How do you pay for long-term care?

The hardest question: how long will care be needed?

When care starts like this, the first question a family asks is usually practical. How do we get money out of the savings and investments to pay the carers? The harder question is the one that comes later: what happens when that money runs out?

Nobody can tell you how long care will go on. That, in my view, is the fundamental issue with care costs. Most big expenses in life have a shape to them – a mortgage has a term, school fees have an end date. Care has neither. You could be paying £6,000 a month for six months or ten years, and no one can tell you at the outset.

That uncertainty is hard on the finances and harder on the family. The default approach is to run savings down and hope they last. It leaves whoever manages the money doing the sums every month, wondering how long the pot will hold out.

What will the state pay towards care?

Here’s how it works. The starting point is the means test. Anyone with more than £23,250 in savings and capital pays for their own care in full. Between £14,250 and £23,250 they contribute alongside the local authority, and below £14,250 the local authority pays. Those are the figures for England in 2026/27.

On paper that sounds like a safety net. In practice, there are two problems with relying on it. The first is that provision varies from one local authority to the next: the situation for a friend in Gloucestershire, for example, may be quite different from what you experience in Bristol. The second is that when the local authority takes over, the care someone receives is not guaranteed to match what they had been paying for themselves. The level of care can change, and so can the location. For a family who chose a particular care home because it felt right, a move to one that is less of a fit is a real possibility.

For most of the families I work with across Bristol and North Somerset, the means test is not the plan. Their savings sit well above the thresholds, so the real question is: how do you fund care from your own money without the fear of it running out?

What is an immediate needs annuity?

An immediate needs annuity (INA) is an insurance policy bought with a single lump sum when someone already needs care. In exchange, it pays a regular benefit towards the cost of that care for the rest of their life, however long care continues.

The cost is worked out for each person individually, following an assessment of their health. That assessment takes in any medical conditions and whether they have difficulty with everyday tasks such as dressing or climbing stairs, sometimes referred to as ‘activities of daily living’. For that reason, an annuity tends only to be suitable for someone who, following assessment, is thought to have some degree of reduced life expectancy.

The benefit can be set to rise each year, either in line with inflation or by a fixed percentage. Around 5% a year is typical, though it can be set lower or higher, so the payments keep pace as the cost of care increases. The benefit is paid directly to the care provider, so it is not treated as part of the person’s income and no tax is due on it.

Part of the capital can also be protected at the outset, typically 50% and sometimes as much as 75%. That protected amount comes back one way or another: through the regular benefit payments themselves, or, if the person dies during the capital protection period, as a return of capital. In many cases the protection period runs for between 18 and 36 months, and the regular payments carry on for life even after the protected amount has been paid out.

The annuity creates a boundary that care costs otherwise lack. Instead of an open-ended drain on savings, there is a known cost, paid once, and thereafter the cost of care is covered for life.

According to Age UK, a place in a care home costs around £1,100 a week on average and a place in a nursing home around £1,450 a week, and individual homes can charge more or less than that depending on the area and the home you choose.

It is a big decision, and the numbers involved deserve careful thought. According to Age UK, a place in a care home costs around £1,100 a week on average and a place in a nursing home around £1,450 a week, and individual homes can charge more or less than that depending on the area and the home you choose. With an INA you are committing a large sum in one go, and apart from any protected element the capital is not returned. If care turns out to be needed for only a short time, the annuity may pay out less than it cost, and the family would have spent less by paying for the care directly. Set against that is the certainty that the payments will not run out, however long someone lives. For many families, that certainty, and the peace of mind of knowing the rest of the estate is protected from care fees, outweighs the risk. Which way the balance falls depends on the person’s health, their assets and how much that certainty is worth to the family. It is a choice to make with specialist advice, and with a clear view of the other options.

Looked at this way, the £400,000 annuity has an effective cost of £240,000. At care fees of £6,000 a month, that is a little over three years of care, and the payments continue for as long as care is needed. The family gets the fees paid for life, a smaller tax bill, and an end to the monthly worry about the money running out.

A note of caution belongs beside any example like this. Inheritance tax depends on individual circumstances – the allowances available and how the estate is made up – and tax rules can change. The saving is only realised on death, so it is not money the family sees in the meantime. The figures show how the moving parts interact, not what your own position would be. An annuity should be bought because the care need is real and the product is right on its own terms, with any tax saving as a secondary benefit.

What if the money is tied up in the house?

Sometimes the savings alone would not cover the annuity. Where most of someone’s wealth sits in their property, equity release on the home can fund the purchase. The annuity then puts the boundary around the care costs, funded by the house rather than by cash. Equity release is a significant step in its own right, with costs and consequences for what remains in the estate, so it belongs in the same properly advised conversation as the annuity itself.

Paying for a parent’s care

One more thing is worth knowing, particularly if you are reading this with a parent in mind: care can be funded from someone else’s pocket. If your parents’ savings would not stretch far, you can pay for their care from your own money, and the same planning applies, from the means test through to the annuity. For a generation whose parents may not have wealth of their own, that is increasingly part of the plan.

What should you look for in an Adviser?

Long-term care advice is a specialist area with its own qualifications. The two to look for are a long-term care planning qualification awarded by a recognised professional body and the Later Life Adviser Accreditation from the Society of Later Life Advisers (SOLLA). Advisers are not required to hold the SOLLA accreditation, so it is well worth asking about. Colin Thomas, who contributed to this article, is a Chartered Financial Planner and Fellow of the Personal Finance Society. He also holds the CF8 Long Term Care Insurance qualification from the Chartered Insurance Institute, and works with families on the decisions described here.

Care planning rarely feels urgent until it suddenly is. If you’ve started wondering how care would be paid for – for yourself, or for a parent – the best time for that conversation is while it is still a planning question rather than a crisis. If you would like to talk it through, get in touch.

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About Laura Joyce

Laura Joyce is a financial planner at Laura Joyce Wealth Management, advising families across Weston-super-Mare, Bristol and North Somerset on inheritance tax planning, intergenerational wealth and strategic financial management. Laura Joyce Wealth Management is an Appointed Representative of and represents only St. James's Place plc (which is authorised and regulated by the Financial Conduct Authority).

About Colin Thomas

Colin Thomas is the owner and Advising Principal of Catalyst Financial Consulting LLP, advising individuals, families and business owners across the UK. He specialises in later life planning, including long-term care (both sourcing care and paying for care fees), inheritance tax mitigation, estate planning, leaving a legacy and equity release, alongside pre- and post-retirement arrangements. With over 31 years in financial services, he is a Chartered Financial Planner and a Fellow of the Personal Finance Society. He is based on the outskirts of Bath, and most of his clients live in Somerset, Gloucestershire, Wiltshire, Berkshire and Oxfordshire.

Although the content of the article was correct at the time of writing, the accuracy of the information should not be relied upon, as it may have been subject to subsequent tax, legislative or event changes.  

Equity release is a lifetime mortgage. To understand the features and risks associated with such products, please ask for a personalised illustration.

Please note that Catalyst Financial Consulting LLP is a separate business within SJP. Catalyst Financial Consulting LLP do not work in legal partnership with Laura Joyce Wealth Management.

Some aspects of Long term care may involve a referral to Karehero, a care navigator and matching service provider, whose services are separate and distinct to those offered by St. James's Place.