Using investment bonds to pay for your long-term care

Money Advice Service

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 might 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, usually 1% of the fund value.

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 because they are treated as life insurance policies and disregarded.

However, if you already need care, 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.

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. This can be drawn monthly to provide a regular income.
  • 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 might 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 might be better off putting your money into an ISA.
  • The returns from investment bonds are not always guaranteed. Their value could fall as well as rise and they might 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 less than you originally invested, but this type of bond will cost you more in charges.

Next steps

Warning

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.

This article is provided by the Money Advice Service.

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Some important information about Rest Less Money

We want you to understand the positives, but also the limitations of using our site. We operate in a journalistic manner and therefore all information, guidance or suggestions provided are intended to be general in nature, and you should not rely on any of the information on the site in connection with the making of any financial decision.

When we set out to build Rest Less Money, we wanted to be a trusted place where you could find helpful information about financial matters affecting the over 50s. As a free to use resource, we try hard to provide the best information we can, but we cannot guarantee that we won’t occasionally make mistakes. So please note that you use the information on our site at your own risk, and we can’t accept liability if things go wrong.

Key things to remember when using Rest Less Money:

We do not offer financial advice – As a journalistic site, it’s important to know that we do not provide financial advice. You should always do your own research before choosing any financial product so that you can be certain it is right for you and your specific circumstances. If you are in any doubt, please seek professional financial advice from a regulated financial advisor.

No Liability – please note that you use the information on Rest Less Money at your own risk and we can’t accept liability for how you choose to use the information given on our site. We will often provide links to content or products and services available on other third-party websites. These are provided purely for your convenience and we cannot be held responsible for any content, or any of the products and services offered on any website that we link to.

 

Accuracy of Information – We try to make sure that all the information provided on Rest Less Money is correct at the time of publishing as we want it to be the most helpful resource possible. Sadly, we are not perfect however, and so we can make no guarantees as to the completeness, accuracy, adequacy or suitability of the information available on the site.
Whilst we work hard to try and provide accurate information, deals and prices can change, so whilst they may be correct at the time of writing, providers may subsequently decide to alter them later – so always double check first.

A final note on the Rest Less Community Forums – always remember that anyone can post their opinion on the Rest Less Community Forums, so it can be very different from our own opinion and may not be factual or well researched. Always be wary of any content posted on the forums and be sure to do your own research and due diligence on anything suggested. 

We hope you find Rest Less Money a useful resource and we would welcome your feedback at [email protected] on how to make it even better. For more information on any of the above you can read our full terms and conditions.

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