Calculating any Shortfall | Investments & Savings | Depleting Capital
Immediate Care Plans | Combining Investments & Savings with Immediate Care Plans

Utilising Capital to Pay for Private Long Term Care

Once care is needed and if capital is above the Means Test threshold, we have to look to our own resources. The primary consideration is having the right level of care in the location desired - usually somewhere easily accessible for loved ones and possibly close to where we used to live. A secondary consideration is often preserving as much of our estate as possible - if possible - to pass to our loved ones. Firstly, we need to calculate any shortfall. Secondly, we need to calculate how much capital is available to use - including existing investments and savings, and possibly the proceeds from the sale of the home.

I. Calculating any Shortfall

The basis of calculating any shortfall for private care is usually basic maths and as follows (using a simple example):-

However, as the shortfall is great and investment income is taken into account in this instance (as is
common), it is best to disregard the investment income – at least until funding options have been
worked out – as the capital used for investments may be needed for an immediate care plan in full
or in part, and/or alternative investments (this may not be the case if existing investments are
comfortably paying fees). This would leave a beginning shortfall above as £22,997.80.

II. Options Available to Pay for Private Care

The following is a brief introduction to financial plans which can be used to pay for care. They fall
under two broad categories:

1. If Income from Available Capital is Sufficient to Cover Care Costs

Investment & Savings Portfolios

If the person in care has enough capital to invest, then a standard investment portfolio can be set up with the aim of rising income and growth of capital. A typical portfolio could include deposits, bonds, commercial property and equities - the content and proportions dependent on the needs and risk-reward profile of the person in care, which is usually conservative at this stage of life. Whether beneficiaries will surrender the portfolio or keep it intact after the person in care's decease is often also a factor. However, at the time of writing, income levels would typically be between the levels of 3 - 5% net of basic rate tax of the value of the capital. This equates to £3,000 to £5,000 pa per £100,000 invested. If the care fees are a 'modest' £25,000 per annum this would take £500,000 to £833,333 invested. Money left on deposit alone would not grow in value or provide a rising income, so increases in costs would not be covered unless there was a large surplus of funds.

A brief summary of the major investments as they could apply to care funding is as follows:-

A Summary of using investments to pay for care is as follows:-

2. If Income from Available Capital is Not Sufficient to Pay Care Costs

Due to the size of funds needed, this is the most common scenario. There are three options available:

A. Depleting Savings

This is simply placing money on deposit and using the interest and capital to fund care costs. Ignoring increase in care costs (which would be expected to increase above inflation and interest rates) and interest paid, fees of £25,000 per annum would require £125,000 to cover five years of care. Once capital is depleted below the means-testing threshold, care would usually have to be provided by the Local Authority - at a home and location to suit their budget, which may or may not require a move. Depleting savings may be appropriate when there is a large surplus of funds and/or the person in care would be reasonably expected to live for a short period of time.

A summary of the key considerations is as follows:-

B. Immediate Care Plans (ICPs)

An Immediate Care Plan (ICP), also known as an Immediate Needs Annuity (INA) is a specialist form of annuity. It is therefore helpful to consider the various forms of annuity. An Annuity is an income bought from an insurance company for a fixed term (called a‘ Temporary Immediate Annuity,’ TIA) or for life (called a ‘Purchased Life Annuity,’ PLA). Income from Personal Pensions and their variants usually comes from a form of annuity called a‘ Compulsory Purchase Annuity’ (CPA). The single premium is given up to the insurance company - it is not returnable (so estate values and inheritances reduce). The Annuity also ceases to pay with the death of the annuitant, although widow/er and dependant pensions can be built in and/or a guarantee period (a minimum period the Annuity will pay out even if the annuitant/s die/s). However, guarantees do cost - with a smaller income payable. Annuity benefit can be level or increase at a set rate – usually a fixed amount or inflation capped at a set level. Annuity rates are based on three factors:-

Non-pension annuity income is usually treated as part interest - being taxed at the rates of the individual - and part capital for tax purposes, with the capital portion increasing on new annuities with age. Once someone gets to the late 80s and beyond most-to-all of the income is usually treated as capital and not taxed. An Impaired Life Annuity (ILA) is a Purchased Life Annuity providing enhanced terms for those eligible - a higher income - because the insurance company deems the annuitant's life expectancy to be less than standard, after medical underwriting (assessing the individual’s medical history), and therefore pays more for what it calculates should be a shorter period.

Immediate Care Plans* (ICPs) are long term care versions of Impaired Life Annuities, with two additional key benefits to ILAs:-

*ICPs are also known as Immediate Needs Annuities (INAs)

Level or Increasing Benefit

As with non-care annuities, benefit can be level or increase at a set amount or with inflation (capped to a set level). If an increasing income is selected, the initial benefit level will be lower. The break-even point to consider is how long it would take an increasing annuity to pay benefit which will match the level benefit and replace missed higher income payments.

Changes in Care

If the person in care changes care provider, the benefit can be switched to the new provider– including a domiciliary care provider if they move back to their domestic home. In the usually unlikely scenario that a person receiving care ceases to do so, the benefit can usually be paid direct to them as a non-care annuity, although some tax could be payable. However, as we have seen, once an individual reaches their mid-to-late 80s this is usually negligible to none, as most of the benefit is deemed to be return of capital by HMRC. If the person in care moves to a higher level of care, with a substantial increase in fees, a new financial assessment should be undertaken with your financial adviser to see the best way to meet the increase at that time.

Depleting Savings or ICPs?

Whether to utilise an Immediate Care Plan or to deplete capital on deposit is usually a calculated risk. If the person in care lives a short time, it is better to leave the money on deposit. If the person in care lives a longer time, it is better to use an Immediate Care Plan. Unfortunately, we do not have a crystal ball in these matters. We can only plan based on reasonable life expectancy at outset and the type and degree of risk the person in care and/or their families are willing to take - risk of the person in care dying in the short term, having spent a large sum on an Immediate Care Plan, vs the risk of the person in care living longer and depleting capital on deposit over a prolonged period of time.

The rate payable on an Immediate Care Plan is often between the parameters of 15 – 30% per annum, with level benefit and unprotected capital (see below). The break-even point, compared to depleting savings, is when the total benefit repaid is equal to the premium paid, plus an allowance made for bank interest which would have been otherwise received. After this the Immediate Care Plan is paying benefit that would otherwise be coming out of, and further depleting, capital. At 30% per annum benefit, the break-even point is about 3.5 years, at 20% per annum benefit, it is about 5.5 years and so on. Remember that Immediate Care Plans are designed to protect the remaining estate from complete or near complete depletion from paying care fees over the mid-to-long term.

Back to Back Combination Plans

If there is enough capital to utilise a ‘back-to-back’ combination approach (an Immediate Care Plan coupled with an investment plan or portfolio), it may be possible to recover some of the money paid into the annuity through growth achieved on the money in the investment portion. We consider this in the 'Combining ICPS with Other Investments’ section below.

Capital Protected ICPs

There are two protection schemes available:-

Both forms of protection are provided by taking part of the purchase price and applying it to a single premium life assurance – and this element is then not applied to providing an income. As standard procedure, this adviser orders illustrations for clients on all options so that an informed choice can be made.

The Deferred Option

Another option is a Deferred Care Plan (DCP). A DCP is the same as an ICP, but it has a deferred period before benefit is paid, usually of one to five years. Care fees are paid out of own resources in the meantime. The annuity is purchased up front, but the longer the deferred period is, the cheaper the premium usually is also. A DCP can be useful, subject to satisfactory figures, to help cover the risk of the person in care dying in the early stages, compared to the full cost of an ICP, whilst also retaining long term protection if the person lived a longer life. For example, if a three year deferred period is selected and the person in care dies after one year, the remainder of the three years care fees are saved minus the cost of the annuity. If the person in care dies after, or towards the end of, the deferred period, it can be a slightly more expensive option than an ICP - it depends on the terms offered at outset.

ICPs & The Inheritance Tax Factor

Capital protection aside, the thought of a large sum of their potential inheritance being given to an insurance company, understandably, doesn't usually thrill beneficiaries. However, for estates at the relevant level over the Nil Rate Band (NRB) for Inheritance Tax purposes, 40% is potentially going to be deducted in Inheritance Tax anyway when passed to beneficiaries. In most cases, for every £100,000 utilised above the NRB, £40,000 was due to go to HMRC. £100,000 placed in an ICP is therefore effectively costing the beneficiaries £60,000 in the above example and utilising this years NRB. Obviously, with a change of government, Nil Rate Bands may be increased above current forecasts.

A summary of the key considerations in utilising an ICP is as follows:-

C. Combining ICPs with Other Investments

The secondary purpose of using an ICP is usually to protect the remaining estate from depletion if
possible in the event of the person in care living a reasonably long life, compared to depleting
savings. This can be reinforced by prudent investment of the remaining capital, if sufficient is
available. If we wish to pass estates on to beneficiaries, and there is enough capital available, ICPs can
be combined with standard investments to help return capital. This is known as a ‘back to
back’ arrangement. The investment/s and remaining money on deposit can then be
passed on to beneficiaries upon death. A compromise is then achieved between paying
for care and estate preservation. The investment plan or portfolio for this type of
arrangement is typically conservative, sometimes with at least partial capital and/or income
protection as investments can go up and down. Further, investment arrangements of this type
usually need at least five years to run, so potential beneficiaries need to understand and accept this
in case the person in care does not survive this long – they would ideally need to keep the
investment/s for the remainder of the term. There are many investments which provide
protection of income and/or capital in the UK from the mainstream investment providers -
giving some of the gains from the markets with full or partial capital and/or income protection.

A typical combination case involves three tiers:-

The ICP can pay all or most of the care fee shortfall. The amount on deposit covers emergencies,
other shorter term capital needs, and possibly shorter term care increases if an increasing ICP
was not selected. The investment portfolio could be utilised to pay income now to supplement the ICP (and therefore reduce the amount paid to purchase it), or all of the immediate income could come from the ICP and the investment portfolio is left to grow to help replace the purchase price and/or be accessed later if need be for increases in care costs, etc..

A summary of a combination approach is as follows:-

29/03/09 Revision [top]