Long-term care

Considering your options

If you’re considering long-term care options for yourself, your parents, or a loved one, this is an area of financial planning that requires professional advice.

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 linked funds. 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 above the 5 per cent return of capital 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 creates a trust by declaration and then agrees to make a loan to the trustees which is the sum to be invested by the trustees.

The individual creates a trust by declaration and then agrees to make a loan to the trustees which is the sum to be invested by the trustees. Any growth in the bond is intended for the beneficiaries and is therefore outside of 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.