How can my investments fit into financing for later life care?

Q. How can my investments fit into financing for later life care?

A. I think it’s really positive that you’re thinking about this now. Many people leave it until it’s too late to put a plan into place. By thinking about later life care and how to finance it in advance, you hopefully have time to do something about it... should the need arise.

There’s no getting away from the fact that later life care is expensive if you’re self-funding. Privately arranged home care costs around £25 per hour. While it can cost £1,267 a week in a nursing home¹. How long you might need care depends on the type of care needed. Nursing care stays average between 1 to 1.5 years, while dementia care is longer - between 2 to four years². Of course, none of us know whether we’ll need later life care or not. But it’s far better to prepare for the worst and hope for the best than be woefully unprepared.

How to save tax-efficiently for later life care

As a Relationship Manager at Fidelity, I see a lot of my clients ringfence their ISAs for later life care. If they need it, great - it’s there. If they don’t, it can be passed on to their family - although this will still fall within their estate for Inheritance Tax (IHT) purposes. The beauty of an ISA is that it’s tax efficient. Any gains or income from your investments are free from UK capital gains tax and income tax. And while your money is invested, it has the potential to grow (it could fall in value too of course). It’s also flexible, as you can withdraw money at any time, without any penalties.

Other people think their pension is the answer for later life care. There are tax considerations to this of course, as after you take your 25% tax-free cash, any income you take from the remaining balance (while able to grow if it stays invested) is liable to income tax at your nominal rate.

Up until recently, many of my clients have tried not to touch their pension unless they absolutely needed to - as it typically falls outside of one’s estate for Inheritance Tax. So, it’s a tax-efficient way of passing on their wealth.

But in last year’s Budget, the Chancellor of the Exchequer announced plans to bring pension wealth within the scope of IHT. This has caused some of my clients to rethink how they’re going to pass on their wealth and take an income in retirement.

Of course, it doesn’t have to be a case of only using your ISA or your pension to pay for later life care, you could use a mixture of both.

Think about your investments

Now, let’s talk about the actual investments you hold in your ISA and/or your pension.

Many investors, as they get closer to retirement, think about de-risking their portfolios. But if you’re 60 and you don’t need to access your savings until you’re 80, your portfolio has plenty of time to potentially grow (again, no guarantees).

The challenge is not to de-risk too early. If you do, you’ll potentially limit what you can afford in later life care. It’s more of an art, rather than a science.

But diversification - holding a mix of different investments - is important in your portfolio. And that’s because different asset classes perform differently in the same economic conditions. Holding a mix will help to balance each other out to potentially give you a smoother ride over time.

• Learn more about managing risk here

Practical steps you can take now, to prepare for the future

If you’ve not got an ISA set aside for later life care already, why not set up a regular savings plan now?

The ISA allowance is currently £20,000 per year. If you only use a quarter of that allowance up over the next ten to twenty years it will definitely help get you some of the way there.

• Read about the benefits of investing regularly
• Open a Stocks and Shares ISA

Equally, you might want to think about taking financial advice if you’ve already amassed a healthy pot but would like a personal financial recommendation.

• Find out more about financial advice

Thinking about what ‘might be’ can feel daunting. But you’re doing exactly the right thing. The best thing to do is put a plan in place now and then forget about it. You can’t put a price on peace of mind.

About Marianna Nezhivaya - Relationship Manager

After a career in wealth management with several large private banks, Marianna joined Fidelity in 2017 to pursue a new challenge. She’s passionate about investment management and people and enjoys using her experience to help customers achieve their investment goals.

When she’s not working, she loves learning more about innovation and sustainable investing. She also cherishes spending time with her friends and family, discovering the cultural life that London has to offer, travelling and doing sports.

Learn more about our Wealth Management service

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Source:

¹ How much does care cost? | Age UK
² Factors influencing length of stay in UK care homes

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Tax treatment depends on personal circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55 (57 from 2028). This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.