How Can I Fund Care Fees For My Parents?
As our parents enter later life the need to ensure they can live a comfortable, happy life becomes paramount. This can create a very stressful time for them because all of a sudden they find themselves dependent upon others and also for their children who now see their parents vulnerable, perhaps for the first time, and are having to ensure the cost of any care is covered.
The cost of care is extremely expensive; over £70,000 pa for some care homes. Finding this capital can create some very difficult decisions. This article aims to act as a guide for those decisions.
Establish a Power of Attorney
I have covered the importance of having a Power of Attorney previously but, in summary, it is imperative one is established before it is too late. That is, while the donor (your parents) have the mental and physical capacity to understand and sign a legal document. Doing so will give you authority to act and make decisions regarding their financial affairs and health and well being. Not doing so can cause delays and decisions being made that are beyond your or their control.
Review Net Worth and Income
Once you have authority to obtain their financial information you will need to understand the value of the assets they have and the income they are receiving. Assets will include their home, savings and investments and you will need to determine their values, interest rates, investment risk they are exposed to and accessibility; do savings accounts not mature for some time for example?
The income they are in receipt of will, typically, include investment income and pension income; State pensions, Occupational pensions and private pensions. Pension income may change on the death of either parent.
Understand the cost of care
The cost of care will vary depending on the nature of the care needed; in home, respite or residential (nursing and/or social) and the part of the country in which they live. The cost of care will also vary from care home to care home depending on the quality and comfort of the home.
Additionally, the annual increase in the cost of care can be much higher than the average cost of prices in the UK as measured by RPI so it is worth finding out what the increases have been over recent years and factor that into your decision making.
Apply for appropriate State benefits
As well as State pension and widow’s pension there are other State benefits can be applied for. The main one being Attendance Allowance which is a tax free benefit payable from 65 for those who have a physical or mental disability. There are two tiers of payment; the lower rate currently being £49.30 a week and the higher rate £73.60 a week.
If you or a member of your family are caring for your parents they may also qualify for carer’s allowance at £55.55 a week, or part thereof depending on other State entitlements.
If the value of your parents’ assets is below £23,250 and their income is not sufficient to cover the cost of the care home Local Authority funding can be applied for. A successful application will see the difference between the weekly income being received and the weekly cost of care being covered. A word of warning though, there is little control on where your parents may be placed if the Local Authority is picking up the bill and it is not sensible to gift away assets to reduce their wealth to below the threshold; Local Authorities have the authority to count assets ‘deliberately deprived’ from their wealth as being owned.
Research funding options
Once you have established the value of their assets you can research into how they can be used to meet the cost of a care fees shortfall. There are four main options each with advantages and disadvantages:
- Draw on capital - this will provide a known level of capital to meet fees but depending on the total of assets they may be quickly eroded leaving them out of money and facing the risk of moving to a lower standard home which a local authority is willing to pay for. Usually there is a property that can be sold but quick sales can result in lower valuations and delays while deals are transacted.
- Invest for income - by investing liquid capital for income it provides the opportunity for the value to grow whilst providing an income. The risks are that stockmarket crashes erode the value of assets and reduce the income that is received. This can be compounded by capital withdrawals expediting the erosion of capital in a falling market. Also, the value of investments needed to provide sufficient income is likely to be beyond the scope of many.
- Purchase a care fees annuity – care fees annuities provide a tax fee income that covers the cost of care. This removes any investment risk and uncertainty as they are guaranteed to pay for the remainder of the annuitant’s life. However, they are expensive and are of little value if the annuitant dies shortly after purchase. While this can be mitigated through capital protection options it does further increase the purchase price.
- A combination - it is often the case that a combination of the three are decided upon. A care fees annuity can provide a guaranteed level of income supported by secure savings while surplus income is invested to provide the opportunity for capital growth to support future income.
- Equity Release - where a home can’t be sold, perhaps due to a spouse or dependent living in it other options are available. Firstly, local authorities will disregard it as an asset during an assement so local authority funding may be possible. Where this is not the case giving up part ownership in the home via an equity release contract can provide a source of income. Care should be taken however because they can be costly and the disadvantage of giving up equity in a home rarely is outweighed by the benefit of receiving capital.
The sooner care fees can be planned for the less stressful it will be for all parties and the more likely the parent(s) needing care can have the cost of care fees met without taking too many risks at a time of life when recovering losses through bad decision making advice may be impossible. If you are in any doubt it is imperative you speak to a CF8 qualified adviser.
If you would like to receive advice regarding care fees for someone click here.
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