Building a big enough pot to enjoy a moderate standard of living in retirement, while also funding residential social care if required, could require almost £1.5 million by age 60, new figures from investment platform IG show.
That works out at around £800,000 in today’s money, which is still a daunting sum. To achieve it, today’s 30-year-old would need to invest almost £12,000 a year, or around £1,000 a month, for the next 30 years. This assumes investments grow at an average rate of 8% per year, while the cost of retirement and social care rises at around 2% per year.
Burnham’s social care reform challenge
IG has published its analysis as PM Andy Burnham tries to negotiate a new settlement on social care funding, potentially moving towards a system where care is free at the point of use, like the NHS. Such a system could cost around £18 billion a year, according to estimates, putting another huge burden on taxpayers.
But funding social care yourself can be an even bigger burden. Today, care costs in England are means-tested. People with assets above £23,250 will generally be expected to pay their own care costs. Once assets fall below £23,250, councils may start contributing. Those with assets below £14,250 won't have to use their tiny pot of capital, but may still have to hand over much of their income.
Planning for care costs
Many people can see their savings and pensions steadily drained by care bills. For homeowners, the family home can also be included in the calculation, although there are important exceptions, including circumstances where a partner or certain relatives continue to live there.
IG investment analyst Aaron Bright said younger people need to start planning early. “The longer the time-horizon, the greater the benefit from compounding returns. Our analysis shows how essential it is to take a long-term view to retirement and social care planning.”
IG estimates that three years in residential care could cost around £150,000 in today’s money. That’s on top of around £654,000 needed to fund a moderate standard of living throughout a 20-year retirement.
Financial risks and taxpayer burden
Together, that’s roughly £804,000 in today’s money. Allow for 2% annual inflation over 30 years, and the figure rises to £1.46 million. Around one in seven 65-year-olds can expect to incur social care costs exceeding £100,000, according to official figures.
Many families may prefer to take their chances. But they’re taking a big risk, says Lucie Spencer, partner in financial planning at wealth management firm Evelyn Partners. “Social care can eat through carefully built-up savings, pensions and legacies.”
Burnham is brave to tackle this problem and has previously suggested a 10% inheritance tax levy to help fund social care. That may not prove popular, either. However, we fund social care; somebody has to stump up. Taxpayers could shoulder the burden through higher taxes, or individuals could shoulder it by building much larger retirement pots.
Nobody knows how much care they will need. Some will remain healthy and independent well into old age. Others could face years of expensive residential care. Saving for something you expect to happen, like retirement, is difficult enough. Saving for something you hope will never happen to you is even harder. So is paying tax for it.
