Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
Investing to cover the cost of care
Planning for paying for a care home isn’t a fun prospect, but with annual costs running to tens of thousands of pounds, it is smart to be prepared.
Here’s our guide to care fees and how to invest to pay for them.
WHEN DO YOU HAVE TO PAY?
Anyone with savings or assets worth more than £23,250 will likely have to pay towards their care costs. Your property will be counted in this calculation if you’re moving into a care home, unless your partner or certain other close relatives still live there. This means that for many people they will need to use their home to help fund their care costs.
An exception on self-funding care is where someone needs care due to certain medical conditions or illnesses, and in this case the NHS will pay for care under ‘continuing healthcare’. The local authority will assess you and determine whether you’re eligible, and unfortunately there isn’t a list of conditions or illnesses that qualify you for funding.
Instead there are guidelines the local authority will follow, which can result in different areas interpreting the rules in different ways and a postcode lottery on whether care fees are paid.
HOW MUCH DOES CARE COST?
On average those paying for their own care will pay £750 a week for a care home and £1,000 a week for nursing care, according to LaingBusson, which crunches the figures on care costs. These averages hide big regional differences, where in the North East the average cost for nursing care is £674 a week, and in the South East it’s £1,017.
HOW CAN I MEET THIS COST?
You need to work out your total income each year, including any state pension, private pensions or rental income from buy-to-let properties. Once you’ve worked this out, you can subtract this from the care costs and work out your shortfall you need to make up.
Depending on the type of care home you’re moving into you’ll need to calculate some spending money too. Care homes vary from those where you still prepare some of your meals (and so incur some food costs), to those where everything is provided for you, down to your daily newspaper. So it can be tough to predict what these costs will be – you need to ask the home what’s covered.
If you already own a home, you may want to keep hold of it and rent it out in order to generate income. The advantage of doing this is that you keep the home to pass on to family members when you pass away, and you also don’t have to go through the process of selling the property.
However, depending on the area you live in, the type of property and the condition of it you might find that it doesn’t generate enough income to fund your care costs. You’ll also need to factor in periods where you might have no tenants, and also any costs of renting out the property and maintaining it.
WHAT SHOULD I INVEST IN?
The latest Barclays Equity Gilt Study gives an idea of the average long-term returns from different asset classes. Over 10 years the average return from UK stock markets has been 5.8% a year, after inflation, while government bonds have delivered 2.7% a year and cash has delivered a loss of 2.5% a year, after inflation.
This shows the importance of investing your money, rather than leaving it in cash. This is particularly the case as care costs tend to rise by more than inflation each year, so you need your income to grow every year.
For example, based on these average returns, if you have £200,000 sitting in cash you’ll lose £5,000 a year in real terms. If you keep it in cash and withdraw £20,000 a year to pay for care then your pot will only last for eight years. This also assumes your annual costs (and so withdrawal) remains the same, which is unlikely.
Meanwhile, if you assume the average return from UK stocks during that time, of 5.8%, your money will last for 15 years – almost double the time.
INVESTMENTS FOR INCOME-SEEKERS
JPMorgan Claverhouse (JCH) – this investment trust makes it on the Association of Investment Companies’ ‘Dividend Heroes’ list, meaning that it has raised its income every year for the past 20 years or more. In this case it’s increased it every year for 46 years. While there’s no guarantee that will continue, no one wants to be the fund manager who ends a 50-year streak of increasing dividends.
More importantly, the trust is one of just three on the list that has managed to increase its payout by more than inflation every year for the past 20 years. This is particularly important for those paying for care fees as the costs hike each year. What’s more, it’s the only one of those inflation-beating trusts to currently yield more than 4%.
The trust invests in 60 to 80 different UK companies and targets a mixture of income and capital growth, meaning your pot should keep growing as well as delivering an income. The £400m trust is far from the largest in its sector, but over the past 10 years has delivered a total return of 154%, compared to the FTSE All Share’s 111.5% return. Looking just at income, the fund has paid out £53,117 of income on a £100,000 investment over the past 10 years.
MI Chelverton UK Equity Income (B1Y9J57) – This £627m fund often slips under the radar of income hunters, but it’s been around since 2006, and managers David Horner and David Taylor have run it since launch.
Over the past 10 years the fund has been one of the top for income and capital returns in its sector. If you’d have invested £100,000 a decade ago you’d have received £87,000 in income during that time, while also seeing your initial investment grow by 110%. On a total return basis your pot would have grown to more than £356,000 over that 10 year period.
The fund invests in UK companies, both large business and those listed on the AIM market. This means you’re exposed to higher risk as some companies will be smaller and potentially less liquid.
To give you an idea of the split, the fund currently has 93 holdings, and 23 are large companies worth more than £1bn, while 11 are below £100m in size. Current holdings include pub group Marston’s (MARS), travel company National Express (NEX) and homeware retailer DFS Furniture (DFS).
Schroder Income Maximiser (B53FRD8) – A more complicated option that uses derivatives to boost income payouts, this fund isn’t for everyone. You need to make sure you understand how the derivatives are used in the fund, which essentially sell future potential capital growth in favour of income.
It means that the fund prioritises income over capital gains, so your initial pot will likely grow more slowly than other income funds. For example, the fund has returned 15.5% over the past three years and 100.1% over the past decade on a price basis, but during that time it has handed you £23,128 and £74,328 of income respectively on a £100,000 investment
The £1.2bn fund targets income of 7% a year, and has around 80% in UK stocks at the moment, including the likes of oil giant BP (BP.), banks RBS (RBS) and HSBC (HSBA), and supermarkets Morrisons (MRW) and Tesco (TSCO).
Don't need the income now?
With the income investment options, if you’re saving up for future care costs, rather than meeting the costs now, you can automatically re-invest the dividends or buy the accumulation share class of the fund until you need to draw the income. This means you’ll benefit from the income rolling up over time, but have a fund ready to generate income when you need it.