19 Nov 2021

Using investment bonds to pay for your long-term care



Investment bonds aren’t considered the best option to pay for your long-term care. However, in some circumstances they can be helpful. Find out more about 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 might be suitable for you if you:

  • can treat them as medium to long-term investments
  • won’t need access to the cash, and
  • 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, and
  • 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. This is because they’re 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.

  • If you’re living in England or Wales, download a factsheet about deprivation of assets and the means test from the AGE UK website
  • If you’re living in Scotland, find out more on the Care Information Scotland website
  • If you’re living in Northern Ireland, find out more about deprivation of assets and the means test, on the Age NI website
 

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 be charged 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

 

It’s important that you get 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.

The content of this Factsheet has been created by and is provided by The Money Advice Service and is produced under licence from them.
Please be aware there are links contained within this factsheet that may take you to external sites, we are not responsible for their content. This is a general advice and information factsheet only and should not be treated as a definitive guide and does not constitute legal or professional advice. We are not a law firm and information is not intended to create a solicitor client relationship. Law Express and The Money Advice Service does not accept any responsibility for any loss which may arise from relying on information contained in this factsheet. This is not a substitute for legal advice and specific and personal legal advice should be taken on any individual matter. If you need more details or information about the matters referred to in this factsheet please seek formal legal or financial advice.
The Money Advice Service is not regulated by the Financial Conduct Authority and the Money Advice Service does not provide a regulated service. The information and tools that the Money Advice Service provides are generic and should be of general assistance to you in managing your finances. However, the money advice service cannot recommend specific financial products and always recommends that you seek further information from an independent financial adviser, and/or further information from the providers of specific financial products.
This factsheet is correct at time of going to print. The law set out in this factsheet applies to England and Wales unless otherwise stated.