This is part six of a series on planning and paying for later life social care costs.

We’ve previously:

• Explored why your care needs likely won’t be funded by the state.
• Discussed the means test, and which of your assets are counted or disregarded.
• Highlighted the mechanics of the key social care funding thresholds that determine your funding position.
• Provided a guide on estimating your own social care costs.
• Given a case study of a plan to cover care home fees.

Today we’ll look at how to self-fund care from your assets.

We’ve previously covered what a Local Authority counts in its means test. This test determines how much you personally have to pay.

This time we pass the baton to professional paraplanner – and Monevator contributor – Planalyst.

Assuming you’ve been deemed a self-funder, how might your own assets pay for your social care?

Take it away Planalyst!

Personal experience

Any social care I might need is likely many decades away. However my grandparents required care later in later life. I know my parents could too.

I work as a paraplanner for a financial advice firm. This role includes advising clients on how to fund social care at the point of need.

We should all know about the care system. You may stay fit as a fiddle by the end. But what about your parents, or a partner? What if you want to pay top-up fees to get them into a nicer or better-located care home? Life happens.

Today we’ll look at how to pay for social care with products that have some specific application to this purpose.

We’ll only mention in passing investments like equities and bonds. Most Monevator readers are plenty familiar with those.

Immediate Needs Annuity

Typically the go-to product for anyone needing care, an Immediate Needs Annuity is the only financial product designed to cover care costs – at home or in a care home – currently available.

You buy an Immediate Needs Annuity with cash outside of a pension. That’s as opposed to from a pension pot, like with a typical annuity.

If paid directly to your registered care provider, the income from an Immediate Needs Annuity is tax-free. That’s the big advantage.

If instead it’s paid directly to you, then only part of the income is tax-free. That’s because a proportion counts as a return of capital.

Show me the money

For a one-off cost you get:

• A lifetime income, which can’t be changed once set-up.
• Typically an enhanced starting level of income due to age or health conditions.
• Annual fixed (between 1-8%) or inflation-linked increases to cover care fee rises.
• Capital protection to pay a lump sum to your estate or under trust for beneficiaries. (This costs extra).

You can also choose a deferred care plan. This is essentially an Immediate Needs Annuity, with all the above features, only the income payments start one to five years later. This lowers the upfront cost. But you’d have to self-fund your care in the meantime.

Taking the capital protection option enables you to buy the annuity but still potentially bequeath some of the funds to your heirs (terms and conditions apply!). The extra cost might make it less attractive if you’re set on leaving a large legacy.

You can only purchase an Immediate Needs Annuity on a single-life basis. That’s different to pension annuities, which offer a joint-life basis to include a named spouse or dependant to receive your income (or a portion of it) on your death.

How to get an Immediate Needs Annuity

Anyone can put up the cash for the Immediate Needs Annuity purchase. So a relative could help to fund your annuity, if needed, for example. The tax treatment to the income remains the same, because it is still based on your life.

Immediate Needs Annuity income payments typically break even against the purchase price at around five years at current rates.

Unfortunately, ever-rising care fees have made providing these annuities less attractive to insurers. As a consequence only four providers remain in the market.

Covid has affected Immediate Needs Annuities. Today’s products may offer you capital protection for free. Such protection returns your capital purchase amount, less any income already paid, if you die from Covid within the first 6-12 months. Check the specifics with the insurer. This protection probably won’t stay available for long.

Capital investments: equities and bonds

Don’t fancy your chances of living long enough to get value for your money from an annuity? Then you’ll need to self-fund from your accumulated capital and income streams.

Check out the average life expectancy data for people in care in our previous article for more.

You might decide to self-fund simply by drawing directly from your investments. But you must be sure your capital withdrawals from your ISAs and other investments will last. That leads us back to the Sustainable Withdrawal Rate (SWR) that The Accumulator covered last time.

You need to think about how much risk to take with your underlying investments. Paying for social care is a short-term objective. You don’t want sudden market declines to eat into your funds just when you need to turn them into cash.

Investment bonds

This type of investment bond is bought from a life insurance company. They are not the standard corporate or government bonds we usually cover on Monevator.

Single premium investment bonds with an element of life assurance can be a good option to pay for social care.

That’s because the value of investment bonds can be disregarded from your capital total for the purposes of the means test.

You must purchase investment bonds when still healthy to benefit from this feature.

If you invest in them when you need care, your Local Authority is likely to count your investment bonds as capital under the ‘deprivation of assets’ rules. (We covered deprivation of assets in part two of the series.)

These rules mean your investment bonds would count as capital even if you can’t access them – because they were gifted or placed in a Trust.

(Note that your local authority will count withdrawals from an investment bond as ‘income’ in the means test. That’s confusing because such withdrawals are normally classified as ‘capital’ by HMRC.)

Tax and investment bonds

Withdrawals from investment bonds can take two forms:

• 5% per year (cumulative) of the original investment, tax-deferred.
• ‘Encashment’ of segments, which could incur chargeable gains tax.

New jargon alert! Encashment just means to exchange a cheque or a financial product such as a bond for money.

The return of the originally invested capital is tax-deferred. It is included in a ‘chargeable gains’ tax calculation when the bond is partly or fully encashed. At this point the amount previously withdrawn could incur income tax.

A complex calculation is deployed to work out if an encashment of the bond has made a chargeable gain. There are lots of factors to consider.

Ultimately you’re liable to pay income tax on any chargeable gains. This tax is levied via standard self-assessment. The chargeable gain counts as savings income for your income tax calculation.

• If it’s an onshore bond, this is added at the highest marginal rate over and above any other income.
• Offshore bond gains are the first, lowest part of any savings income.

There’s also 20% deemed corporation tax already paid in an onshore bond (not offshore). That means there’s effectively a 20% tax credit:

• Basic rate taxpayers won’t have more tax to pay if the gain is in that tax band.
• Higher-rate taxpayers pay 20%.
• Additional rate payers must cough up 25%.
• Non-taxpayers can’t reclaim the tax already deemed as paid.

Exotic locales

Not having taxes paid within the funds in an offshore bond means you could see higher growth compared to an onshore bond. The tax-free growth rolls up and compounds over time.

However depending on where in the world the investment is held, you could face non-reclaimable withholding taxes instead. Offshore bonds are usually more expensive than onshore, too.

Bonds can be placed into various kinds of trusts. Trusts can be structured so that the person needing care could still have access to the original capital withdrawals, but a beneficiary would receive a lump sum on death. Potentially outside the estate.

Professional financial and legal advice is needed. If you’re interested you must do it early in any estate planning process. And it might not be right for your circumstances.

Pension assets

Unless you’ve no other means of self-funding, starting a pension annuity or drawing down income from a pension isn’t the first port of call for funding care fees.

That’s mostly because pension and annuity income is taxable (over and above any tax-free cash). Whereas when left alone your pension investments roll-up tax-free.

Someone paying for social care is usually acutely aware of their mortality. Estate planning therefore often influences how they pay for social care. And a pension doesn’t incur inheritance tax, because it’s not included in your estate.

Wondering how to calculate your potential pension annuity annual income level? The Accumulator did that in a previous post. He used the Money Helper comparison tool.

Pix-and-mix

You can combine the different funding options. For instance you could purchase a small immediate need or pension annuity income. This provides you with a guaranteed base, alongside any existing secure incomes in retirement like the state pension or other non-means-tested State benefits, or even a defined benefit pension income.

Residual savings and/or personal pensions could cover the balance.

This approach could avoid a high withdrawal rate on your invested assets. It’d also mean not spending so much on an annuity. That could leave more of your estate intact.

Your family home

Typically your largest asset, equity in your home may be required to self-fund your care.

It’s possible to keep your home in the family. You can do this by outright gifting it or placing it in a trust. Such a move must be part of genuine estate planning. Do it well in advance of any need for social care to avoid falling foul of the deprivation of assets rules.

Alternatively, you could downsize to release some equity. You’d then still have a property to pass on. Downsizing works well if you need a place to live whilst receiving care at home. You could buy a home that’s easier to maintain or is more accessible. This could reduce the level of care you need.

If you’re going into a care home, you could sell your property to use the cash to cover your care fees, and invest the excess. That excess could ultimately be left to your family.

Letting out your home as an extra source of income is another option. For many needing care it will be less attractive. You’d have all the cost and hassle of being a Buy to Let mogul.

The second post in this series explained how a family home is disregarded from the local authority’s financial assessment, provided certain family members or your live-in carer lives there.

There’s also a 12-week disregard if no one was left living there when you went into care. During this period, your home would not be included in the assessment. After that your property value will be considered as capital in the means test.

Equity release and deferred payment

We previously covered Deferred Payment Agreements with a local authority. Such an offer is only available when you go into a care home.

The commercial equivalent is equity release. It’s broadly the same idea. You again release capital from your home. But with equity release you’re paid a lump sum upfront or multiple sums over time.

You might enter into an equity release arrangement before needing care to meet other spending needs. Note that if you’ve already taken out equity release against your home, you’re unlikely to be eligible for a Deferred Payment Agreement.

Equity release comes in various flavours, such as Lifetime Mortgage or Home Reversion. Which reviewed the details. Compared to a Lifetime Mortgage, a Home Reversion plan typically gives you less than the share of your property being given up and repayments are more expensive.

Different strokes

There is one notable difference between the local authority and commercial lenders. A commercial lender who is a member of the Equity Release Council agrees that:

• Customers must be allowed to remain in their property for life.
• Customers have the right to move their plan to another suitable property without any financial penalty.
• All plans carry a ‘no negative equity’ guarantee. Borrowers will never repay more than the value of the home at the end of the contract, provided it is sold for fair market value.

The first two principles wouldn’t apply to a Deferred Payment Agreement. You would already be in a care home. For that reason they may also not be relevant to your equity release deal.

The local authority puts an equity limit on the property charge – up to 70% of its value.

If you hit this level of care funding, the local authority stops paying for your care under the agreement. You’re then back to a financial assessment to see if you remain a self-funder.

What about interest?

Local authorities can choose whether to charge interest on the Deferred Payment Agreement. If they do1, then interest is linked to the market gilt rate plus 0.15%.

This rate is published for local authorities in the Office for Budget Responsibility’s Economic and Fiscal Outlook every six months.

In October 2021, the weighted average interest rate on conventional gilts was 0.40%. It is forecast to be around 1% for the next seven tax years.

In contrast, equity release always incurs interest on the loan. Typically the rate is fixed, though some lenders offer variable rates. The average rate recently was 4.26%. That’s according to the Autumn Market Report 2021 from the Equity Release Council.

With both local authority and equity release you’ll probably lose your home to repay the debt. You may sell during your lifetime to reduce the interest you owe, or on your death. Hence your house is not going to go to the kids.

As with trusts, you should get professional financial and even legal advice.

Free support

Even self-funders should explore potential free money options, including:

• NHS continuing healthcare
• NHS-funded nursing care
• Section 117 mental health aftercare
• Intermediate care and re-ablement package
• Minor aids and adaptations in the home
• Charities and the voluntary sector

We cover these free social care options in the final post in the series.

Bonus appendices

Discontinued products

You might hear about a couple of products that are no longer available:

• Long-term care insurance policies
• Long-term care investment bonds

You may have elderly relatives who use/d them.

These products were very tax-efficient. Most of the payments are typically tax-free, whether paid to the person in care or directly to the care home. (The bond’s tax position is a little more complicated. It depends on how the funds are withdrawn and whether onshore or offshore.)

This income still counts as part of the means test.

Unfortunately these products disappeared due to rising cost of providing care. They became less profitable for issuers even as the level of care they covered shrunk. So they’re no longer available.

Social care funding – the diagram

This flowchart simplifies the complexities of the social care system:

1. In England and Wales. [↩]

A few years ago I was the proud manager of multiple bank accounts. Pretty surprising, considering I’m hardly the most industrious rodent in the rat race of work.

In this post I’ll talk about how I ended up with so many bank accounts and what I learned.

I’ll also share a few tips to help you secure a better interest rate today.

But first things first – how did managing my savings turn into almost a part-time job?

Work hard-ish, save harder

I’ve never been a very high-earner. And while I’d welcome any chance to change that, my full-time job is foremost a means to an end.

I know not everyone feels this way about work. Perhaps that’s why I’m not promoted ahead of my more ambitious colleagues. (Or maybe I just lack their skills, personality, and brainpower? Don’t answer that!)

Regardless, chasing money in a high-stress job at the expense of living life is not for me. I prefer a lower-paid job I can tolerate to a high-paying role I can’t stand.

Despite my low earnings, like most Monevator readers I dream of retiring early. So I’ve always understood the importance of saving regularly and getting the highest interest I can on my cash.

However my income doesn’t leave me much latitude to be frivolous.

My saving account years

My younger self thought the stock market was a casino. As a risk-averse person, I preferred to stash my cash into a savings account. I wanted a guaranteed return.

In my defence, savings rates a decade or so ago weren’t anything like as low as in recent times.

I got a cool 3% interest in an easy-access Cash ISA. That’s not going to make Warren Buffett sweat, but it was comfortably above inflation at the time. 

Throughout the 2010s though, savings rates on standard savings accounts and cash ISAs alike deteriorated. By the end of the decade even 1% easy-access rates were extinct.

Financial forces – ranging from the Government’s Funding for Lending scheme (launched in 2012) to the Bank of England’s low base rate – pressed down on interest rates on cash.

Banks could easily access cheap money, so they had less need to attract savings from the average Joe. Savings interest rates were hammered.

Using multiple bank accounts to up my interest rate

As savings rates on normal accounts began to get embarrassing, I started stashing my cash in multiple bank accounts. This way I could continue to earn a decent overall return.

Oddly enough, while interest rates on savings accounts were low, many current accounts offered higher headline rates to attract new customers.

While even the highest-paying easy-access savings accounts at times paid less than 1%, the best current accounts were offering as much as 5% in interest.

These rates surely weren’t profitable for banks. Presumably some had decided that sending money out the door this way was a price worth paying to expand their total customer base.

The snag?

Opening and profiting from these current accounts was rarely as straightforward as with traditional savings accounts.

Multiple bank accounts, multiple hurdles

Very often the juicy headline rates only applied on relatively small sums, for example.

Some accounts also stipulated you had to pay in a set amount each month to receive the interest.

But these barriers did not deter me!

Over a year or so, I opened numerous current accounts, one after another. I stashed the maximum allowed into each one.

At the same time I was also opening bank accounts to profit from switching bonuses.

To get around any minimum pay-in stipulations, I set up standing orders to move my money between accounts.

For example, if one account required you to pay in a minimum of £500 per month, I’d set up an automatic payment to cycle this between two accounts.

It sounds a faff, but it didn’t take more than half an hour to sort out.

I had multiple bank accounts including: 

• £2,500 in Nationwide’s FlexDirect account (5% interest)
• £2,000 in a TSB Classic Plus account (5% interest)
• £5,000 in a Club Lloyds account (4%)
• £20,000 in a Santander 123 account (3%)
• £5,000 in three Bank of Scotland current accounts (3%)
• £3,000 in two Tesco current accounts (3%)

As a result I earned a savings rate far above those offered on normal savings accounts – yet still without risking my savings on anything racier than cash.

Incidentally, I actually had three Bank of Scotland accounts and two Tesco accounts as these providers allowed you to hold multiple accounts.

My investing years

Sadly, these generous current accounts have since disappeared or else they’ve massively reduced their interest rates. The benefit of saving in multiple bank accounts isn’t really a thing anymore.

Once I realised earning a decent return on my cash through interest was no longer possible, I began to think about investing my wealth instead.

Thanks to Monevator, the majority of my money is now in an investing account.

To date, my index tracker funds have earned a far greater sum than I would have made had I saved in a normal savings account.

Of course, investing is a different beast from saving. And there are no guarantees investing will trump returns from savings accounts in future.

Nevertheless, I’m happy I now have a long-term plan for building my wealth, rather than having to juggle ten or more bank accounts!

Three ways to boost the interest rate on your savings today

Despite today’s high inflation, I still like to keep a bit in cash on hand for a rainy day. And I continue to hunt for the best options.

If like me you’re partial to holding some cash, you may be able to boost the interest rate you earn.

Right now, you can earn 1.5% AER variable via app-only Chase Bank. While it’s a savings account, you must first open Chase’s current account to access it.

If you’d rather not open a new bank account, then Cynergy Bank pays 1.2% AER variable, including a 0.9% fixed bonus for 12 months.

If neither of those easy-access options take your fancy, here’s some alternative tips to help you boost the interest rate on your cash:

Tip #1: Lock away your cash 

Easy-access interest rates can be dire, but if you’re happy to lock away your cash for at least a year you can easily bag higher savings rates. That being said, if you do opt for a fixed savings account, consider the effects of inflation.

For example, if your money is locked away for a long time and inflation and bank rates spiral, you won’t be able to do much about it.

Going for a one-year fix is a decent compromise. As your fixes roll over, simply re-up them to the best new fixes available. 

Tip #2: Consider Sharia savings accounts 

Sharia savings accounts can be opened by anyone. They work like normal savings accounts. The only difference is they follow Islamic banking principles.

This means that technically they don’t pay interest. Instead, they pay you an ‘expected profit rate.’

Often these expected rates are very competitive. It can pay to widen your search to include these types of accounts.

Tip #3: Look into regular savings accounts

If you squirrel away cash each month, then regular savings accounts can still offer you a way to earn a higher interest rate. Rates of 2-3% aren’t uncommon, though many of the best deals are tied to a bank’s specific current account.

There are also often limits as to how much you can save each month in these accounts. But some let you stash away up to £500 a month. Not too shabby.

You could well end up with multiple bank accounts spread around to harvest these higher regular savings rates. A blast from the past for me!

Are there any savings tips that I’ve missed? Have you used multiple bank accounts to boost your saving rate? Comment below – and see all my previous articles in my dedicated archive.

What caught my eye this week.

I get the impression people are already tiring of the endless inflation talk. But I find it hard to look away.

The stats just keep coming!

This week UK inflation hit 7%. That’s a 30-year high and ahead of most economists’ predictions.

The old RPI measure of inflation is already at 9%. Some pundits think CPI could get close in just a month as energy rises kick in. Even the Office for Budgetary Responsibility forecast a peak of 8.7%, although not until the end of the year.

Unlike much of the financial shenanigans we market nerds get juiced on, high inflation is already hitting everyday life as much as it’s roiling the indices.

Most obviously as the Bank of England raises interest rates – extremely likely to rise to 1% next month and probably to double that by Christmas.

But also in once-benign backwaters, where we were lulled into a false sense of security by years of low inflation and near-zero rates.

Loan ranger

For example, The Institute for Fiscal Studies this week highlighted how high RPI will send interest rates on student loans soaring:

…the maximum interest rate, which is charged to current students and graduates earning more than £49,130, will rise from its current level of 4.5% to an eye-watering 12% for half a year unless policy changes (the interest rates for low earners will rise from 1.5% to 9%).

This means that with a typical loan balance of around £50,000, a high-earning recent graduate would incur around £3,000 in interest over six months – more than even someone earning three times the median salary for recent graduates would usually repay during that time.

The maximum interest rate will later plunge, then rise again. Inflation is measured with a lag and there are other delays before rate rises – and a maximum rate cap – kick in.

It’s pretty complicated, but according to the IFS it should shake out as follows (red line):

The blue line is the IFS’ alternative policy of when to apply a rate cap. It argues for a smoother implementation on the grounds that breathless talk of a loan rate rollercoaster could put kids off going to university. (Though not before it used the word rollercoaster in the title of its own report.)

The whole mechanism is fiendishly complex. And apparently rate rises won’t affect most graduates anyway, as they don’t earn enough to pay off their loans.

See the IFS report for the full details.

Cap in hand

Simon Lambert at ThisIsMoney makes a case for quick action on the cap, regardless of how many graduates will be hit.

Not least because it’s already bad enough we send young people into adult life saddled with huge debts. (I agree).

But a wider point is that none of this mattered too much in a 2-3% inflation and 0-5% interest rate world. With inflation heading to double-digits, the wheels start to come off.

You can readily understand how price and wage spirals get going as different groups call for special measures. I’m also surprised we haven’t heard about massive financial blow-ups yet, given the pace of developments.

Time will tell. For now, enjoy the Bank Holiday weekend perusing another bunch of great reads.

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