When individuals become ill or suffer a disability that means they are unable to care for themselves (with the probability that the disability will continue over the long term) then long term care may be required. According to the Association of British Insurers someone turning age 65 today has almost a 75% chance of needing some type of long term care services in their remaining years.
Long term care is not just medical care, but rather assistance with the basic personal tasks of everyday life such as bathing, dressing, using the toilet, eating, incontinence and transferring to/from bed or chair. It could also be required for assistance with everyday tasks including housework ,managing money ,taking medication, preparing and cleaning up after meals, shopping for groceries or clothes, using the telephone or other communication devices, caring for pets, responding to emergency alerts such as fire alarms etc.
The rules on the provision of long term care are complex. In general the local authority is responsible for the assessment of an individual’s care needs and their ability to pay for them. Each person that requires care will have to go through a financial ‘means test’ based on their individual capital and income (it will exclude the capital and income of the applicant’s spouse or civil partner). Your local authority has a maximum rate they will contribute based on the type and level of care needed and, if the cost of the individual’s chosen care home exceeds this maximum, then the individual (or their family) will be required to meet the excess.
There is also a means test on capital assets which set an upper limit above which the individual will have to fund their own fees and a lower limit below which capital can be ignored. These limits are usually changed each year. From April 2014, the upper limit in England is £23,250 and the lower limit is £14,250. Capital amounts which fall between these amounts are assessed as providing £1 of additional income for every £250 of capital above the lower limit. This known as “Tariff Income” and is aggregated with the individual’s other income for the purpose of the income test.
Changes from 2016
The Care Act 2014 has proposed that from April 2016 anyone with assets of less than £118,000 will receive help for their social care costs and a £72,000 limit on lifetime care costs will also be introduced. However, this does not include ‘hotel costs’ such as board and lodgings and the cap will only apply once needs are established as ‘substantial’. Some actuaries are reporting that, when you add in these ‘hotel costs’, the actual total cost of care will be double the £72,000 limit (read the article here). Individuals going into care before April 2016 will still pay bills themselves if their assets are above £23,250.
So why use investment bonds for elderly savers?
Quite simply, life assurance policies (which is what an investment bond is classed as) are normally excluded from the means test for long term care fees assessment.
The Department of Health issues the Charging and Residential Accommodation Guide (CRAG) for local authorities that outlines which assets are to be included within the means test. The guide states that:
“…if an investment bond is written as one or more life insurance policies that contain cashing in rights by way of options for total or partial surrender, then the value of those rights has to be disregarded as a capital asset…”.
However, the reason for investing in an investment bond cannot be purely for the reason of avoiding care costs as the local authority may argue that deliberate deprivation has occurred. Deliberate deprivation is the term used when individuals knowingly deprive themselves of their capital or income to reduce the value taken into account for means testing. Some examples of deliberate deprivation are:
- Giving assets away (outright or into trust);
- Selling assets at below market value;
- Purchasing of assets that are excluded from the means test;
- Failure to claim an income, or capital, to which the claimant is entitled.
CRAG states that, if the local authority think that deliberate deprivation may have occurred, they should look at the timing of the disposal of the capital asset and the intention behind this. The guide states that the intention to avoid the charge need not be the main motive, but it must be a significant one. Where the individual was fit and healthy and could not have foreseen the need to move into care, it would be less reasonable to assume that deliberate deprivation had occurred.
There is no time limit for local authorities to apply the deliberate deprivation rules if they think it has occurred. There are separate rules which enable local authorities to recover care fees from the third party receiving the capital asset, if the transfer took place in the six months before the client moved into the care home.
The key issues, therefore, are timing and motive.
For example, if an elderly individual in failing health moves capital into an investment bond shortly before making a claim for local authority assistance with care home fees then the authority may well include this capital in the means test even though investment bonds would normally be excluded.
There are many genuine reasons why an individual may have invested in a bond such as tax planning for an efficient income in retirement or simply investing assets with a desire to keep pace with inflation . As long as avoiding the means test assessment was not a significant motive and the client is fit and healthy and could not reasonably foresee the need for long term care, then there would be less scope for a local authority to apply the deliberate deprivation rules.
Of course, should you want to discuss how long term care could affect you or your family then feel free to get in touch with me at firstname.lastname@example.org. All initial discussions are at no cost or obligation for either party.
NB Bonds that have no life assurance element, such as capital redemption bonds, will be included as capital in the means test. Regular withdrawals taken from a bond will be taken into account and assessed as income received.
Information correct as at 14th July 2017