Why don’t people save for care in their old age?

 My stepmother passed away last summer; my father had died some fifteen years before. They were both a good age, he made it to 81, she to 89. They’d had a good retirement in their bungalow together, travelling around Europe quite widely, enjoying a good standard of living funded by their pensions which, including their state pensions, were perhaps providing them with combined income of around £40K.

I didn’t know details of their income, or outgoings, when they were alive. People don’t talk about money; many, I believe, don’t even think about it in quite the way they should.

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Viv and I have a number of spreadsheets which document our possible finances in a number of differing scenarios. We know what our pension can pay for now; we also, perhaps, are lucky that we don’t have to buy annuities to use them, and can plan to have the amounts of money that we might need at a time in our lives that we might need it.

One of the scenarios we’ve considered is that I die in my seventies, leaving Viv needing to spend money to pay for home helps, cleaners and carers; her spending then will be greater than our joint spending when I’m alive, at a time when her income will  be less (because my state, and one of my company, pensions will stop). Her needs may further increase at a greater age, such that she needs more involved care, when she’s in her eighties (we’re almost the same age). The costs that will need to be covered by our pensions might vary with age something like:

(There’s no allowance for inflation here).

The problem with conventional - final salary and annuity based - pensions is that they provide generally the same income throughout retirement. They don’t allow for the upward steps in spending that arise when we need care. Many retirees perhaps just assume that, because a flat pension is what their company gives them, it must be what they need. Those people are unlikely to take advice from a financial planning expert. It's only when, many years later, finding themselves in a care environment with little by way of assets to fund the care they would like, that they might - if they can - regret not considering the huge extra costs that can arise in one’s final years - whether they be at home or in a care home. 

The most my father and stepmother had, I believe, by way of savings or investments was around £40K. In later years, my stepmum had less, she had to manage on just her pensions and a portion of my father’s occupational one.  These days that £40K would fund perhaps nine months in a - fairly modest - care home. They thought that was enough of a cushion for the unforeseen; fortunately (some might say), my stepsister cared for my stepmother in her final years. If she’d had a live-in carer for two years the bill might have been upwards of £60K; if social services had been involved she probably would have been despatched to a care home, with a bill of over £100K that would have to be paid from the proceeds of the sale of her bungalow. And, of course, us rellies wouldn’t have had much say in the matter.

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Only needed if you have a mortgage?

There are ways to fund care in later life. We’ve discussed how we might address our problems with our financial chap; he suggested we look at life insurance.

I’d always thought that life insurance is something you need if you have a mortgage, or, perhaps, a young family. I’d never thought of it as a financial tool to help the retired. It seems that, at age 65, I could buy a fifteen-year term life policy with a £200K sum assured for around £113 a month; that would, if something happened to me before the age of 80, be a significant help to Viv. Doing the sums, the total premium payable would be about £20,300, a little more than a tenth of the sum receivable on my death. To me, it's a no-brainer, even though Viv’s and my pensions can be drawn down flexibly, and we’re not over-committing ourselves early on. 

I've mentioned the idea to a couple of acquaintances of a similar age to me and they seem surprised by the very idea of life insurance for the retired: it seems they view retirement as a situation in which you enjoy yourself as much as you can, and then, when you get ill or weak, the state will look after you. 

Keep you in style?

But can the state afford to look after us all, or at least, can it afford to keep us in the style we would, at the very least, want to have to accept?

Retirees from some occupations enjoy generous final-salary pensions. Doctors, teachers, civil servants, all enjoy a healthy income in retirement, and many a cruise line has benefitted over the years. However, bearing in mind that those pensions are funded by us - the taxpayer -  should we perhaps be asking some questions about this, and the possible consequences? Is it right that retirees should benefit from generous, taxpayer-funded pensions, spending them as they wish, and then benefit from publicly funded care when they are a few years older?

Shouldn’t they - or the pension trustees - hold back some funds for care in later life?

The problem is that conventional pensions are paid in uniform amounts, irrespective of age. (Drawdown does not suffer from this restriction). Pensioners may feel they have plenty of money, for whatever eventuality; the cost of care may not enter into their minds.

Care only comes at a price, often when one of a couple has already passed away, leaving the survivor looking for at least £50K a year when their income may be less than half that. They may feel it to be fair to fall back on the state. But what are pensions - and all of the associated tax benefits - for, if not to provide us with security in our old age?

What I believe all pensioner couples should be considering is to look at their finances with a view as to ‘what-if’ one of them passes away many years before the other. Will the survivor have the means to be able to pay for good quality care? 

If the answer to that is ‘no’ then they should consider how to hold back some of their income, perhaps using life insurance. A policy like the one I outlined above, costing just over £100 a month, would reduce their combined disposable income a little in the early years of their retirement - but it would provide significant assurance that a lone survivor would be able to afford decent care. 

If those on good pensions paid for their own social care - from their pension pot - the cost to the public purse - that is, all of us - of, and the pressure on social services teams caused by, state funded social care would be reduced.

Rather than displaying our social conscience by walking around wearing face masks, or looking to the younger generation to fund our care in old age through increased NI payments, shouldn’t we - the older generation - be putting our finances in order so that we don’t become a burden on others?