SUITABILITY AND RECOMMENDATIONS
There are potentially several ways to fund long term care and how this is done may depend on whether the property is retained or sold. The options may include the following:
Retaining the property
- Local authority deferred payment scheme if your client meets the criteria
- Renting out the property if it’s suitable for renting
- Equity release (not generally available if your client is in residential care).
Selling the property and release the cash
- Cash in the bank
- Investment strategy
- Immediate care plan (“ICP”)
- A combination of all three of the above.
Every one of these options has pro’s and con’s, depending on personal circumstances, and hence the need for good quality regulated and qualified advice. Most of the activities above are what we might term “regulated activity”.
For many people who self-fund their care their property is sold and they then have the cash to fund their care. It’s basically a choice of leave the cash in the bank, invest or buy an ICP (or indeed a combination of these options).
Before getting to the regulated activity, the assumption has been made that advisers would have investigated the possibility of NHS Continuing Healthcare (NHS CHC), Mental Health Act 1983 (MHA), and all other potential sources of funding including maximising any benefits that may be available such as attendance allowance.
There are some important factors to consider when looking at some of the care funding options. The Money Advice Service (MAS) has some information relating to the use of both investment bonds and ICP’s or Immediate Needs Annuities.
They comment as follows about investment bonds (abridged):
Using investment bonds to pay for long-term care
“Investment bonds are not considered the best option to pay for your long-term care. However, in some circumstances they can be helpful. Read on to find out more and consider the pros and cons.”
Investment bonds may be suitable for your clients if they:
- can treat them as medium to long-term investments
- won’t need access to the cash
- are prepared to accept a degree of risk.
Investment bonds won’t be suitable for your clients if they:
- will be totally reliant on them to fund their care
- can’t afford to risk losing any of their capital
- might need to get their hands on their money early.
Do investment bonds affect means test calculations?
When your client’s local authority carries out a means test to work out how much they’ll pay towards their care, money tied up in investment bonds will normally be excluded from the calculations.
However, they can’t just put their money into bonds to avoid paying. Their council will see this as ‘deliberate deprivation of assets’ and take their value into account.
What are the pros and cons of investment bonds?
Pros
- Over time, the return on your client’s 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 your client can hold onto their 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 their children
- Although money made through investment bonds is taxable, your client can normally withdraw up to 5% of the original investment amount each year without any immediate Income Tax liability
- They can avoid putting all their eggs in one basket and potentially reduce the ups and downs of the stock market by investing in a range of funds
- They can usually switch between funds free of charge, although they may start to be charged if they keep switching funds frequently.
Cons
- They’ll normally need to tie up their money for at least five years and might incur big penalties if they cash in their bond early. If they can’t tie up the money for this length of time, they may be better off putting their money into an ISA
- The returns from investment bonds are not always guaranteed
- They may not cover the cost of their care. Make sure they 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 they withdraw some or all of their money early
- Although the tax benefits appear attractive at first, investment bonds are probably better described as ‘tax deferred’ rather than ‘tax free’. When they cash them in, the withdrawals are added to any profit made by the bonds and are taxed as income for that year.
Risk
As with any investment, the value of investment bonds can fall as well as rise. Your clients might make more than they would from a savings account, but they could also lose some of their money.
Some investment bonds guarantee that they won’t get back less than they originally invested, but this type of bond will cost them more in charges.
MAS conclude with the following warning to clients about use of investment bonds to fund care:
Warning
There are well-known cases of companies mis-selling investment bonds, so be sure to get independent advice before making your decision.
Investment bonds are only one of the ways to help self-finance long-term care and are not suitable for many people. It’s important that you seek 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.
They comment as follows about ICP’s (for more information relating to ICP’s please refer to MAS)
Immediate need care fee payment plans
“If you need a regular income now to pay for care either at home or in a care home, an immediate need care fee payment plan could be worth looking at. This income is tax free if it is paid directly to the care provider.”
How immediate need care fee payment plans work
Immediate need care fee payment plans are designed to cover the shortfall between your client’s income and the costs of their care for the rest of their life.
The price of a plan is based on how much income they need and the insurance company’s assessment of how long they’re likely to need it for.
How much they pay upfront will depend on:
- the level of income they need
- their age
- the state of their health (the poorer their health when
- they buy the plan, the cheaper it will be)
- current annuity rates
- their life expectancy (the shorter that is, the cheaper the plan will be).
The income from the plan is tax free if it’s paid directly to the care provider.
If they’re worried about future fee price increases, they can build the cost of covering them into their care plan.
For an extra cost they can also put in a special clause (known as capital protection). This allows their family to get some of the lump sum payment back if they were to die early.
Some insurance companies offer a “deferred” option in their plans. This option allows your clients to choose to defer receiving income from the plan until a later date.
The longer the deferred period, the lower the cost of the plan. If they are considering a plan, check to see if this option is offered so they can compare costs.
Immediate need care fee payment plans could be suitable for your client if:
- they’re already in a care home, they’re about to move into one, or they’re receiving care at home
- they want the peace of mind of knowing that they have a regular income for life that can be used towards their care costs, whatever happens they have the money available to invest
- they want to cap the cost of their care, potentially safeguarding their remaining capital.
Immediate need care fee payment plans are NOT for your clients if:
- they don’t need to pay for care immediately
- they think they may only need care temporarily
- they might want their money back in the future
- there’s a good chance that they’d be entitled to NHS Continuing Care funding.
Risks
Once your client has taken out an immediate need care fee payment plan, there’s no going back as they won’t be able to cancel the plan.
They won’t be able to cancel the plan, but where care is no longer required, the income will continue to be paid, but will be paid directly to the client rather than their chosen care provider. However, in making that change, the income would lose its tax-free status.
They will also need to weigh up having a regular, secure income to pay for care against losing the lump sum they’ve invested if they were to die early.
For more information
Call: 01737 233065
Lines are open Monday to Friday, 8.30am to 5.30pm
Email: ltc@wearejust.co.uk
Or visit our website for further information: wearejust.co.uk