity was offered with options for longer, although still limited, protection.
@TA Oh, I forgot, I think the capital protection that was offered as an option with the immediate annuity gradually reduced over the six months, so it was even more unattractive compared to the deferred annuity.
@TA Sorry, I confused myself in my comment (29) and I have referred back to the adviser’s report. £23,250 is of course the capital limit, not the income limit, for local authority funding. But the point remains, the annuity income even though paid directly to the care home would be assessed as your income. So, under the current rules, when added to your other income would likely exceed the local authority standard contribution rate and therefore exclude you from further support.
@ David V – It makes sense that protection options would be attenuated but still looks like a good option to investigate versus burning off ISA capital in two years.
People react against annuities on an emotional level and deferred annuities look intuitively less appealing still. I’d guess they embed a rationality premium for anyone prepared to think it through.
Thank you for taking the time on this. Your insight might well prove invaluable if our parents need help making these decisions.
@ SemiPassive – that’s definitely worth considering. Must admit I’ve always assumed I’d put the lot in the ISA in order to diversify my tax shelters against regressive government action. Guess I’d need to think about:
Potential LTA issues as you suggest, and the chance the rules worsen.
ISA vs SIPP inheritance tax issues. Not a biggie for us as we don’t have kids.
Advantage of annuitising that capital later if left in SIPP.
Advantage of immediate / deferred care annuity options in social care scenarios.
Where’s Al Cam when you need him?