Care in later life comes with a hefty price tag, with average care costs in the UK frequently exceeding £100,000 per year. That is why baking flexibility into your retirement plan is essential for your own peace of mind.
Many people fine-tune their retirement plan, but often overlook one of the biggest costs of all: long-term care.
It often arises suddenly and can drastically change financial plans, causing complications which could have been avoided with early financial planning.
U-shaped retirement spending
There is a common misconception that costs dramatically fall during the retirement years. But as the graph
below indicates, long-term care costs can cause a massive spike in the latter end of retirement when unanticipated long-term care bills arise. The logic typically goes as follows:
- Later life: Costs can rapidly spike again due to unexpected healthcare of long-term care costs.
- Early retirement (60s to early 70s): Spending is often at its highest as you have the capacity to travel, focus on hobbies and support your family or other dependents.
- Mid-retirement (mid-70s to early 80s): Costs typically fall due to a slower pace in lifestyle.
Planning ahead: Cash flow and flexibility
This is where cash flow planning becomes critical for your financial plan. By sitting with an adviser, you can forecast your income and expenditure, stress-testing plans against scenarios like unexpected care costs which can quickly exceed £100,000 per year.
Flexible income sources, such as pension drawdown, enable retirees to adjust their income over time, reducing withdrawals in quieter years and increasing them if care costs arise. This flexibility is especially important because care needs are unpredictable, and planning for a spouse or parent adds complexity when one person requires full-time care support while the other continues living independently.
Funding care with annuities
With care fees potentially exceeding £100,000 per year, a care annuity can offer a guaranteed income to cover either part (or all) of these expenses.
For example, you could use a lump sum of £400,000 to purchase a care annuity. In return, you receive a guaranteed, fixed income to help cover care fees for the rest of your life. If the income is paid directly to a registered care provider, these payments are also tax-free. This option provides long-term certainty and removes the risk of care costs continuing indefinitely.
Tip: Annuities are not risk free. If the individual requiring care does not live long enough, the upfront cost may exceed the income received, which can therefore reduce the amount left in their estate. That is why annuities are typically considered when care needs are established.
Estate planning
If a property constitutes a large portion of your wealth, selling it to cover care costs can dramatically reduce what is passed down to descendants.
The Residence Nil Rate Band (RNRB) helps protect part of your main residence from Inheritance Tax (IHT) when left to direct descendants. Each individual currently has an RNRB allowance of £175,000, transferable to a spouse. If unused on the first death, it can be claimed on the second.
The RNRB tapers for larger estates, with estates over £2 million losing £1 of RNRB for every £2 above the threshold. This applies on both the first and second death, based on the surviving spouse’s estate. Even if you sell your home and later move into care, you may retain eligibility if equivalent assets are passed to direct descendants.
[i] Want to gain confidence that your financial plan can withstand unexpected care costs? Speak to an expert for tailored guidance and a robust plan by call 03300 564 446 or get in touch via our contact form.
This article is for general information purposes only and does not constitute financial advice or a personal recommendation. Past performance is not a reliable indicator of future results. Investments can rise or fall in value, and you may receive less than you originally invested. Tax treatment depends on individual circumstances and may change in the future.
