Money Pit Stop: How do I cover potential care costs and leave inheritance


Janet Brookes wants to make her  wealth stretch to cover potential care costs  and to build an ample inheritance package

Janet Brookes wants to make her  wealth stretch to cover potential care costs  and to build an ample inheritance package

Janet Brookes wants to make her wealth stretch to cover potential care costs and to build an ample inheritance package

In our series Money Pit Stop, we ask an investing expert to give our readers a free portfolio makeover. 

Freelance NHS radiographer Janet Brookes, 71, wants to make her accumulated wealth stretch to cover potential care costs in later life.

She also hopes to leave money as well as her mortgage-free home, valued at £260,000, to her two children and four grandchildren.

Janet is in good health at present. Her freelance work is through a radiography firm – which she runs as a sole trader. The company has £80,000 in savings. 

She works part-time, earning £10,000 a year, but she aims to retire within the next two years.

Janet is also eligible for a state pension paying £150 a week, but she suspended the payments two years ago. She plans on reclaiming them once she calls time on her career.

Janet’s total yearly income is £25,000. This is comprised of a NHS final salary pension which pays £15,000 a year and the £10,000 from her freelance role. 

Her total yearly outgoings are £20,000, which includes general living costs as well as expenditure for running a car and even holidays.

This leaves Janet with around £5,000 in surplus cash. This will drop once she retires but her state pension should lift her income up back up to £22,800 – leaving her with a surplus of £2,800 as well as savings and investments to fall back on.

But is this enough to achieve her aims? We ask a chartered financial adviser. 

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Janet’s savings and investments

Risk appetite: Low to medium

Savings: Janet’s total cash savings amount to £99,500. This is comprised of £17,500 in an NS&I savings and investments account, £2,000 in a Post Office savings account and £80,000 in a business account.

Shares, funds, trusts and ETFs: Janet has £50,000 in a HSBC stocks and shares Isa and 178 shares in Centrica which are worth around £249 (at the time of writing). The total value of her investments is £50,249.

Pension: Janet has a final salary NHS pension which pays her £15,000 a year. She suspended her £150 per week state pension payments in 2016. She plans to reclaim them once she retires.

Janet also has a defined contribution pot with Royal London, worth £50,000 and another with Abbey Life (which is now part of fellow life assurer the Phoenix Group) worth £18,000. She contributes £100 into the Abbey Life account each month.

Property and mortgages: Janet’s home is worth £260,000. There is no mortgage on the property.

Martin Bamford is managing director of financial advisory firm Informed Choice. He is also a chartered financial planner and a SOLLA accredited later life adviser.  

Martin Bamford, adviser, Informed Choice

Martin Bamford, adviser, Informed Choice

Martin Bamford, adviser, Informed Choice

Janet has a common financial objective which we hear from many people in retirement. However, wanting to leave your home to children or grandchildren whilst making sufficient provision for your own financial needs can be a difficult balancing act.

When it comes to covering future care costs, the financial implications can be very difficult to forecast. 

We don’t all need to move into a residential care home as we get older, or even to pay for additional care in our own homes. But when care is needed, it can be very expensive and lasts for an unpredictable length of time.

Starting with the here and now, Janet is in a comfortable financial position with her income comfortably exceeding her outgoings. 

At the time she chooses to stop working as a part-time radiographer, she will be able to claim her deferred state pension, resulting in only a modest fall in income, with total pension income still exceeding what she spends each year.

We often caution our clients when it comes to deferring state pension income. While it means you receive higher payments when you do claim, it is still difficult to recover the full amount for the period you deferred in real terms.

For many people who are continuing to work in retirement, it can be better to claim the state pension when it becomes available, suffer the inevitable income tax and stash the money in savings for the future.

Despite the future unknowns around care costs, there are some important steps Janet can take today. 

Inheritance considerations 

Firstly, she should get her will updated so it reflects her current wishes. 

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Not having a will as you get older can be problematic should you lose mental capacity, as it requires an application to the Court of Protection to create a statutory will.

Secondly, Janet should put in place a lasting power of attorney, appointing an attorney (trusted friend or relative) to make important decisions on her behalf should she lose mental capacity in the future.

There are two types of lasting power of attorney, both of which Janet should consider putting in place. 

One covers health and welfare decisions, with the other covering property and financial affairs. Once written, these legal documents are only put to use should she lose her mental capacity in the future.

What Janet should avoid doing at this stage is giving away money to her children and grandchildren. 

She’s in good health, so any gifts would probably not be viewed by the local authority as ‘deliberate deprivation’ in order to avoid paying future care fees. However, until Janet knows whether she will need care and how much this will cost, it’s important to keep her options option.

Under current rules, people in England with eligible assets of more than £23,250 have to fully fund their own care costs

Under current rules, people in England with eligible assets of more than £23,250 have to fully fund their own care costs

Under current rules, people in England with eligible assets of more than £23,250 have to fully fund their own care costs

Another thing to avoid is the so-called asset protection trust. These trusts are often sold by unregulated will writers who claim they allow the buyer to protect assets from local authority means testing when they need care in the future.

But they are expensive to put in place and easily challenged by the local authority, which views them as an act of deliberate deprivation.

Thinking ahead to paying for care costs in the future, we await the publication of a Government green paper, hopefully in the summer, which we expect to set out new proposals for means testing and a lifetime cap on care costs.

However, for the moment people in England with eligible assets of more than £23,250 have to fully fund their own care costs.

The exception to this rule is where care is primarily medical, rather than social care, where non-means tested NHS funding can be available.

In the event that Janet needs residential care in the future, she has two main sets of assets on which to draw, in addition to her pension income. 

The average cost of a residential care home is £29,270 a year, rising to £39,300 a year if nursing care is required.

However, these averages vary a lot depending on where you live, with care homes in London and the South East often costing two or three times as much as the average.

Janet will need to use her savings, investments and potentially the value of her property to cover the shortfall between care costs and her income. 

There are several options for funding a care fees shortfall, ranging from simply keeping the money in cash savings and drawing it down, to buying an immediate care annuity. 

These products are individually underwritten based on your age, health and medical history, and guarantee an income for life which is tax-free when paid to a registered care provider.

As Janet lives with her husband but he doesn’t own a share of the property, its value would be disregarded from any local authority means testing if he continued to live there after she moved into residential care. 

This is because a property occupied by your spouse is disregarded from the means test. Such a disregard also applies where a relative who is over 60 lives in the property.

If Janet’s husband was no longer living in the property, one option she could explore is a deferred payment agreement with her local authority. 

This means she would not have to sell the home immediately, with the local authority paying towards her care home costs until she dies, at which time the property is sold to recover their costs.

However, she would not be eligible for a deferred payment agreement if anyone else continued living in a property once she became resident in a care home.

If Janet makes it to the end of her life without needing to draw on the value of her home to cover care costs, then inheritance tax becomes a consideration. 

Individuals receive a nil-rate band of £325,000 on which no inheritance tax is paid. 

An additional nil-rate band is gradually being phased in, which applies when a residence is passed on death to a direct descendant, such as a child or grandchild.

This additional nil-rate band is £125,000 in 2018/19, so when added to the £325,000 nil-rate band, Janet will be able to pass on £450,000 free of inheritance tax. 

This doesn’t quite cover her total value of her savings, investments and property, but it’s close and should be fully covered by the start of the 2019/20 tax year when the additional nil-rate band rises to £150,000.

Within her list of savings and investments, Janet has some assets which are likely to be free of inheritance tax when she dies.

Her Royal London private pension and Abbey Life private pension can both be passed to children or grandchildren tax-free, and the accumulated profit in her limited company should be subject to business property relief.

How to invest

In terms of an investment portfolio, I would suggest Janet keeps her current cash holdings of £17,500 with NS&I, £2,000 in Post Office savings and £80,000 accumulated profit in her limited company. 

We usually recommend an emergency fund equivalent to between three and six months worth of expenditure, but for older people this cash balance should be much higher, as there are fewer opportunities to replenish this from employment earnings.

The balance of her capital, which could be viewed as ringfenced to provide an inheritance if there is no unexpected care costs in later life, we would suggest along the lines of the portfolio below.

Overall, Janet appears to be in a good financial position and should be able to afford care fees if they occur in the later stages of her retirement. 

Bamford's suggested portfolio has the greatest weighting to Fidelity's UK Index fund P Acc (18 per cent). See also the table above for the percentage split

Bamford's suggested portfolio has the greatest weighting to Fidelity's UK Index fund P Acc (18 per cent). See also the table above for the percentage split

Bamford’s suggested portfolio has the greatest weighting to Fidelity’s UK Index fund P Acc (18 per cent). See also the table above for the percentage split

The information provided by our expert is for the purposes of this article and is not personal financial advice. If you are at all unsure of the suitability of an investment for your circumstances please seek advice.

Nothing in this response constitutes regulated financial advice. Published questions are sometimes edited for brevity or other reasons. 

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