Long Term Care – creating drawdown alternatives
9 August 2017
Thinking about old age can be stressful. Surveys suggest people are more fearful of being put in a care home than they are of death. Funding directly from assets is a viable option that can help alleviate people’s anxiety, says James Goward, Rathbones head of Sales Support.
Less than half of UK homeowners under 60 are confident that they will have enough money to control how and where they are cared for in old age.
While the sums for social care appear daunting at first, Office for National Statistics data show they are actually comfortably covered by the average wealth of British 65-year-olds.
The crux will be designing the best strategy for each client to ensure they achieve their goals. This is where an experienced discretionary fund manager (DFM) should be able to help – alongside the right financial planning.
It is estimated that one in three women and one in four men will have long-term care needs. About 40% of people aged over 65 have a longstanding illness, a percentage that rises to almost 60% for the over 80s.
Council budgets and care homes are already strained and the number of people aged 85+ is forecast to double by the mid-2030s.
A client’s freedom to choose what is right for them in later life, rather than relying on public funds, is important.
One challenge is the dearth of financial products: only care annuities and self-funding through accrued assets and income are available.
Emergency-level interest rates have made annuities an expensive option for many. Effective management of a client’s assets to create the right level of income – through interest, dividends and capital drawdown – has become increasingly important when paying for care.
As an example, take John, a widower with two children. Having sold his house, he lives with one of his children and has £1.2m in available assets. John wants to leave his estate to his family after his death. John is getting on and now needs residential care; a suitable annuity would cost £600,000. John’s doctors advise he is unlikely to survive another four years. Given John’s life expectancy, it’s appropriate to consider funding directly from assets, as there is little likelihood of complete asset depletion. Selling down these assets while simultaneously creating a natural income, minimising taxes and ensuring as much as possible of John’s wealth can be bequeathed will be a complex job.
About half of those in UK residential care are fully self-funded and, given the creaking finances of the local councils that run social care, this could rise further.
DFMs’ expertise and breadth of market access have helped pensioners create a drawdown alternative to annuities in the age of rock-bottom yields.
These same skills may be the answer to helping people dispense with their anxiety about aged care and ensure they can afford the retirement they deserve.
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