At the point of retirement, there’s a lot to think about when organising finances, from how best to access your pension to how long they need to last for. But there may be one important matter you’ve overlooked; do you have enough to pay for care costs if it were needed?

No one wants to think about losing independence. Yet, as we live longer lives, more of us will need some form of support. That doesn’t always mean moving to a care home and relying on help day-to-day. For some, it could simply mean leaning on loved ones a little more and there are many circumstances in between.

A London School of Economics study suggested that between 2018 and 2035, the number of people relying on care would rise significantly. By 2035, it’s estimated that the number of adults aged over 85 needing round-the-clock care would almost double to 446,000. In addition, the number over 65s needing continuous care would exceed one million.

As a result, it’s important that you think about the cost of potential care when you plan retirement finances.

Who covers the cost of care? 

There are huge variances in care costs depending on where you are located and the sort of care you need.

Research suggests the average cost of residential care in 2019 was £33,852 a year. If nursing care was required, this increased to £47,320. Even if residential care isn’t needed, this bill can be higher than you expect. Paying for just two hours of support a day at £15 per hour, enabling you to remain in your own home, would lead to an annual bill of £10,920.

If these costs aren’t something you’ve considered, it could derail plans. Care costs could deplete your assets faster than expected and may reduce the amount of inheritance left behind for loved ones.

So, when do you cover care costs?

Whether you need to pay for the cost of care will depend on your capital (your savings and property). In England:

• If your total capital is over £23,250 you must pay all fees in full
• If your capital is between £14,250 and £23,250, the local council will pay for some of the care costs and you’ll need to contribute the rest
• If capital is less than £14,250 your local council will pay for care. However, your eligible income will still be taken into account and may be reduced as a result

It’s worth noting that in some situations your property won’t be included in your capital, for example, if it’s occupied by a partner, so it’s important to get individual advice on this. You also aren’t typically forced to sell your home and you can enter into a deferred payment agreement with the council.

Setting money aside for care

The first question to consider here is: how much should you set aside for care?

The above figures looking at the annual costs give you some idea of how expensive care can be. Depending on your preferences, care costs could be lower or higher. Of course, no one knows if they’ll require care or how long they’d need that support for. So, coming up with a target figure can be a difficult task on its own.

But you should ask a second question too: how will it affect your retirement income?

Taking a lump sum from your pension or other assets and earmarking it for care may have an impact on the lifestyle you hope to achieve in retirement. When you’re assessing retirement income, it can be difficult to understand how your finances will look throughout, even more so if you’re planning for potential care costs.

This is where financial planning and cashflow modelling can help you. By visualising how your income will change over the years, you’re in a better position to make decisions that are right for you. You’ll be able to understand how setting aside a lump sum will affect your income and how quickly care could deplete your assets if it were needed. It’s a step that can provide you with confidence as you plan for retirement.

No one knows if they’ll need support later in life and you may be tempted to leave care out of your retirement plans. However, it’s a step that could leave you financially vulnerable and mean you don’t receive the type of care you prefer. Taking a proactive approach and planning now can put your mind at rest.

What will happen if care isn’t needed?

If you’ve put some of your assets to one side with the aim of paying for care if it’s needed, you should also make a plan for what will happen if it’s unused.

Leaving it as an inheritance for loved ones is a common plan. This means you have to think about a few other things. First, is your will up to date? To ensure your assets are distributed according to your wishes a will is essential. You should also consider the impact of Inheritance Tax if your wealth exceeds £325,000. There are often things you can do to reduce Inheritance Tax, but you need to take a proactive approach.

If you’d like to talk to a financial adviser about care costs you can take steps to put your mind at ease.

Please note: The Financial Conduct Authority does not regulate estate or tax planning.