Why you must make plans now for care costs in later life: Sarah Coles

We also have to deal with the consequences of everyone else getting older around us. The government has responded to longer lives by raising the state pension age, and is expected to keep doing so. At the moment, anyone born on or after 6 April 1977 will have to work to the age of 68, and there’s still the chance that date could be brought forward, which means there will be some people who may not be able to work until the day they get their state pension.

Women have longer average lives, and still make up more than half of those over the age of 100. However, it doesn’t mean men are off the hook for this planning, because they’re living longer than ever. Twenty years ago, there were 8.2 women over 100 to every man: now it’s 4.5.

It means we need to prepare as much as we can for our later life, ensuring our income doesn’t run out before we’re ready for it, and that we can cover the cost of any care we need.

Paying for care is fiendishly expensive, and in England it will usually be up to you to cover at least some of the cost, until you’ve spent almost everything, and have assets of less than £23,250. This may not include the family home if you’re still living in it, or if your spouse, partner or any relative over the age of 60 is living there. However, it may include the value of your property, so you may need to pay for care throughout.

Governments have pledged to tackle the cost of care, but it’s such a political hot potato that it may be safest to assume that there will be no structural political solution – you’ll need to consider how to cover the cost yourself.

You can put aside a pot of money in savings or investments, and ringfence them for care needs. The problem is that to cover all the costs, this pot needs to be sizeable, and there’s a chance you’ll never need it.

One useful option is to use the money in a defined contribution pension. If you use drawdown, and just take the income produced by your investments, you will leave the capital invested. This means you could approach the end of retirement with substantial sums in your pension that can be used for care if you need it. And if you never need care, you may be able to leave whatever is in your pension to your family without paying inheritance tax. One added advantage of this approach is that if you’re saving into a workplace pension, your employer is helping to build the pot too.

Often the value of your property will need to be used in some way. Some people will rent the family home out to cover fees, although this is risky because rental income is not guaranteed, and will be depleted by tax, maintenance and repairs. You can consider equity release to free up some of the capital, but this is expensive. There will be a set up cost, and usually any interest on the loan will roll up, and needs to repaid when the property is sold. The longer you live, the more the interest will cost.

There’s also the option of a deferred payment arrangement with the local council. The council adds up the care fees, plus a set-up fee and any interest. After your death, your family can sell the house and repay the debt. Councils tend to charge less interest than equity release companies. However, for many people, under the current system, the most sensible option ends up being to sell the family home. This can be a horrible emotional wrench, but it can also remove the stress and expense of keeping the property when nobody is living in it.

If you want to use your pension as a care savings tool, it’s vital to check you’re on track to save what you need. The first step is to work out where you are, using a pension calculator. Then you can see how much you need to pay in to meet your retirement goals. If you can’t afford to boost your contributions right now, then you can pledge to do so as soon as you get a pay rise, before you have time to get used to the extra cash.

There will also be decisions to make when you get closer to retirement. It can help to break it up into phases. In the early years, you may want to work part-time to supplement money drawn from your pension. Once you stop work altogether, you may want some guaranteed income to cover the essentials - through things like the state pension, defined benefit pensions or annuities. You don’t need to buy an annuity with the whole pot from day one, you can just cover the income you need at that time. For expenses beyond the basics, you might want to draw from your pension pot.

If you only take the income generated by your pension at this stage, you won’t risk running out of cash if you live longer than expected. As you get older (and possibly sicker), you’ll qualify for higher annuity rates, and you may want to guarantee more of your income. Alternatively, you may want to leave a sum in case you need care later in life. Both are sensible options, it will just depend on your priorities.

Worrying about care costs and running out of cash can take the shine off living to 100, but while we can’t guarantee how long we’ll live, or whether we’ll stay in good health, we can take the steps we need to ensure that whatever happens, we have something to fall back on.

The toll winter takes

Almost a fifth of people were struggling to keep warm at home at the end of 2023, while 1 in 25 ran out of food before they could afford to buy more. This is horrendous in itself, but also poses real health risks. Some 14% said cutting energy use affected their physical health, 6% said cutting back on food did and 3% said not being able to pay the rent or mortgage did too.

There’s a real risk this traps them in a negative spiral, because the HL Savings & Resilience Barometer shows that people who are in poor health are more likely to be in financial trouble. Fewer than one in four have enough emergency savings, only one in eight have enough cash left over at the end of the month, and they’re half as likely to be on track with their pension as someone in good health. This means they’re more likely to have to try even more extreme cost-cutting measures, which in turn is going to take more of a toll on their health.