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Means to an end

In the last Tutor’s Corner, we looked at a coursework question and a sample answer taken from the DipFA, the ifs School of Finance’s level 4 qualification. This is the second part. The case covered James and Heather Jones, who contacted you to discuss concerns regarding James’ mother, Edna, who may need long-term care

In the previous Tutor’s Corner, we gave the first part of the sample answer outlining the types and cost of care available to Edna and the impact of her financial position for means-testing. This final part of the letter will conclude by evaluating the various options available.

Cost
Having reviewed the various options of long-term care available to Edna, it is important to compare the different costs of each one:

1: Residential care home

If Edna moved to a residential care home, the cost would be £22,620 a year (£435 per week x 52). The five-year cost of residential care = £113,100.

2: At-home care from nurse/ professional carer as necessary

A full-time carer would cost about £30,000. This figure does not include the cost of potential home modifications. The cost may also increase if Edna req-uires a greater degree of care.

The five year cost of full time care in the home = £150,000

3: At home care from a family member. There would be no cost for the care but again modifications to the home may be required. The family member may be able to claim a carer’s allowance if they are providing over 35 hours of care a week.

If Edna has a disability or long-term health problem and requires assistance from another person for general tasks such as getting dressed in the morning, she may qualify for attendance allowance. This is non-means-tested so does not evaluate savings and assets and is tax-free. It is a weekly benefit allowance to pay for any assistance Edna needs.

Current allowance (rates below apply from April 2008-March 2009):

  • The lower rate of £44.85 a week is paid for those requiring help frequently during the day or during the night.
  • The higher rate of £67 a week is paid to those requiring day and night care.
  • The local authorities assess the amount of assistance required and decide the rate accordingly.

Funding options
There are several ways to raise funds to cover the cost of care, all of which need to be evaluated for their implications to tax and means-testing. Edna has also made a will to leave her assets to her children upon her death. This suggests Edna would like to leave an inheritance to her children, which is also worth bearing in mind.

Renting Edna’s property
The income generated from rent could at least contribute an income towards the cost of care. However, the net income after the deduction of charges such as upkeep or management costs is often low and may not cover the total cost of the care. This option does allow Edna to retain 100 per cent ownership of her property but is clearly not appropriate if Edna wishes to remain in her home.

Equity release
If Edna wishes to receive care in her own home, equity release can provide the necessary funds. Equity release is a way for homeowners with little or no mortgage to increase their income or available cash. Homeowners transfer an interest in their property to a third Edna may be able to obtain an impaired life annuity which may provide higher than normal paymentsparty in order to raise a cash sum or provide an income. A potential disadvantage to this option is that the value of the property decreases over time as the interest mounts up. The two main types of equity release products are:

  • Lifetime mortgage – designed to meet the costs of long-term care. A lifetime mortgage would not require regular payments of interest during its lifetime. Interest is rolled up and added to the total debt that must be repaid at the end of the mortgage.
  • Home reversion plan – this involves selling all or part of your home to a third party in exchange for a regular income or a cash lump sum. Edna could live in the property until her death but is likely to only receive 35-60 per cent of the market value of the property. This option is often suitable for those who do not need anyone to benefit from the full value of the property following their death.

Sell Edna’s property
The sale proceeds could be used to buy an annuity. This is a contract in which a person pays a premium to an insurance company, often in a single lump sum, and in return receives periodic payments for an agreed period or for the rest of his or her life. Edna may be able to obtain an impaired life annuity due to her age which may provide her with higher than normal payments.

Deferred payment
The local authority could provide an interest-free loan that is claimed back when Edna’s property is eventually sold. Deferred payments means the home does not have to be sold immediately. This may be used in conjunction with renting or letting the property. However, the charge on the property increases over time due to the fact that no payments are made during the life of the owner.

Other funding options
Edna also has a with profits bond of £50,000 which could be withdrawn periodically to pay for care. Alternatively, the sum could be invested in areas that would provide an income to contribute to the cost of care. This option may not cover the full cost of care and as such the value of fund could depreciate if more money is being withdrawn than is being earned in interest. Please do not hesitate to contact me with any further queries you have and I hope to meet Edna and Joseph Jones at our next meeting with you where we can discuss this in more detail.

It may be appropriate at this stage to arrange for Edna to undergo assessment by Adult Social Care Services. Please find enclosed a Welfare Rights Briefing Notice with details and contact information.

Yours sincerely,
Financial Adviser

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