About half of the people who enter a care home are funding their own care. Whenever we sit down with clients to discuss meeting the costs of care, after we work out the income shortfall, we always explain that there are 6 options available to them.

In a previous article, we mentioned 3 different ways to pay for the costs of care using a property that you own. This article will focus on options for paying for care that do not involve using a property, and it will assess the advantages and disadvantages of each option.

  1. Drawdown from cash – Whether or not the care recipient has a property, there is always the option of funding care from other assets. The simplest of these is to meet the cost by drawing down on cash.

Advantages

  • This is the simplest way to fund a shortfall. Set up costs and ongoing costs are minimal
  • Does not involved any investment risk
  • Allows for the use of tax shelters such as ISAs, to reduce the tax liability.

Disadvantages

  • Paltry interest rates mean that a significant sum is required to generate sufficient interest to meet the shortfall
  • Drawing down on capital introduces the risk of running out of capital
  • Larger amounts of cash will require holding accounts with several institutions to take stay within the Financial Services Compensation Scheme Limit of £85,000 per banking licence
  1. Drawdown from investments – It may be possible to use a portfolio of investments managed to an appropriate risk level to generate income or capital growth that is better than can achieved on cash to make the capital last longer.

Advantages

  • The possibility of making the capital last longer
  • Options to tailor the portfolio to use tax allowances such as personal savings allowance and dividend allowance
  • Allows for the use of tax shelters such as ISAs, to reduce the tax liability.

Disadvantages

  • Charges are higher than cash
  • If not managed properly and regularly reviewed, there is a risk of loss when the investments are sold
  • Drawing down on capital introduces the risk of running out of capital
  1. Purchase an annuity – this option involves securing an income from an insurance for the rest of the care recipient’s life. The insurance company will assess the recipient’s current age and state of health to work out the capital cost of purchasing the income.

Advantages

  • If paid directly to the care provider, the income is tax free
  • Once set up, the annuity involves very little intervention, so it is simple to administer.
  • Removes the risk of the individual running out of capital
  • Can include guaranteed increases each year to offset the increases in the cost of care.

Disadvantages

  • There is a risk of making a loss in the early years if the recipient dies.
  • Once set up, the annuity income cannot be changed

In practice, most clients require a combination of the approaches in order to effectively meet their needs. Our financial planners are all qualified and experienced in finding the right solution for you.

If you would like to speak to a member of WBW Chartered Financial Planners about any of the content in the article or for any financial planning related queries that you may have, then you can arrange a free telephone consultation for this week only as part of CISI’s Financial Planning Week 2019. To arrange a free consultation, please call 01626 202340 or email enquiries.cfp@wbw.co.uk.