Using savings and investments

On the face of it, using savings and investments to pay for care may seem like a sensible option. Savings and investments may be easier to access compared with other funding options, however there are some drawbacks.

If a client solely uses savings and investments to fund care, the client may not be protected from longevity risk.

Advantages and disadvantages of savings and investments

Advantages

Certainly, there are instances where this can be an effective approach. For example:

  • Investments could be a good option if care costs aren’t regular or the costs of care vary, for example if someone needs a short-term stay in a care home following an illness or operation.
  • Any savings and investments may perform very well and not only cover the cost of care for life, but also leave surplus money as an inheritance.
  • The money can be readily available and accessible.
  • Investments and savings could be combined with another method of funding for care. For example, your client could use an immediate needs annuity to help with any shortfall.
  • Requires care in their own home for a short period of time.
  • Requires a varying level of care each week.

Disadvantages

In contrast, there are risks in paying for care from savings and investments:

  • Increases in residential care costs have consistently outstripped inflation. This may put further pressure on paying for care costs from savings and investments.
  • Any savings and investments aren't guaranteed and your client could lose money and be unable to afford the cost of lifetime care.
  • If savings and investments run out and there are no other options, the type of care and where it's undertaken would be decided by the local authority. It is also worth noting that from April 2015 the national eligibility criteria came into force, as part of the Care Act 2014. This means that individuals have to qualify for care needs. If someone has exhausted their savings and investments and doesn’t meet the eligibility criteria, there will be no way of paying for their care.
  • Due to the age of people going into care, they will be investing for the short to medium term. A large proportion of a client’s assets may need to be invested in savings and investments. This may make it difficult for returns to keep up with inflation and care home fees.

 

An alternative approach

You may wish to consider an immediate needs annuity. In exchange for a single premium, an immediate needs annuity usually pays a monthly payment to your client’s UK registered care provider for the rest of their life:

  • The costs of care are uncertain. A BUPA study found that, while the average stay in a care home is around 2.3 years, nearly one in ten people will still be alive after six years. An immediate needs annuity can provide a degree of certainty over the costs of care.
  • No income tax is payable as long as payments are made directly to a UK registered care provider.

Find out more about our immediate needs annuity, Lifetime Care Plan. 

Other options include equity release or renting the home.

There are risks to this approach too:

Immediate needs annuities don’t guarantee to cover the entire cost of care and your client's care costs may increase over time. Your client is responsible for funding any shortfall and may need to fund their additional care costs from other sources.

The total amount of monthly payments made, plus any payment made as part of any death benefits, may be less than the original premium paid for the plan.

If your client no longer requires care, or becomes eligible for state funded care, they will not be able to cancel the plan and the income will be paid directly to them, subject to income tax.

Income tax is not usually due on payments made to a UK registered care provider under current laws. The rules governing tax may change in the future.

More about care funding

Find out more information from our care funding resources.

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