Residential nursing care can be very expensive and it is sensible to make provision well in advance. The longer investments have to magnify, the less pressure on a family nearer to the time of need.
If £1,000 had been invested in the FTSE All-Share index of companies 30 years ago, a saver would have £14,734 today, according to Fidelity International.
The average care home including nursing costs £35,152 annually or £676 a week, according to the advice specialists Symponia. Yet some have significantly higher fees with £60,000 plus not unknown.
The rate is expected to increase by eight to 10 per cent this year, largely for auto-enrolment of pensions and the introduction of the national living wage.
The latter takes effect in April at £7.20 per hour for staff aged 25 years upwards.
Part of the problem in planning sufficient finance is the unknown period that the facility will be required.
Future allowances and the consequential financial demand are of course not known. Currently, anyone who has severe and multiple healthcare requirements is fully funded by the state regardless of their assets but the system is complicated.
For an individual who does not qualify for ‘continuing’ healthcare, care and residential expenses have to be self-funded until assets – including property – fall to £23,250 or less.
However, your home would be disregarded if it continues to be occupied by a partner or certain relatives.
Westminster suggested that a cap of £72,000 would be placed on care costs but such a decision has been postponed until 2020.
With the age for retirement falling and yet greater life expectancy, it is important that more money is set aside than was by previous generations. Today men and women retire at the average ages of 64.8 and 63.1 years by comparison with 67 and 64 for their grandfathers in the 1950s.
Like all long-term planning, make sure investments are made as tax-efficient as possible. This applies particularly to utilising the full Individual Savings Account (ISA), which this tax year is £15,240, and pension contributions.
Consider setting up a monthly savings plan to self-impose some money discipline. By investing regularly, volatility is greatly reduced and you are not trying to guess the best time to enter the stock market.
Rather than use an intermediary who has charges, go directly to a fund manager, many of whom offer schemes with no initial or annual fees. This applies to both funds which are closed-ended (investment trusts) and open-ended (like unit trusts).
If investing for 10 or more years, look at equity income funds, says Laith Khalaf, senior analyst at private client stockbrokers Hargreaves Lansdown. Such collectives invest in dividend-paying companies and can be a source of growth as well as income. Khalaf tips both CF Woodford Equity Income and Marlborough Multi-Cap Income.
More cautious savers might consider a conservative fund like Newton Real Return or Troy Trojan, both of which seek long-term growth by investing in a mix of different assets but have a focus on providing shelter when markets take a tumble.
One little known area which excludes assessment by a local authority when determining assets is a bond with a life assurance element. The principle is that someone can insure their life and the premiums are acceptable expenditure.
An investment bond, technically called a ‘non-qualifying life assurance’ policy, would be just such a device. Obviously, if it was purchased to artificially reduce the value of an estate just prior to an assessment, it would be queried and so buy such a bond well in advance.
Seek professional help in this area. Richard Harwood, divisional director of financial planning at wealth manager Brewin Dolphin in Leeds, says they ascertain what type of plan is preferable based on tax, risk and other factors.
Once someone goes into care, there are specific plans available. They are specialist annuities that pay directly to the care provider and are tax efficient.
On the negative side, they can be expensive and are inflexible. Instead consider an investment that allows for your holding to be passed on in the event of death.
Even combining private and state pensions is unlikely to meet all the costs of a care home but could form the backbone of such provision. An experienced independent adviser will see if current savings can meet the shortfall.
If there is only a small difference, gradual capital withdrawals can mean the fund will last quite a time.
With a drawdown arrangement from a personal pension, divide the value by the number of years of expected remaining life and deduct that sum.
The exercise should be repeated annually based on the revised pension value and a life expectancy which will be one year less.
A more frugal approach would be to take out just the annual enhanced value year on year, leaving the capital protected. If deducting four per cent each year, the pension pot is never likely to dry out.
Look at the family property as a source of income. If someone goes into residential care but leaves one partner at home, equity release could be used or part of the property rented out.
Consider such leading equity release providers as Aviva, Bridgewater, Hodge Lifetime, Just Retirement, Legal & General, Pure Retirement and the mutuals LV= and Scottish Building Society.
It is often best to finance care in an individual’s home rather than to move out. The cost implications need to be considered by the family.
As financial decision-making becomes more difficult, ask a solicitor to arrange a ‘power of attorney’ so that a trusted relative can handle matters. Make sure such an arrangement is lodged with every organisation likely to be involved before decisions need to be made as staff are often poorly trained in this area.
Keep invested as fully as possible in the stock market. Whilst deposit-based savings are safer (with compensation up to £75,000 in the event of provider failure), they are not likely to create sufficient funds for care.
This is because they are based on the official rate offered by the Bank of England which at 0.5 per cent has been at its lowest level in its 322 years since 2009.
Where the likely requirement is under 10 years away, opt for mature markets like Europe, UK and US, particularly income-generating stocks, but if there is more time, ensure at least half is entrusted to emerging markets. For the former, consider such funds as Baring European Select, JO Hambro Continental European, Legal & General US Index and Legg Mason IF Royce US Smaller Companies.
Further afield, there could be great results from Jupiter India and Stewart Investors Asia Pacific Leaders whilst for a wider remit, Rathbone Global Opportunities deserves inclusion.