Please note this case study is not based on real life events and is intended to show how care can be paid for in a specific scenario. Before such a transaction is entered into we would recommend that advice is taken from a suitably qualified Independent Financial Adviser.
Linda is 80, having been married for over 40 years, she was unfortunately widowed five years ago, but lives happily in a small flat in Poole.
Both Linda and her late husband had excellent jobs and as a result have been able to build up large assets, including a flat worth £500,000, plus savings of a further £650,000.
Linda has a State Pension and receives £6,300 per year; in addition she gets a private pension of £12,000 per year, paid by her former employer. Both of these figures are after income tax has been deducted.
Linda has two children, who have long since ‘flown the nest’ and are now making their own way in the world.
A couple of years ago Linda had a stroke. Whilst she has tried to live at home, using a combination of family, friends and a visiting nurse to care for her, she has become increasingly frail. It has now become clear she needs more specialist, round the clock, care.
Following her husband’s death Linda made a Will and put in place a suitable Power of Attorney. However she is still concerned about how she will pay for her care fees, which she estimates to be about £40,000 per year (Source: www.investmentsense.co.uk/long-term-care-fees-calculator). Especially as she will receive no help from the Local Authority as her assets are well above the upper limit where support is provided.
Linda’s children are very clear that she is to receive the best possible care and have identified the home where they would like her to live.
Linda however, is also keen that she arranges her financial affairs as efficiently as possible, so that the maximum amount of money is left to her children, despite the fact they are no longer financially dependent.
Linda has calculated that in addition to the £40,000 care fees, she will need an extra £3,000 per year to pay for personal items and buy her children birthday and Christmas presents.
To help provide some much needed clarity, Linda arranges a meeting between herself, her children and her existing Independent Financial Adviser (IFA) to decide on how best to arrange her finances.
At the start of the meeting Linda’s IFA confirms her suspicions; she will receive no help from the Local Authority. Although, she might be entitled to Attendance Allowance, which could give her between £55.65 and £83.10 per week.
Linda’s IFA confirms her requirement of £43,000 per year and explains that £18,300 will of course be provided by the existing pensions, both of which are index linked. The shortfall is therefore £24,700 per year.
Linda’s IFA then talks her through the options she has with the property, namely to sell or rent it out. Linda has already decided that she will sell the property, as she doesn’t want the headache of becoming a landlord. Assuming the property sold for its current value, and after allowing for costs, the IFA suggests the sale should realise approximately £480,000, giving Linda total assets of £1,113,000, with which to meet the income shortfall of £24,700.
Linda’s IFA explains that she has two main options:
- Investing the £1,113,000 and using some of the interest or income it creates to pay for the cost of care
- Buy an Immediate Needs Annuity, also known as a Care Fees Plan or Care Fees Annuity, which the IFA estimates will cost approximately £176,000
The four of them discuss the pros and cons of each option and decide the Immediate Needs Annuity is more appropriate, because:
- Linda doesn’t want to expose her capital to risk and would prefer to hold it all in cash deposits, rather than invest it in assets which could fluctuate in value
- As interest rates are so low Linda’s IFA explains she is unlikely to generate a sufficient gross return, i.e. before tax, from savings accounts, to provide enough income to meet the care fees
- Using an Immediate Needs Annuity is a relatively simple solution, which can build in annual increases to cover the cost of any rise in fees. It also guarantees to pay an income for as long as she lives
- The income from the Immediate Needs Annuity will be paid directly to the care home and will therefore be free from Income Tax
- Linda is happy that there will be sufficient capital left to leave to her children when she ultimately dies
It is also agreed that Linda’s IFA will review her existing savings to ensure she is receiving as much interest as possible and she is taking advantage of every possible tax-efficient option, such as Cash ISAs and certain National Savings & Investments products.
Finally, Linda agrees to meet again with her IFA, once the house has been sold and the Immediate Needs Annuity has been bought, to discuss ways of reducing her Inheritance Tax liability.
What has been achieved?
Following the advice from her IFA, a number of things have been achieved:
- Barring any unexpectedly large rise in the cost of care, Linda’s care fees are guaranteed to be met between now and her death giving her much needed, and very valuable, peace of mind
- Her children will still inherit the majority of her estate, subject of course to any Inheritance Tax due
- Linda’s savings have not been exposed to the risks associated with stock marketing investing, which make Linda nervous