Using investment bonds to pay for your long-term care
Investment bonds are not considered the best option to pay for your long-term care. However, in some circumstances they can be helpful. Read on to find out more and consider the pros and cons.
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 for you if you:
- can treat them as medium to long-term investments
- won’t need access to the cash
- are prepared to accept a degree of risk
Investment bonds won’t be suitable for you if you:
- will be totally reliant on them to fund your care
- can’t afford to risk losing any of your capital
- might need to get your hands on your 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 the bond 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 your 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, contact AgeUK NI to find out more about deprivation of assets and the means test.
What are the pros and cons of investment bonds?
- 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.
- 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.
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 less than you originally invested, but this type of bond will cost you more in charges.
There are well-known cases of companies mis-selling investment bonds, so be sure to get independent advice before making your decision.
Investment bonds are only one of the ways to help self-finance long-term care and are not suitable for many people. It’s important that you seek reliable, independent financial advice to discuss what option is best for your individual circumstances.
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.