Long-term care

Considering your options

Corporate bonds are a type of fixed interest security. A fixed interest security is a way of ‘lending’ money to a company in return for a fixed rate of interest over a set period. This type of investment is intended to provide you with a regular, reliable income.

Here are five ways to help you to plan for long-term care.

1. Using ISAs

The over-50s received a boost in October when their annual Individual Savings Account (ISA) allowance increased by £3,000. Those who turn 50 before April 6, 2010 may now shelter £10,200 a year from tax. Of this, up to £5,100 may be held in cash.

ISA savings are a highly tax-efficient way to generate additional income and income is free from further tax and does not count towards the age-related allowance means test.

2. Insurance bonds

Insurance company investment bonds are usually invested in managed with-profits funds or unit trusts. Once you have invested in an insurance bond, you may withdraw up to 5 per cent per year, for up to 20 years, and have tax on this income deferred until the bond is encashed – usually after death in the case of bonds used to pay for care-home fees.

This is because the 5 per cent withdrawal is treated as a return of capital, rather than income, for tax purposes. Insurance bonds are not always counted towards a means test for financial assistance. However, this varies from authority to authority, and any withdrawals are counted as income.

3. Care annuities

Immediate-needs annuities provide a guaranteed income for life, in exchange for a lump-sum investment, which is forfeited on death. The annuity is paid direct to the care home and is free of tax.

The poorer your health is, the better the rate you can expect to be paid. The cost will depend on a number of factors including age, gender and the state of the applicant’s health.

4. Trusts

A gift-and-loan trust can be used to fund long-term care, with the added benefit of reducing inheritance tax on your estate. The individual places a small amount, such as £1,000, in trust and then lends a large sum, such as £100,000, to the trustees.

The individual may not benefit from the trust by law but they can have the loan repaid, typically at 5 per cent per year, which can then be used to pay for care fees. The trustees can invest the capital, and the aim is that it grows in value outside the individual’s estate.

5. Equity release

Even with recent falls in house prices, most elderly people have significant equity in their homes. Equity-release schemes are loans against the value of your home, with interest deferred until the property is sold – normally on death.

Most lifetime mortgage schemes will allow you to borrow between 20 per cent and 45 per cent of the property’s value. Unlike selling your property to raise funds for care-home fees, you will still benefit if the housing market gains value. You can also keep your house.