Investment bonds to pay for long-term elderly care

Investment bonds are not considered the best option to pay for your long-term care. There is no guarantee that the return from your investment will meet your care costs and you have to tie up your money for a long time. However, in some circumstances they can be helpful

What are investment bonds?

For clarity, the investment bonds we’re talking about here are medium- to long-term investments that are designed to produce capital growth. Depending on the size of your investment, the returns could also be used to provide a regular income to pay for care fees

They’re not to be confused with other investments that have ‘bond’ in their name, such as guaranteed bonds, offshore bonds or corporate bonds

Investment bonds may be suitable if :

They can be treated them as medium to long-term investments

Your parent won’t need access to the cash

Your parent is prepared to accept a degree of risk

Investment bonds won’t be suitable if:

There is total  reliance on them to fund your care

You can’t afford to risk losing any capital

You might need to get money early

How do investment bonds work?

You pay a lump sum, perhaps from the sale of your house, to a life insurance company. They invest the money for you, usually in a range of funds, until you either cash it in or die

Although investment bonds are primarily designed for capital growth and long-term returns, it may be possible to use them to help fund your care. The bond also includes a small amount of life insurance, and on death will pay out slightly more than the value of the fund

Do investment bonds affect your means test calculations?

When your local authority carries out a means test to work how much you’ll pay towards care, money tied up in investment bonds will normally be excluded from their calculations. However, you can’t just put your money into bonds to avoid paying – your council will see this as ‘deliberate deprivation of assets’ and take their value into account

If you’re living in England, download a factsheet about deprivation of assets and the means test 

If you’re living in Wales, find out more about deprivation of assets and the means test 

If you’re living in Scotland, download a factsheet about transfer of assets and the means test 

If you’re living in Northern Ireland,  find out more about deprivation of assets and the means test

What are the pros and cons of investment bonds?

Pros

• Over time, the return on your investment can be higher than with a cash savings account – always compare interest rates before deciding
• Although they carry some risk, investment bonds are considered safer than many other investment options
• If you can hold onto your capital and only use the returns, investment bonds can generate the money needed to pay for care, and leave a lump sum to pass on to your children
• Although money made through investment bonds is taxable, you can normally withdraw up to 5% of the original investment amount each year without any immediate Income Tax liability
• You can avoid putting all your eggs in one basket and potentially reduce the ups and downs of the stock market by investing in a range of funds
• You can usually switch between funds free of charge, although you may start to be charged if you keep switching funds frequently

Cons

• You’ll normally need to tie up your money for at least five years and might incur big penalties if you cash in your bond early. If you can’t tie up the money for this length of time, you may be better off putting your money into an ISA
• The returns from investment bonds are not always guaranteed and may not cover the cost of your care. Make sure you fully understand the terms of the bonds before investing
• Investment bonds are subject to a range of different charges – everything from initial and annual charges to cash-in charges if you withdraw some or all of your money early
• Although the tax benefits appear attractive at first, investment bonds are probably better described as ‘tax deferred’ rather than ‘tax free’. When you cash them in, the withdrawals are added to any profit made by the bonds and are taxed as income for that tax year

Risk

As with any investment, the value of investment bonds can fall as well as rise. You might make more than you would from a savings account, but you could also lose some of your money

Some investment bonds guarantee that you won’t get back anything less than you originally invested, but this will cost you more in charges

Take Care

If after seeking advice you still choose to go ahead, you can buy investment bonds through a financial adviser or directly from an insurance company

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Grace Consulting provides affordable fee-based independent advice to help you choose the best care option to suit you and your relative’s needs and wishes. Our Care Advisers provide the knowledge and support you need to make the right decision for you and your family. myageingparent.com is partnering with Grace Consulting, the UK’s leading provider of personalised independent care advice, who, for over 40 years, has specialised in finding the best possible care for older people. Please note this is not an Age Concern or Age UK service.

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This article is provided by the Money Advice Service.