The proportion of elderly people requiring residential care and support in the home is increasing. The number is already significant and set to increase dramatically, as people continue to live longer and the quality of healthcare improves. With this in mind, last month we introduced you to a series of care funding options available. This month, we present the final three: ‘Guarantee the capital value’, ‘Invest the proceeds’ and ‘Buy the necessary income’.
- Option 4: Guarantee the capital value
If you decide to sell your property, or the money for paying care fees exists already as a lump sum, one option for funding is to put that money on deposit and withdraw the fees as and when required.
The benefit of this approach is that the risk to capital is zero and the money is always readily available. Even if the bank or building society goes out of business, the Financial Services Compensation Scheme steps in and repays up to £85,000 per person per institution.
However, interest rates are currently at an all time low and deposit accounts have suffered from the effects of inflation, which can erode the real value of such savings over time. In addition, if the fees need to be paid for longer than expected, the savings could be used up, which may mean falling back on the state for support.
- Option 5: Invest the proceeds
The second option for funding care fees from a lump sum would be to invest it. Over the longer term, stock market investments have traditionally outperformed cash deposits and also been more effective in maintaing the real purchasing power of that money, i.e. protecting against the effects of inflation.
If the income yield required is quite low, then this can be an option for individuals, as it may be possible to produce such a yield without taking too much investment risk. However, for someone who is going into a care home, the long term may not be an option.
The value of an investment can go down as well as up, particularly in the short term. This could cause capital to be eroded more quickly than expected. If the individual is dependent wholly on the lump sum being considered for investment and the yield required is significant, or the risk they are required to take needs a long term view, it might not be a suitable solution.
- Option 6: Buy the necessary income
One way where you can secure a fixed and agreed income for life is via an Immediate Needs Annuity.
The primary benefit of this option is that it secures that income for life, regardless of how long that is. The usual method of purchase is a single lump sum payment in exchange for an income to cover all or part of the costs of long term care for the life of the individual. It is also possible to have different options depending on the circumstances and assets where the immediate needs annuity can be deferred.
Other features that can be added to the annuity are escalation rates and capital protection. Escalation attached to an annuity means the income paid to the care home rises by a fixed percentage each year and protects the income against inflation.
The exact costs of an annuity varies depending on the individual's age and current health. Life expectancy is fully accounted for in the cost, which will therefore be higher for a younger, more able person and lower for someone older and suffering from greater health impairment.
There are some risks which do need consideration. If the person seeking care does not live as long as expected, they may have paid more for the annuity than they would otherwise have received to meet the cost of care fees. Also, if the fees for the Care Home increase by more than the income paid by the annuity, then the shortfall will have to be met from other sources.
To view the first three care funding options available, click here.