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Funding long term care

Equity release is predicted to play a greater role in people’s retirement and long term care planning. Long term care is still one of the great unknowns - and taboos - of growing old.

The recent Equity Release Council figures which showed that lending in the second quarter of 2015 - at £384.3m - was the largest of any quarter since 2002, prompted me to share some research we recently undertook with YouGov. The survey of around 1,600 people aged 50-75 showed that while equity release was predicted to play a greater in people’s retirement and long term care planning, long term care is still one of the great unknowns of growing old.

We Brits famously don’t like to talk about death and, similarly, it would seem that we also don’t like to think about how and where we might spend our later days.

The survey I referred to, for our forthcoming Redefining Retirement report, asked people aged 50-75 about their provision for long term care and while initially the responses were positive – 30% of people suggest they will have some savings set aside for their long term care - only 1% had a care plan in place, and 2% have, or plan to have, long term care insurance. A massive 46% haven’t thought about their long term care needs. 8% have no intention of thinking about it at all.

As the Government has delayed the implementation of its pre-election plan to introduce a cap on the amount an individual will have to pay towards their long term care costs until 2020 (back from its original implementation date of 2016), not thinking about it is not really an option for many.

With nearly half of those aged 65 or over having care needs, putting the introduction of a cap into the long grass for 5 years, possibly never to be seen again, will have implications for those who are not eligible for state support and need to source the funds required from their own assets.

Advisers and clients must address the potential need to meet long term care costs and come up with a plan accordingly.

As property is very often the biggest asset that people hold, it makes some sense to look at how that, as an asset, could be used to help pay for a person’s care costs. Housing assets are taken into account in the current system. If you have more than £23,250 in assets (figures differ slightly in Scotland and Wales) you will be responsible for your own care costs. However if you receive care in your own home, property assets are not considered in the calculation. As soon as you move into a care home then your home is included and can be used to cover costs.

In the same survey, we asked whether people would be interested in releasing value from their home and of those who would, 34% said they would do so in order to pay for their long term care.

Equity release, which seems to be increasing in popularity among older homeowners, is one avenue that can be explored as a means of funding care costs. It is already increasing in its use as a source of delivering income in retirement of which care costs would be part. It seems a logical step that people should start to consider how they access the value of their property when they are able, in order to put something aside and form a plan for later in life when they may have a requirement for care outside their home and when they may not have the luxury of time to plan.

One of the reasons people gave for not wanting to release equity was that they didn’t want anyone else having an interest in their home. This brings me to the other, rather more straightforward, method of releasing value from a house – downsizing. Moving to a smaller home ahead of any care costs being incurred is another way to release value from any property asset, allowing the released capital to be invested to  provide for future long term care. This whole aspect has well-documented emotional issues attached to it.

But given the concerning level of engagement with long term care planning as a whole, we have also recently called for regulatory change to allow people to use their pension savings to pay for the cost of care.  Even for funds held to provide income withdrawals a capped amount, in line with the personal allowance, should be permitted to be paid to a care provider tax free to assist with the funding needs, effectively providing individuals in this position with a second personal allowance.

As the public become more aware of care costs they may be willing to put more into their pension to help meet the needs of later life - of which care, for many, will be a major part. During decumulation others may be more frugal , reducing their shorter term income needs to ensure they have enough remaining to help with care costs. 

In simple terms, whether it’s property or pensions, advisers and clients need to start getting their heads together to address the issue of long term care as it is not going to go away.

This article first appeared on professionaladviser.com

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