Care budgeting and how to budget with care

"Would more take advantage of the peace of mind offered by care annuities if the Government subsidised part of the cost of the care requirements?"

The webinar covered the issues that need urgent Government attention. These included the quality-of-care provision; how it is funded, and who and how much people should pay towards the cost of their care. From my point of view there were two main takeaways.

Firstly, whatever future care solutions the Government come up with, it is going to cost the public purse. We therefore will not probably hear much more about the Government’s plans until after the Public Spending Review in the Autumn. Its plans will need to be factored into that review.

The cost to the public purse must be weighed against the economic cost to households and the wider economy of the current system. How many give up work in their 50s to care for a relative? This comes at a cost to the household and the wider economy? How many of those will have to care for a partner into their 80s?

The other takeaway was a quote from Andrew Dilnot. He took the view that it was important to realise people cannot budget for care as they do not know how long they will have to pay for the care they do not know they will need.

Paying more than £4,000 a month for a dementia sufferer requiring 24/7 care is not uncommon. Consider how many households could meet such an outgoing for 12 months. What if the need is required for five or even 10 years? Consider also, those aggregate costs against house values.

The very wealthiest of households may be able to meet such costs. Under the current system, the poorest will have their costs met by their Local Authority. It is the majority in the middle who will have the greatest difficulty in saving for the cost of and paying for their care.

I am not sure if Dilnot realised it but he summed up the whole retirement dilemma. The cost of a retirement is the sum of the spending that will occur during that retirement. It is possible to take the view the Government subsidise some of that spending through the State Pension.

The poorest retired households will only have the State pension to live off. The wealthiest are those who have sufficient retirement wealth who can easily adjust their income to meet changing economic circumstances without running the risk of outliving their retirement fund.

Those in the middle face the same problems Dilnot mentioned about care budgeting. The correct investment portfolio should enable an individual to draw around 3.5% to 4% of their initial retirement fund as an inflation-proofed income, with a 90% probability of the income sustaining for 30 years. Assuming life expectancy at retirement is 25 years all is fine, or is it?

There is a 10% probability that investment experiences will mean the income will not sustain 30 years. Also, you may live 35 years and not 25; and what if you must pay for care for the last 10 years of that retirement?

This is what makes financial planning in retirement so complicated. There are so many uncertainties and risks.

One way to cover the longevity risk in retirement is to purchase an annuity. Annuities are insurance products not investment products. Their value should be measured as such. Much as insurance offers peace of mind you will be able to afford a replacement home if yours burns down, annuities offer peace of mind that income will sustain if you live far longer than average.

This brings us back to care budgeting. Would more take advantage of the peace of mind offered by care annuities if the Government subsidised part of the cost of the care requirements? The problem is how should the subsidy work, and how much will it cost the public purse if its contribution is to be meaningful?

Hopefully, we will find out more in the Autumn.