With MP’s calling for a potential levy for over 40’s to cover the spiralling cost of social care for the older generation; when is the right time to start preparing financially for your old age? * With social care being greatly affected in recent government cuts, there already exists a £2.5 billion funding gap. Therefore, MP’s are proposing that when people turn 40 they would start paying into a fund to ensure they benefit from a free social care provision at the point they need it.
When the majority of people look ahead at their retirement, they realise they must have a substantial pension to support them to maintain a decent standard of living, but many do not consider the potential costs of social care, either within their home or moving out into a care home.
Recent research from ‘Think Tank Demos’ indicates that 1 in 4 Brits think that social care is free and only 5% of over 40’s are prepared financially for any costs they may incur in later life. **
This is very worrying and may partly be due to people in their 40’s and 50’s settling down later in life compared to the current over 60’s and 70’s (their parents), so they’ve not been on the property ladder for as long and are still saddled with longer mortgage commitments. These mortgages may not finish until well into their 70’s, plus they may potentially also have credit card debts and loans, limited pensions or savings in place, and very little spare money to commit to their retirement and social care costs.
Family commitments and the rising cost of living means many just won’t be prepared for the costs of their later years. They may be counting on inheritance money from their parents’ properties in order to pay off their own mortgages (as was the case for many people now in their 60’s and 70’s) but with an ever-ageing population this is becoming increasingly unlikely as this generation may now need to sell their homes to pay for their own social care.
Although, the older generation may have benefitted from having substantial work pensions, state pensions and reasonable savings in place, this does not necessarily mean they are completely covered. Many married very young, had children in their early 20’s and now their children are grown up, are enjoying a new lease of life travelling the world spending all their spare cash! So it may come as a shock if their house needs to be sold to cover social care costs, bearing in mind it may not be enough, especially with the average care home now costing £30,000 per year. They also need to consider these costs when lending money to children as this could leave them out of pocket later on.
Therefore, what’s the solution?
It may be that the older generation have plans in place to co-habit with their children and/or grandchildren when the time comes that they need looking after. This could involve them selling their home and moving into their child’s house or both parties’ selling their properties to buy one larger property which is then gifted to them upon their death. This can benefit both sides but the issue of inheritance tax and the 7-year rule needs to be considered as well as any additional children/siblings’ right to the inheritance – so rules and contracts must be put into place.
However, if this is not an option and with the growing issue of more parents living further away from their children, it’s advisable that both generations have alternative provisions in place.
It’s important to not bury your head in the sand and get sound financial advice to put plans in place ready for retirement and social care so the worry and stress is not left to your loved ones. With the rising cost of living, many people in their 40’s are understandably not paying into pensions whilst raising young families, but it’s essential to try and save even if you can only put a small amount away each month and have sufficient life insurance plans in place.
It’s all about balancing your current finances whilst planning for your retirement; especially with the age level on the state pension being continually raised every year. If you plan to retire at 65, you’ll need a pension pot worth around £400,000 to provide you with an annual income of £20,000 which is a sizeable amount of pension to work towards.***
There are many ways you can start saving for your retirement and social care provision in your 40’s; paying into a pension, saving any spare cash in ISA’s and investments, paying off loans and credit cards and trying to chip away at your mortgage. Plus trying to avoid taking out any loans or additional mortgages in your later years unless you have guaranteed sufficient funds to cover them.
If you would like financial advice on any of the areas covered in this blog please contact us at info@birchwoodinvestment.com