How an investment solution works in practice

The following example is for information only and is not based on a real-life case study.

Mrs Smith, aged 85, is currently resident in a care home where the costs (including personal spending) are currently £25,000 per annum. She has a total income of £13,000 per annum and capital of £150,000.

The difference between her income and care fees means that Mrs Smith’s assets are currently eroding at a rate of £12,000 per annum.

Mrs Smith’s daughter arranges an investment for her mother using £125,000 of her mother’s capital. The investment grows at a rate of 6% per annum.

She arranges for an income of £12,000 per annum to be taken from the investment in order to meet the fees. This means that in the first year £7,500 of growth is put towards the fees and the remaining £4,500 is met from the capital.

The following year the fees have increased by 5% to £26,250 per annum and there is now £120,500 in the investment. This provides £7,230 towards the fees and, with the income remaining at £13,000 per annum, the remaining £6,020 is met from the capital. If this pattern continues then Mrs Smith’s capital will be completed eroded within ten years.

Though this has not solved Mrs Smith’s funding problem for the next ten years, it has left them with control of the capital and, should Mrs Smith die within the first few years then the majority of her capital has been retained by her estate.

The main risk here is that should Mrs Smith live longer than expected then all of her capital will have been used towards care fees. Also, the returns on the investment are not guaranteed and so there is a chance that the capital will be eroded at a faster rate.