How to plan and pay for care

The cost of care often comes as a financial shock at a moment that is already emotionally draining. Having a close family member moved to a care home is a blow in itself, but there are also a mountain of practical issues and financial decisions to navigate on top.

Earlier this year, chancellor Rachel Reeves scrapped plans for a reform of social care that would have capped the amount someone could be asked to pay in their lifetime towards their care costs at £86,000 from October 2025. The reform would still have left most people who need care with substantial costs to deal with – but would also have provided a degree of relief.

Tony Müdd, divisional director of development and technical consultancy at St James’s Place, notes that care needs are going to affect an increasingly larger proportion of the population. The need to be aware of costs, so that some forward planning can be done, remains crucial.

A complex system 

The first hurdle is understanding what kind of care you or your family member should have, and making sense of a labyrinthine system. You can ask the local authority to carry out an initial assessment of the person’s needs, and some people with long-term complex health needs might qualify for free care via the NHS. But this is rare, explains Frazer Wilson, senior wealth planner at Canaccord Genuity Wealth Management: “We find that even though that assessment is done, the health needs have to be very poor in order for that to actually be a viable option.”

The next step is a financial assessment. If you have savings and assets of more than £23,250, you will be expected to pay for the full cost of your care. These costs vary depending on where you are in the country and the type of care you need, but are substantial.

In 2023-24, the average cost of a residential care home bed in England was £949 per week, while a nursing home bed was £1,267 a week, according to LaingBuisson data. This increased to £1,152 per week for residential care and £1,457 per week for nursing care in the south-east. 

Before making a financial plan, it might be worth getting support in navigating the system itself, which is incredibly complex, says Müdd. “There are 57,000 care providers out there that do everything from domiciliary to nursing to residential care,” he notes. Charities and specialists can advise on the type of care that would be most appropriate, and help you claim all the benefits you are entitled to – Age UK, for example, has a free advice line open 365 days a year that provides information on this topic, among others. 

Not all benefits available are means-tested. If the person needing care is already receiving the state pension, they might qualify for attendance allowance, which can amount to £72.65 or £108.55 a week depending on their needs. Meanwhile, someone caring for them for 35 hours a week or more might qualify for the carer’s allowance, which is £81.90 a week.

Care home fees can also be negotiated. How successful you are might depend on how high demand is at the care home you are considering, and it is worth getting an idea of the average costs in your area. However, it is local authorities that are able to use this to their biggest advantage, because they have greater bargaining power to negotiate lower fees for publicly funded clients.

A shortfall to plug, and funding options

Even people who are enjoying a very comfortable retirement often find a gap between their existing income and the cost of their care. 

Many worry about having to sell the family home to plug the shortfall. This is not necessarily the case. If you need care but still live at home, the value of your property will not be taken into account in your financial assessment. The same applies if you move to a care home but your partner or a relative under 18 or over 60 still lives in the property.

However, if none of the above applies and you have no other assets, you may need to either sell your home or release value from it in another way. You could rent it out, although this comes with a range of additional complications, including having someone who can manage the property and deal with the tenants. 

While the rental income is unlikely to be enough to pay for the full cost of your care on its own, you could get a ‘deferred payment agreement’. This is a contract where the council agrees to pay for the cost of your care and recoup the money later on, when the property is sold. It could allow you and your beneficiaries to take advantage of house price growth. But the money you are effectively 'borrowing' from the council will also accrue interest, so selling the property straight away and reinvesting part of the proceeds might leave you better off. 

Meanwhile, equity release is only an option if you are receiving domiciliary care, because you must live in the property to be able to apply for it.

If you have significant capital available, or receive a sum from selling your property, you could buy an immediate needs annuity, where in exchange for a lump sum an insurance company pays for the cost of your care for as long as you need it, directly to your care provider and free of tax. This can give you great peace of mind and will be financially advantageous if you end up living longer than expected.

“People shouldn't get too hung up about the fact that it's referred to as an annuity,” says Müdd. Because the average life expectancy of someone entering a nursing home is only a few years, the rate is much higher than that of a pension annuity, often around 20 per cent or more. 

Finally, while you might be able to pay for care costs from your investments, a restructure could be in order first. Because your income needs will have increased, it follows that you may need a higher exposure to income generating assets. You should also consider de-risking your portfolio, says Wilson. Because your time horizon for a significant portion of your money will have shortened, having a lot of equity exposure may no longer be suitable, and bonds could give you more security. Do also consider how to withdraw the funds tax-efficiently and how to structure and pass on your portfolio if you are no longer able to run it yourself. 

The fact remains that care costs are incredibly difficult to plan for, because you can’t know in advance how much you are going to need and for how long. Even advisers have different opinions on how much you should worry about it beforehand. “We encourage people to at least think about care. But if they're younger, in their 60s or 70s, the first thing is to make sure they are enjoying their life and not worrying too much about something that may never happen,” says Wilson.

Müdd agrees that it is difficult to make a detailed plan, but adds: “The average immediate needs annuity cost is about £150,000. I think it gives a very good indication of the sort of money that whoever 'Mr. Average' is will have to find... It's all about having an awareness that you might have this additional need. Therefore don't give it all away, as much as you want to help your grandchildren on the property ladder.”