Using savings and investments
On the face of it, using existing savings and investments to pay for care seems a sensible option. Savings and investments may be easier to access compared with renting or selling the home, realising investments is a relatively straightforward process. Using savings and investments could suit many people but if it’s solely used to fund care, the client may not be protected from the risk of longevity.
Looking at our own longevity assumptions we can see the typical available assets that would be needed when funding care.
Let’s assume an 87-year old female is looking to fund care in a residential care home and her life expectancy is 93 years. If she’s paying care home fees of £800 a week, she would need around £250,000 to fund her care over that time.
However, she also has a 1 in 4 chance of living to 97, and a 1 in 10 chance of living to 101. If she lives to 97, without including any potential increase in her care home fees, she would need around £416,000. There is a chance of someone living beyond their life expectancy, so this should be factored into the advice given when investing.
An alternative approach
This could be 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, one in ten people will still be alive six years later. An immediate needs annuity can provide a degree of certainty over the costs of care.
- No income tax is payable, this is as long as the care home is UK registered. In most cases, the payment from the immediate needs annuity is payable directly to the care home.
You can find out more about our immediate needs annuity, Lifetime Care Plan.
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 benefits, they may not be able to cancel their plan.
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.