Your Money: Can you avoid retiring hurt?

Nursing care: insurance scheme offers alternative to selling assets

The Government last week offered a glimmer of hope to hundreds of thousands of people worried that the spiralling costs of long-term care in retirement may swallow up the bulk of their assets.

Stephen Dorrell, Secretary of State for Health, announcedplans to allow individuals to keep pounds 1.50 of their assets for every pounds 1 of long-term care- insurance cover.

This can be added to the pounds 10,000 of assets that Kenneth Clarke, the Chancellor, said in his last Budget would not be part of any means test when entering long-term care.

In effect, a person taking out cover worth pounds 30,000 - at a cost of pounds 5,000 - will be able to have pounds 40,000 of assets disregarded completely when the local authority assesses its contribution to the costs of care.

Alternatively, people will be given the choice of a pound-for-pound disregard of their assets plus a further pounds 15,000 thrown in, if care has been bought for four years by an individual.

More flexible pension arrangements are also planned, allowing someone reaching retirement age to choose a smaller initial pension in return for a higher amount when care is needed.

Lastly, the Government proposes to make it easier for people to buy "immediate care annuities", lump sums paid at the moment when long-term care is needed, funded out of equity released from peoples' homes.

The potential attractiveness of annuities, were such a figure to be chosen, lies in the fact that, unlike conventional insurance policies, one need not gamble on needing long-term care.

Keith Bedell-Pearce, managing director of Prudential UK, said: "Indemnity insurance is something of a lottery. It may cost pounds 10,000 to provide the insurance cover necessary to fund the care needed before the disregard applies. But many people may think that if there is a one-in-five chance of collecting it is too big a gamble."

Mr Bedell-Pearce believes that it is possible to construct a financial product that allows people to take advantage of the capital locked up in their house, using part of it to buy the annuity while the rest is in effect protected.

However, the Government aims to make it difficult for people to cheat the taxman by taking out only a very short-term annuity policy - where investors get back most of their money while protecting their assets. If an annuity is bought, its minimum duration is likely to be 18 months.