Equity release & elderly care: The £75,000 cap vs. the £145,000 gap

The latest government legislation from Health Secretary Jeremy Hunt announced bills for long-term care in old age are to be capped at £75,000 from 2017. This is of particular interest to the equity release community, with care costs a common reason for retirees seeking additional funds.

Although the announcement is step in the right direction, providing concrete guidelines to help people prepare for care costs, experts have voiced caution warning the new scheme isn't as generous or straightforward as it initially appears.

When calculating the £75,000 cap on care the bill only takes account of the portion of the care home bill that deals with personal care - assistance with washing, eating and dressing. In residential care this leaves two areas outstanding; accommodation costs and general living expenses. Furthermore, the amount paid for personal care will be based on a local authority estimate rather than actual care-home charges. This could fall below the commercial rate, and as such families would need to make up the difference.

Research by Prestige Nursing + Care (12/02/2013) has revealed that the average cost of a room in a residential care home is £27,404 a year, of which £13,428 are care costs. Using these statistics, on average it would take five and a half years for the cap to come into effect, and involve spending £145,196 on care before receiving government support.

Despite the new government initiative, it is clear pensioners still need to find substantial sums of money to fund later life care. Equity release could provide a solution - and already does for many pensioners who use the equity tied up in their homes to fund the cost of care. Equity Release Council data reveals the average over-55 owns a home worth £208,686 (11/02/2013). Equity release could allow pensioners to unlock this amount to meet outstanding care costs, while still leaving an inheritance and without having to move house. 

However, it's always important that people receive expert advice on any form of equity release scheme. ERSA believes educating consumers on a range of retirement finance options is extremely important and equity release should be included as part of this.  As such, retirees should seek specialist independent financial and legal advice to assess all of the available options.

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