People are living longer than ever before. The over 85 age group is expected to double by 2030. It’s likely that most people will live just as long in their retirement as they did when they were working and for many this means they will eat into their savings to supplement their income. Leaving an inheritance for the family is one of the dreams that many people have but it can be heart-breaking to find that the family wealth can disappear so quickly when paying for long-term care.
As the population ages, one in four individuals will require support in old age. According to care adviser The Wealth Care Partnership some individuals, especially those that need to pay for their care, will outlive their capital. Pensions and savings will meet some bills, but advisers warn most people will face a funding shortfall of £20,000 or £30,000 a year.
- Take the case of 'John’. He worked hard all his life, saved regularly and aimed to have his mortgage paid off by retirement. He expected to live ‘comfortably’ on his savings income, which would have grown steadily, plus a pension that was part of his employment package. The value of the property was earmarked for the children to inherit. John saw no need for professional financial advice; it was all settled.
Until recently, this plan worked for most people. Then two things changed: first a serious financial crisis in the UK and worldwide affected interest rates, thereby devaluing savings, and second, people started to live longer. At the same time as interest rates fell, and savings were yielding less income, people were beginning to realise that their careful savings would not fund the lifestyle they had planned.
Still, many people saw no need to worry. The possibility of using Equity Release was always there, making part of the value of someone’s house available for holidays, home improvements and, ultimately, perhaps some kind of care. All that was needed was a chat with friends at the golf club, a couple of phone calls, and someone from a provider, in all likelihood one of the major insurers, would come round to the house, explain it all, and provide all the necessary paperwork to be signed.
- John was 75 when he took advantage of an equity release scheme and it seemed all his problems were over. He now had some capital available for whatever cropped up. He improved the house, bought a new car, and paid for a gardener. It had been made clear that the compound interest on the amount would continue to accrue until he died, but that didn’t seem like an insuperable obstacle, since most people didn’t live beyond about 80-85. John believed that the total amount of interest payable on death was manageable. Certainly, he had no need for professional financial advice.
It’s worth looking at some of the mechanics of equity release here. If we take an example of a couple where the man is aged 75 and the woman is aged 73, both in good health and are looking for a £95,000 lifetime mortgage from a home valued at £250,000, Aviva says it would charge them a fixed interest rate of 6.79%. Typically, the interest rates are higher than on a conventional mortgage. Using 6.79%. the £95,000 debt would grow to £131,940 after five years and have nearly doubled after ten to £183,244. Imagine if they lived to over 90!
- When John got to 80, he started to have some health problems. The house was adapted, therapy was prescribed, help was provided, but by the age of 85, he was unable to manage at home so started to look at residential care.
According to Partnership.co.uk, the cost of residential care is between £30,000 and £40,000 per annum, which does not take into take account additional costs such as clothing, personal items, trips and holidays, and gifts. The cost of residential care can also vary hugely by location.
- John is now facing a potential shortfall in the income he had so carefully planned for his retirement.
Tim Anstee, a director of The Wealth Care Partnership said: "People bury their heads in the sand, until they come face to face with the problem. Most of the people we see are in a state of total shock. They have just been hit between the eyes because mum or dad is going into a home and they suddenly have to find these enormous sums of money from nowhere."
The average care home stay lasts two years and this figure is increasing. The state will only help the poorest. Currently, in England, if your combined assets total more than £23,250, you must pay your own way.
Options for funding this gap are fiendishly complex. Choosing the wrong one can bleed families dry, destroying any hopes of passing wealth on to the next generation.
It is now essential to seek financial advice at an early stage, when measures can be put in place to plan for this kind of eventuality. A huge tranche of the population who thought they could manage their own finances, now need help to navigate the minefield of potential solutions.