Holly Cook: Hello and welcome to the Morningstar series, "Future Proof." I'm joined today by Tony Müdd from St. James's Place and we're going to be talking about retirement planning, but specifically planning for long-term care.
Tony, thanks for joining me.
Tony Müdd: You're welcome.
Cook: So, what is perhaps the risk of kind of not considering that you may need long-term care in the future because, of course, we don't like thinking of death and we don't like thinking about the fact that we may become ill and need sort of palliative care, but it is something that's very costly. So, if you are not thinking of these things, what are the risks?
Müdd: Well, I think the reality that we have to accept that if you just look at the stats, people are living longer, but not necessarily healthier. One in three females, one in four males will receive or need some form of care during their lifetime. We already know that even in the current generation one in five people will see a 100 which is a significant change. So, the issue of care in some ways is not that different to any other potential need for capital in your later life.
The difference is that if you don't save or if you don't at least think about these considerable costs of care then the reality is that you might not get what you need. And it might not be politically correct to say so, but if you are ultimately reliant on local authorities, state aid, which ironically we've still got probably 50% of the people thinking that the state should pay then the quality of care may not be what you actually require or need. The average length of time in a local authority home is actually just under two years. If you compare that with, if you like, self-funded homes, it's in excess of four years. It doesn't take a genius to work out what the reason for that might be.
Cook: Is there a way that you can sort of give us a ballpark figure or a range as to what that kind of long-term care may actually cost, what people need to be thinking about?
Müdd: Right. The costs vary hugely and they also vary depending on whether you are talking about residential care, nursing care or domiciliary care. Domiciliary care is a care in your own home which actually most people think that they will want. Ironically, a lot of people think that their children will look after them. On average in our experience is about one in four people think that their children will look after them. You get very different results when you ask the children.
But the average cost of residential care in the U.K. is around £28,000 per annum. The average cost of nursing care is more expensive, it's around £38,000. Domiciliary care is much more difficult because domiciliary care on a 24x7 basis can be exceptionally expensive. If you think about it, if someone needs that level of care and they want it in their own home, you are looking at three carers permanently and the costs there can be extreme. In practice, most people that receive domiciliary care probably only need someone coming in for four or five hours a day. So, again, that's probably comparable with nursing care costs.
Cook: So, if we just take an example of somebody who thinks that perhaps when they get to age 75 there is a good chance that they may need to spend the last few years of their life in a nursing home, perhaps they expect their expectancy is round about 80, you are looking at potentially £150,000 for a five-year stay in a nursing home or even more. So, that's a really substantial chunk that you need to be saving for?
Müdd: Yes, you could comfortably spend £150,000, £250,000 without frankly batting an eyelid. So, yes, it is a lot. I would count to that by saying and I wouldn't in any way deviate from the need to at least think about it. But again, if you look at sort of 65-year-olds 65% of those actually have their own home unencumbered. Now, if they are prepared to use the value of that home, especially here in London, frankly, they can afford whatever level of care that they want.
It does mean that they won't then be able to pass on their homes to their children, but that is at least a choice. So, anyone, frankly, looking at this video and worrying about it, if they have their own home then even if you've got a couple they almost certainly would be able to pay and afford their own level of – whatever level of care they want.
That being said, it is absolutely essential that they get advice. Now, you may say, well, you would say that working for a wealth management company, but if you run out of money then that is much more than just a financial issue for most people. If you take the time and trouble to find the right home that suits you, that actually is near your relatives, your children, that is maybe sort of is on the ground for overlooking a nice garden, that is your room and gets a particular care that you've identified, you compare that with a home where actually is being supplied, is maybe not on the first floor, not near your relatives, actually sharing with three people you've never met before, that's – is a significant event for someone who is old and infirm, and frankly that has a very detrimental effect on their health.
So, actually getting advice to make sure you don't run out of money is actually essential. And that comes down to not only the way you save and the amount that you've accumulated, whether or not it's your house or something else, but also what you do with that money in order to – if you like to strip it out to take an income from it in order to pay the care fees.
Cook: So what are some of the sort of most commonly utilised products or strategies for making sure that you do have those assets available if you do want to go down the approach of generating an income?
Müdd: Well, one of the things quite often people do is that they will say, what will I do is I'll – I'm not going to live in my house anymore, because I'm going to a care home, so I'll rent my house out. That is rarely a good choice. Frankly, problem with that is that most – even in London, the yields you will get – if you get 6%, 7%, you are doing really well. There are going to be periods where you've got no tenant. There is going to be a tax liability on those yields, and of course the recent budget changed some of the dynamics around that.
Cook: Of course, if you are suffering from dementia or Alzheimer's or any other of very common illnesses in later life, then managing rental of a property is going to be very difficult as well.
Müdd: It is going to be very difficult and actually 44% of people going into care unfortunately do have some form of dementia. Now the reality is a lot of people who go into care end up doing so with a pair of attorneys, so it's their children who are organizing that for them. So, quite often, it's the children who are making those sort of choices. But getting back to your question, probably one of the most underused types of investment, if I can use that word is something called immediate needs annuity.
An immediately needs annuity, although it's got the term annuity in it, it's not like a traditional annuity. It's not based on sort of interest rates as which we know are currently at historic low. This is a contract that will basically pay a certain amount. Realistically, it can't pay more than the total amount of fees that you are due to pay.
But it pays very high levels of return and they are tax free. Now the reason why they pay high levels of return, which I mean something – anything from sort of 20% to 25%, 26%, is of course when someone goes into care, they have a fairly low expectation of longevity of life.
Now the value of an immediate needs annuity is not necessarily the return, it's the guarantee that however long you live, your fees will be paid.
There is a certainty there that once someone has chosen a home that is right for them to get some of the care that they need, they don't have to worry. And the average cost of an immediate needs annuity is currently around somewhere between sort of £100,000 to £120,000. Because what you are looking to do with one of these contracts is to identify what we call the shortfall.
So this is the difference between the care fees are let's say £30,000 there will be maybe some state pension. You may be having private pension, you may be having a little bit of income and actually once you've identified that. You say, look I have got £12,000 worth of income from those sources. The cost of my care fees are £30,000 I'd like a bit of extra. So what the shortfall is, is £19,000 on average. It's not going to cost £100,000 for most people and they have luxury of knowing that they are then guaranteed cover their care costs.
Cook: Which, is very reassuring, so it's good to have that kind of tangible amount that you could potentially build into your investment plan.
Müdd: It's not the only option. You could just use conventional investments. You can use ISAs, you can use unit trusts or any number of form of collectives. But that doesn't give you the reassurance. The advantage that it does have is that if someone wants to buy an immediate need annuity and they were to die after let's say couple of years. Than actually they would have lost money or more particularly their beneficiaries would have lost the ability to maybe have that money passed to them. Under those circumstances if that is a real concern and it is important that that's family decision then they can guarantee more, what I'll call traditional investment.
Cook: Tony thanks very much, and really practical advice for us there. Thank you for joining me.
Müdd: Thank you.
Cook: For Morningstar, I'm Holly Cook. Thanks for watching.
