According to Care Home UK, the average weekly cost of living in a residential care home is now £704. In other words, residential care now costs an average of £36,608 per year. For those requiring round-the-clock nursing care, the costs are even greater, averaging £888 per week, or £46,176 per year.

Of course, those numbers are the UK average, meaning that the fees someone can expect to pay for care in London and the Southeast of England will be significantly higher.

While healthcare is provided free by the NHS, the government expects people to contribute towards their own social care in later life.

Social care is ‘means-tested’, and according to the NHS, anyone with savings or assets worth more than £23,250 (or who owns their own property) can expect to pay for their own care costs. Right now, roughly half of care home residents pay for their care themselves (‘self-funders’), while the remainder have their care paid for by their local authority.

Most people expect to pay for care by using their pension, savings and investments – or income generated by other assets, such as rental properties. But this may not be the right option to suit your personal needs and circumstances. This is especially true in times of rising inflation, because cashing in your investments to pay an income means your money is likely to be worth less with each passing year.

Another route is to buy an insurance policy designed specifically to help pay future care home costs. These policies are also known as either an ‘immediate needs annuity’ or ‘deferred annuity’, depending on the specific needs of the policyholder.

With both types, you agree to use a lump sum to buy an annuity that will immediately begin to pay out a regular income for the remainder of your lifetime. This income can then be used to pay for care costs. Anyone in poor health can expect to pay less for their annuity, as they will need to pay for care for a shorter period than someone in good health.

Here’s a little more detail on each one.

Immediate needs annuities

As the name suggests, an immediate needs annuity is usually considered the best option if the individual has immediate needs, such as health issues – or they are already receiving care at home or in a care home.

But they also come with a few drawbacks. For example, they can be costly to arrange, and should the policyholder die shortly after taking out the policy, there’s usually no way for the remainder of the capital to be returned to the policyholder’s estate.

It’s also important to be aware that any income received from an annuity is classed by HMRC as ‘earned income’, and is therefore subject to income tax. Buying an annuity could also affect your entitlement to other means-tested benefits.

Deferred annuities

A deferred annuity is similar to the above, as you pay a lump sum and then receive regular annuity payments in the future. However, with a deferred annuity you won’t receive those payments immediately; instead you can specify when to receive them in the future (usually up to five years’ time). The longer the deferred period, the lower the cost of the policy overall.

While a deferred annuity usually works out cheaper than an immediate needs annuity, you still have to make a lump sum payment upfront. But perhaps the biggest downside is that should you need to pay care fees earlier than you’d expected, you’ll have to cover those costs yourself until the deferred annuity income begins. This could leave you severely out of pocket until the annuity starts.

While some people find that a long-term care annuity is the right solution for their needs, for most people, there are better ways to fund care fees over the long term. For example, you might consider an investment strategy that keeps your funds invested, and from which regular amounts are paid out to cover care costs when required.

Most people find that this is a more flexible approach, as it gives their retirement pot the chance to grow while it’s not needed. An added benefit is that upon death, the remaining capital still forms part of the deceased’s estate, and can therefore be left to beneficiaries.

However, do remember that the value of investments, and any income you take from them, can fall as well as rise, and you may not get back the full amount invested, so it’s essential to seek professional advice. A financial planner can help you make the right choices, and advise you on ways in which you may be able to reduce a potential inheritance tax (IHT) bill for those left behind.

Planning for care home fees can be complicated and costly, which is why it’s a good idea to talk to your Amber River independent financial planner. We can help by creating an investment strategy that takes into account the monthly costs of care, and make sure these costs are covered for as long as needed.

No one should be left with the fear of running out of money needed for care during their later years. With careful planning that considers your personal care needs, we can help to structure your finances while giving you some much-needed peace of mind.