Are workers underestimating the cost of care in retirement?

Millions of UK workers could face a financial shortfall in retirement as they fail to adequately plan for the rising cost of care. New research by BW highlights a significant gap between expectations and reality, with fewer than one in five workers factoring care costs into their retirement planning. With care home fees far exceeding the average anticipated pension income, the findings raise urgent questions about financial preparedness and the need for systemic reform.

The findings from our new report The At Retirement Reckoning, reveal that more than a third (36%) of people expect their health and care costs to increase substantially well into their retirement. Despite this expectation, just 17% have fully factored having to go into care into their retirement plan.

The cost of care: expectations

In the research, workers were asked to what extent they anticipated their spending for health and care needs would increase or decrease across a potential four decades of their retirement. While over a third (36%) of respondents anticipate increased health and care costs in the first decade of retirement, 47% expect costs to remain unchanged. This perception of stability persists well into retirement, with 38% expecting costs will "stay the same" in their second decade of retirement, and 33% into the third.

"Very few people are even thinking about their health or care considerations when planning for their retirement."

For those aged 55-64, or those closest to retirement, their expectations are more pronounced. Over half (51%) expect health and care costs to remain stable in the first decade, and significant proportions – 38% and 30% – carry this belief into the second and third decades, respectively. And while fewer expect increased costs in their first decade (34%), more than two-fifths of this age group anticipate increased costs well into their fourth decade of retirement.

Health and care planning

The findings raise concern that many workers could be significantly unprepared for, or unaware of the financial realities of retirement, particularly as care needs and costs often increase over time. A fifth (20%) expect that they will be retired for 10-15 years, but fewer (18%) said they considered their current health when estimating this, and just 20% their lifestyle decisions.

"While education, awareness and financial guidance will play an important part in fixing this problem, the inadequacy of auto-enrolment workplace pension contributions is the main problem that must be resolved."

This is even more concerning when looking at workers’ retirement planning and their considerations for their health and care. While 43% have thought about the possibility of getting a serious illness, they have not considered it fully into their retirement plan; 19% have considered it in their plan, while 28% have not considered it at all. 

Looking specifically at care, just 17% of workers have considered fully going into care into their retirement plan. Meanwhile, 40% have thought about it, but not considered it fully, and 31% have not considered it at all. 

The cost of care: reality

Without greater awareness and planning, millions of workers could face unexpected challenges in meeting future expenses. While there are many variables to take into account – type of care, location, and life expectancy – carehome.co.uk figures  estimate that care costs can vary from £1,160 per week for residential care, to £1,410 for nursing care on average. Annually, this could equate to £60,320 per year for residential care, or £73,320 for nursing home care. 

"With details of the Government’s highly-anticipated pensions review still to come, there’s an urgent need to fix our pension system to ensure better outcomes for retirees, whether they need care or not."

Meanwhile, workers’ expectations for their workplace income are notably lower. The average expectation of income from a workplace pension is £20,435 per year; however, this varies depending on age. Those aged 18-24, and 25-34 expect they will receive £24,900 and £23,900 respectively. However, those closer to retirement aged 45-54, and 55-64 expect to receive £19,400 and £17,750 respectively.

Mark Futcher, Partner and Head of DC at BW, said: “There’s no doubt about it, the UK’s care crisis is deeper than we thought. As of now, Age UK estimates  there are 2.6 million people aged 50+ in England unable to even access care, including hundreds of thousands stuck on waiting lists or waiting for their needs to be assessed. Now, our data suggests that millions more are unlikely to even be able to afford it when they reach retirement.

“While there are numerous factors to take into account, what’s evident is that very few people are even thinking about their health or care considerations when planning for their retirement. As a result, we’re at risk of a growing population with woefully inadequate pension savings that could buckle under pressure at even the slightest sign of illness in retirement.

“While education, awareness and financial guidance will play an important part in fixing this problem, time and time again, the inadequacy of auto-enrolment workplace pension contributions is the main problem that must be resolved. With details of the Government’s highly-anticipated pensions review still to come, there’s an urgent need to fix our pension system to ensure better outcomes for retirees, whether they need care or not.”

This research forms part of our latest report, The At Retirement Reckoning, which surveys over 5,000 UK employees and self-employed people, more than half of which are over-50, and reveals a concerning gap between retirement dreams and the reality. Employees are ambitious in their hopes for their retirement but this is shown to be mismatched with their financial readiness.