How to invest…to pay for long-term care

Continuing our series on how to invest for specific goals, we look at the options open to you if you want to ensure you can fund long-term care for yourself and your partner down the line.

Having to pay for care in your own home or in a residential home is not a financial goal to relish. But as life expectancy increases and degenerative diseases such as Alzheimer’s become more commonplace, it’s becoming a higher-profile consideration for older people. That’s especially so, given the massive strains and funding shortages facing the whole social care sector.

Moreover, demand is set to rise dramatically in coming decades. The medical journal LancetPublic Health estimated that between 2015 and 2035, the number of people aged 85-plus who need round-the-clock care in the UK will almost double, to 446,000. 

So what do you need to know about charges, and what are the best ways to cover your costs in the event that you do need to call on the services of the care sector for a parent, partner or yourself?

When may you need to pay?

In contrast to healthcare, most of us can expect to pay some or all costs if we need social care. The first step is to apply to the local authority for a social care needs assessment.

Local councils may pay some or all your fees, but qualification is means-tested, taking into account your savings, pensions, benefits and other income.

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If you have less than £14,250 in savings, your costs should be completely covered. If you have more than £23,250 in savings or you own your home, you are unlikely to qualify for any local authority help.

Although your home will generally be taken into account in assessing your ability to pay, it won’t be counted if your partner (or an elderly or disabled relative, or your child under 18) also lives there, or if you’re only going into care on a temporary basis.

Even if you cannot get financial help from the local authority, you may qualify for various additional state benefits such as attendance allowance; you can find out more through Citizens Advice.

If you have significant medical needs, you may also be able to get support from the NHS, through its Continuing Healthcare (CHC) scheme. Navigating your way through the CHC funding options can be complex and frustrating, but the NHS recommends getting help from a non-profit specialist called Beacon.

Deprivation of assets

Don’t be tempted to try and give away assets - your home or investments, for instance – in order to qualify for council funding. The council will look at this when it makes your assessment; if it concludes that you deliberately offloaded assets to avoid paying your own care fees, it may still include the value of those assets in the means test, even though you no longer own them.

Costs

These vary widely by location, but in September 2021 the average weekly cost of a residential care home in the UK was £704, while for a nursing home providing nursing or specialist care (for instance for dementia) it was £888, according to carehome.co.uk.

Bear in mind that self-funded residents will pay more than local authorities for places within the same home - Which? estimates around 30% more in 2019-20 in England. So you could easily be looking at annual costs of £50,000 plus, depending on where you live and what you need.

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Care at home can cost anywhere from £10 to £30 per hour, depending on the provider and when you need them (so for instance weekends may cost more). The average hourly rate is around £15, according to Age UK, so two hours of care a day would cost just under £12,000 a year.

The UK Home Care Association provides details of home care workers who follow its code of practice.

If you don’t qualify for council-funded long-term care, you will have to pay for care yourself. There are several ways to do this.

Existing assets and income

You may have investments including ISAs, taxable investments and maybe a SIPP which, together with income from pensions and benefits, are enough to cover some or all of the costs of care.

Gavin Haynes, investment consultant at Fairview Investing, suggests a total return approach aiming for capital growth as well as income, and using some capital to supplement the income generated. He suggests an equity income strategy, “focusing on dividend funds at home and overseas” - but recommends looking for funds with a record of dividend growth, rather than the highest yield.

Indeed, he says, focusing too single-mindedly on a high yield could backfire. “With cash and high-quality bonds (such as gilts) offering such miserly yields, investors who are following a high-yield strategy are being forced into higher-risk assets. There’s a danger that chasing a maximum income could lead to negative capital returns,” he says. Bonds and bond proxies focusing on income are also susceptible to underperformance in the current inflationary environment.

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For anyone trying to gauge the contribution their portfolio could make to care costs, a key question is what a sustainable total return might look like. Haynes warns that although the past decade has produced impressive annual returns from balanced portfolios, “investors may need to accept lower returns going forward, particularly in cautious and balanced strategies, given low bond yields”.

Vanguard recently updated its forecast of expected returns from 60% equity 40% bond portfolios for the coming decade, quoting an annualised return of 3.8%. “On that basis a £300,000 portfolio would be generating £11,400 a year, while a £500,000 portfolio would produce £19,000,” Haynes points out - a useful contribution but certainly not enough in isolation to pay for residential care.

In reality, most elderly people contemplating long-term care are likely to want to hand the management of their portfolio over to a financial planner. This is certainly one time when it makes a lot of sense to take professional advice. Look for a long-term care specialist who is SOLLA (Society of Later Life Advisers) accredited.

ii comment: Dzmitry Lipski, head of funds research at interactive investor, likes Capital Gearing investment trust as a vehicle to invest to cover long-term care. He says: “The investment trust has two objectives: to preserve capital over any 12-month period and deliver returns well in excess of inflation over the longer term. It aims to achieve its investment objectives through a long-only, multi-asset portfolio of bonds, equities and property, with small holdings in infrastructure, gold and cash.

“The trust has been managed by highly regarded investor Peter Spiller since 1982 and has delivered positive total returns in 37 out of 38 years. It has also been a great preserver of wealth in bear markets, including the dot-com crash and the Global Financial Crisis and, most recently, during the market sell-off in 2018 and 2020.

“We view this trust as a good core holding due to its defensive stance and high levels of diversification. The portfolio has a big emphasis on index-linked government bonds, which account for around 30%. Such bonds offer protection when stock markets fall, as well as providing a shield against inflation.”

Property

For many homeowners, the bulk of their wealth is tied up in their property. Often people are very reluctant to sell their home to release cash for social care, in which case there are a number of options to consider.

Renting your home

You could consider letting your home out once you move into a care home, and putting the rental income towards the care home fees.

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However, bear in mind that there may be periods when the property is empty and that income will have to come from another source. There are also expenses attached to rental properties, including insurance, agents’ fees, maintenance and decoration, and you may have to pay tax on the rental income.

Renting a room

This option might work if you plan to have care in your own home and have a furnished spare bedroom to rent out. Under the government’s Rent a Room scheme, the first £7,500 of rent received each year is tax-free. Again, though, remember you may have periods without a lodger or rental income.

Equity release

Equity release plans are another alternative if you want to stay in your present home and have care there. They allow you to access some of the value tied up in your property as a lump sum or income without actually selling it, but be warned - they can be expensive.

There are two types of plan. A lifetime mortgage basically provides you with a loan secured against your property, but the capital is not repaid until the property is sold when you die or go into a residential home. Interest is charged on the loan and can either be paid off each month or rolled up and added to the final repayment.

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Home reversion plans let you sell a part of your home at less than the market value, but then keep living in it rent-free until the property is sold.

Deferred payments

If most of your wealth is tied up in your home, the council may be willing to enter into a deferred payments agreement (DPA), which means it pays for the cost of the care home fees and the money is repaid with interest from the sale of the property at the end of your time in care.

This arrangement could last until you die, or it might be an interim set-up that enables you to sell the property at leisure.

Immediate needs annuity

If you are about to be admitted to a care home or already a resident, have a large lump sum available and don’t want to have to worry about care costs in future, an immediate needs annuity could be a tax-efficient solution for you. But do consult a financial adviser before going down this route.

With this type of product you pay a sum (how much depends on your health and age) up front, in exchange for a regular income towards the cost of care. In contrast to a conventional annuity, this can be paid directly to the care home, in which case it is tax-free.

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The beauty of this scheme is that once it’s set up, it will pay out for the rest of your life, no matter how long you live. But the flip side is that if you die sooner than expected, your money is lost.

Bear in mind also that if your care requirements increase over time, there may be a rising shortfall to be made up from other sources.

As with a conventional annuity, there may be the option of building in annual increases in the income paid, to cover rising care costs. You can also buy a guarantee, so that if you die early some of the unused lump sum is returned to your family. Both of these will bump up the initial lump sum, though.

Enhanced annuity

If you are in poor health and have money left in a pension fund, you could use it to buy an enhanced annuity that will pay out a regular income. While enhanced annuities do not come with the tax benefits of immediate needs annuities paid direct to a care home, they may pay a higher income because of your health conditions.

Investment bonds for long-term care

You make a one-off investment into a bond provided by an insurance company, which is invested by them in a range of funds. The aim is for long-term, relatively low-risk capital growth. However, you can withdraw up to 5% of the original investment every year and tax will be deferred until the bond is cashed in.

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If you can get by using just the returns on your original capital, you may be able to leave the original investment to your family.

But there’s no guarantee that the bond will pay out what you need. These bonds also typically involve tying up your money for at least five years, with stiff penalties for early withdrawal, as well as various other fees.

Running out of money

The costs of residential care are such that it may become evident you’re going to run out of money. In that case you’ll need to start making arrangements several months beforehand, as the process can take a while.

You will need to arrange another care needs assessment with the local authority, as it has a legal duty to support those who cannot afford to pay for care themselves. But you may have to move to another home if your current place costs more than the council budget, or else find the money to top up the shortfall.

Which? has produced a detailed guide to funding long-term care, and you can also get further help from Age UK on 0800 055 6112.