The prospect of substantial care bills is a significant concern for older individuals planning their retirement and considering how to pass on wealth, according to financial experts. In England, individuals requiring residential care may see their assets, including their homes, depleted to as little as £23,250 before state assistance with fees becomes available.
For those needing care at home, the asset threshold before local council support is engaged cannot drop below £23,250, though the primary residence is excluded from this means test. This financial landscape has led to calls for reform, with political figures like Andy Burnham, whose father has Alzheimer's and resides in a care home, vowing to address the adult social care system.
Burnham previously supported plans for a national care service in 2010, but these were met with opposition over funding concerns. Subsequent government efforts to establish spending caps for care costs have not yielded solutions. A new initiative by Burnham is anticipated to be a lengthy process involving difficult funding debates.
A survey by Mattioli Woods revealed that individuals over 55 prioritize paying for care as their foremost financial anxiety when thinking about their legacy, surpassing concerns about inheritance tax or depleting retirement funds. Yasin Patel, wealth management director at Mattioli Woods, noted that as people live longer and care costs rise, the worry about funding later-life care intensifies. He added that while maintaining financial independence in retirement is a common priority, it can sometimes overshadow inheritance tax planning.
Kate Shaw, director and chartered financial planner at FLP Financial Life Planning, stated that care costs are now integral to retirement planning. The question for many has evolved from simply having enough for retirement to potentially needing sufficient funds for care as well.
Financial considerations for care vary across the United Kingdom. England has the £23,250 asset floor for residential care support. Scotland provides free personal care, while Wales has a means-tested system for non-residential care that can cost up to £100 per week. Northern Ireland operates under its own distinct regulations.
While the NHS may fund care based on health needs through its continuing healthcare assessment process, this can be complex. Families may be able to avoid selling their homes if a spouse or certain other individuals, such as relatives under 60 or over 18, continue to reside there. However, financial advisors caution against gifting assets, including property, to avoid care fees, as this can be classified as deliberate deprivation of assets. Local authorities have the power to assess such gifted assets as if they were still in the owner's possession, regardless of when they were transferred.
Experts advise early conversations with family members about potential care needs and preferences, as planning becomes more challenging once a care requirement arises. Personalized cash flow forecasts can help individuals understand affordability and gain confidence in using their wealth. Some opt for immediate needs annuities, also known as care annuities, which provide a guaranteed income for life to cover care costs, often purchased by family members acting under a power of attorney. These annuities offer tax-free income paid directly to care providers.
Patrick Haines, partner and chartered financial planner at Partners Wealth Management, highlighted that care homes are often preceded by in-home care. He reiterated the importance of avoiding the "deliberate deprivation of assets" rules when selling or renting a main residence to fund care. Once care costs are managed, various strategies can help reduce future inheritance tax liability, such as gifting from surplus income, outright gifts that fall outside the estate after seven years, trusts, and Business Relief investments.
Inheritance Tax Considerations
Pensions are set to become subject to inheritance tax from spring 2027, potentially increasing the number of estates liable for the 40% levy. The current inheritance tax thresholds include a nil rate band of £325,000 for individuals or £650,000 for couples, with an additional residence nil rate band of £175,000 per person if a home is passed to direct descendants, creating a potential £1 million tax-free allowance for couples. These thresholds are frozen until 2031. Strategies to potentially reduce inheritance tax include making gifts from surplus income, outright gifts that can fall outside the estate after seven years, utilizing certain trusts, qualifying Business Relief investments, and life assurance in trust to cover tax liabilities.