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.
Advantages of using savings and investments
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 rise as well as fall, this could leave your clients unable to pay future care fees.
- 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.
- Needs care in the home for a short period of time.
- Requires a varying level of care each week.
Disadvantages of using savings and investments
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 costs from savings and investments.
- If savings and investments run out and there are no other options, the type of care and where it is 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
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.
More about care funding
Find out more information from our care funding resources.
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