A home is often a person’s highest value asset, and so, in our experience, it is most common to have to sell the property in order to cover care costs. If the individual requiring care is considering moving into a care home, their property will be accounted for in the financial assessment and it is at this point that most people sell their property. Usually this is when we are approached for advice; to advise on how best to use the proceeds to pay for care, along with existing savings and investments.
Immediate Care Plans
One of the potential, and sadly often over-looked, routes to care funding is the Immediate Care Plan (sometimes called a care annuity). Something of a secret it seems to the general public (and even more worryingly, amongst care admission teams and families entering into care). This is a secret that more families entering care really need to know more about.
What Exactly Is An Immediate Care Plan?
An Immediate Care Plan (ICP) provides a guaranteed, secure income for the rest of your life to specifically pay for long-term care costs. As long as the income is paid to a CQC registered care provider or care home then the income is paid tax free – a significant financial benefit. The ICP requires an upfront lump sum investment with the average in the UK being £160,000.
Each ICP is bespoke and individual to each applicant with ICP providers appraising the individual’s medical history and current health status via GP and Care Home reports and other relevant data.
An ICP can only be recommended by a niche set of specialist qualified financial advisers and this is part of the reason why this valuable product is often overlooked by families entering the care journey. For anyone looking into advice we would strongly recommend seeking out a SOLLA-accredited (Society of Later Life Advisers) Independent Financial Adviser – the gold-standard in later life advice.
When Is An Immediate Care Plan Appropriate?
By far and away the most importance benefit of an ICP is that if offers both the person entering care and the family significant peace of mind.
Research has shown that one in four people are forced to sell their home to pay for care and one in six use up their entire life savings paying for care. If you run out of money, you fall under the care of the Local Authority and run the risk of being forced to move to a more ‘cost effective’ care setting.
Therefore the ICP is really there mainly to protect you and the family from longevity risk; the danger of running out of money. It not only provides peace of mind for the person in care that they will not have to be moved in the future, but also it ring-fences the assets that are not used when investing in an ICP – potentially to be used for the family inheritance or an emergency fund if the situation changes. Its also a great Inheritance Tax planning product – as the lump sum used to invest in the ICP is immediately deductible for IHT.
From a practical point of view, ICPs are only available to ‘self-funders’ - those who are required to pay for their own care because they have significant assets. ICPs are usually taken out on a shortfall basis where the person does not have enough income to meet the care expenses but has significant wealth in the form of cash, investments or perhaps a property sale. The average lump sum required for an ICP in the UK is £160,000 but quotes are provided on an individual basis – sometimes higher lump sums are required depending upon age and health status. In our experience, the average does tend to be higher than this for our clients - often due to the increase in cost for local care homes.
The Features of an Immediate Care Plan
ICPs offer a guaranteed and low risk form of care funding solution. However at your first financial advice meeting, your specialist later life adviser will potentially recommend different options and guarantees that some or all of the ICP providers offer. Some, none or all may be appropriate, depending upon your own specific circumstances and what is important to you and the family. These will be discussed and agreed upon with your specialist later life adviser. The following options give you an idea but are not exhaustive.
For instance, escalation options allow for the ICP income steam to increase with predicted care fee increases or increase by a certain amount each year or are simply linked to inflation. This is an important consideration as with care costs rising on average 6-8% per year, it is very easy for an income short-fall to start to emerge over the years in care.
Each provider has various capital protection options available, some providing an automatic return of some or all of the capital if death was to occur within 6 months of outset. It’s also possible, for an increased upfront premium, to protect a longer term minimum return for the ICP. Again, your adviser will be able to recommend suitable options depending upon your situation and what is important to you.
A deferred needs plan is exactly the same as the ICP expect the income is deferred – with the deferral period lasting anywhere between 1 and 5 years. This is a very popular option as it requires a lower upfront premium, can be cheaper in the event of an early death (short-term protection still available with certain providers and cheaper overall if death happens before the income from the plan starts) but also protects against longevity risk. Remember, you will need to fund your own care fees during the deferral period but it often works out cheaper this way. Speak to your adviser for more details.
Using Existing Investments
Another option for paying for care is to use any existing investments you or your loved one might have built up. Certainly by investing the capital, it should work harder and generate you or your loved one a much higher income than having money sitting in a bank account.
In addition, other related considerations like Inheritance Tax efficient investments and trust planning might give you or your loved one to ‘kill two birds with one stone’: pay for care and solve a potential IHT liability.
Of course with the global economy having its usual ups and downs, investment returns can be less certain, especially in the short term and retaining, adding or switching investments must be handled with care and with specialist later life financial planning advice. This is even more important for attorneys dealing with a loved one’s financial and investment affairs under a Lasting Power of Attorney where legal considerations to act in the best interests of your loved one take precedence over all else (see Guide to Self-Funding care (5)).
Using Existing Cash Savings
Finally, the lowest investment risk option (and arguably simplest) is to keep the money in a / or a few bank accounts and draw the money out to pay for the care costs.
This might be a sensible option for short-term needs or to act as an emergency fund whilst the rest of the money is working harder invested and / or the Immediate Care Plan is producing a guaranteed stream of tax-free income towards the cost of care.
By simply using cash savings to pay for care be mindful of low returns and not keeping pace with inflation. Above all else be wary of the on-going withdrawing capital with the ultimate risk of running out of money entirely putting you or your loved ones chosen care setting at risk.
Harold Stephens is a local, later life financial and legal planning specialist with a special interest in long-term care provision and tax efficient funding options. If you, or your loved one, are at the point of care need and are currently making important care funding decision then get in touch now for an initial chat with one of our specialist advisers by calling 0117 3636 212 or emailing office@haroldstephens.co.uk.
We will also be putting on some in person events throughout October and November in the local area covering the topic of care funding decisions and related later life financial and legal planning. Event details are updated regularly here: https://www.haroldstephens.co.uk/events/
