Feature

posted 1 Jul 1996 in Volume 1 Issue 5

Planning for Long Term Care 2

In the previous issue of ECA Ken Hart gave an overview of the market for the products available to fund long term care. Kne now examines some key products in more detail.

Much has happened since the last issue of ECA. Probably the most significant development has been the Government Green Paper.

Whatever the end result of this or any other Government initiative there is one clear fact. The responsibility is going to rest on the individual to provide for themselves. Increasingly, the financial services industry will be looked to for solutions to meet the need of provision of Long Term Care.

Like any other insurance based product, the individual will need to weigh up the potential for there being a claim against the cost of taking out the cover. For this reason, companies are looking at ways of offering a policy which will make it affordable to those who wish to take out some form of insurance. The balance they will all need to get right is to offer a product with enough benefits to make it attractive without making it so expensive that it is only afforded by the wealthy.

The latest new entrant offering a policy is BUPA. Their product will be joined by others over the next few months.

Those already in the market will re-launch their range.

For many people who are concerned about taking out a policy to cover themselves in the event of needing Long Term Care, there is a fear of Government policy making their contract irrelevant. PPP have issued a statement saying that they will amend any existing contracts to cater for any change in legislation. This should be some comfort for those who have taken out a policy already.

Whatever one's view, the role of the Independent Financial Adviser is going to become more important over the months and years ahead. IFACare is an organisation which has always been concerned that advisers of Long Term Care policies should be competent and abide by a high code of conduct, indeed to treat the product as if it were regulated. Currently, IFACare are working closely with a number of providers in the industry in developing suitable products. In addition, IFACare are providing all members with a series of training workshops. IFACare's prime objective is to ensure our elderly clients receive proper, relevant advice. It is my opinion that all advice for Long Term Care should be dovetailed with that of a solicitor and where appropriate an accountant so as to ensure the client is best served.

Most of the existing policies are a variation of a theme. Someone pays either a single payment or a regular monthly premium and if he or she never make a claim the money is effectively lost.

There is one major exception to this from Scottish Amicable European called " The Long Term Care Bond".

For many people with capital, investment is about getting a good balance between opportunity and risk. Achieving this balance while helping to reduce the effect of inflation is the primary purpose of professional management.

Today, however, more people are worried about the threat of seeing their capital eroded through future costs of Long Term Care.

Scottish Amicable European believe they address the above needs by combining access to a range of professionally managed investment funds with provision against having to meet the needs of Long Term Care.

The Long Term Care Bond offers three different cover options which means cover can be chosen which best suits a clients needs. The options are:-

Capital Growth
Capital Reserve
Protection Select

Scottish Amicable European have combined the advantages of an actively managed investment bond together with provision to cover Long Term Care needs.

The client can choose the type of funds invested in to cater for his or her own risk profile. The choice is from a series of risk graded managed funds, index tracking or sector funds each focusing on a particular area of the investment market.

The Tax Advantages

The Scottish Amicable European funds are not subject to Income or Capital Gains Tax. This is due to its international financial services centre being based in Dublin. The only tax paid by the funds is when withholding tax is levied by some countries on dividends which cannot be recovered.

Depending on the cover option chosen, the Bond may be able to provide regular tax-deferred withdrawals for each of the next twenty years. Up to 5% per annum of the amount invested can be withdrawn without any immediate tax liability.

A tax liability may arise on any gain when the Bond is encashed, either in whole or in part. Tax could also be due if withdrawals exceed the 5% limit.

Access

One of the features of using Scottish Amicable Long Term Care Bond is that you are not locking your money up for good.

Long Term Care Cover

Individuals who have built up a sum of money during their life time are now unsure if they will be able to retain control if either they or their spouse should go into care. By combining active fund management, together with Long Term Care cover, Scottish Amicable European have sought to bridge that gap with three options which we shall now consider in more detail.

In each option full access to the capital is maintained.

CAPITAL GROWTH OPTION

This option is the most flexible. The cost of care is met by monthly deallocation of units from the Bond fund.

In the event of a claim, all the Long Term Care payments will be met by Scottish Amicable European. No further charges are taken to meet the cost of Long Term Care benefits.

The Bond fund itself is therefore reserved solely for investment purposes.

For a client who wishes to provide Long Term Care cover, while at the same time looks for investment growth and estate protection as equally important, the CAPITAL GROWTH OPTION is of interest.

Example

A Male aged 55 invests £25,000. The cost of Long Term Care is met by monthly deallocation of units. (£17.06 per month to provide escalating cover of £10,000 per annum.). Ten years later he goes into care. No further payments are taken to cover care fees. Scottish Amicable European continues to pay the benefits. The full value of the Bond, say £60,000, is available for use by the client as he so chooses.

Withdrawals

From day one, it is possible to take regular withdrawals without affecting the level of cover, provided the amount of regular income is specified at the outset. Such withdrawals can be taken monthly, quarterly, half yearly or yearly. Based on current legislation, up to 5% of the initial investment can be taken as a tax deferred withdrawal for each of the next twenty years. In addition, the 5% withdrawal will not count as income in their age allowance calculation.

In addition, it is possible to have a one-off withdrawal at any time. Care must of course be taken to ensure there is sufficient capital left to allow for the cost of care to be met out of the remaining amount. Scottish Amicable European would highlight in advance if there is any such risk to the level of cover.

CAPITAL RESERVE OPTION

As with the Capital Growth Option the cost of care provision is met by monthly deallocation of units from the fund. It is possible to have an income and other withdrawals.

If a claim is paid the monthly deallocation of units ceases. The cost of the Long Term Care benefit is paid out of the growth in the Bond.

As soon as the growth in the Bond has been exhausted, Scottish Amicable European continue to pay the cost of the claim.

This option therefore requires a smaller initial investment than the Capital Growth Option.

Example

A male age 55 invests £25,000. The cost of part of the Long Term Care cover is met by monthly deallocation of units (£12.80 per month for £10,000 per annum of indexed link cover).

Ten years later a claim is made. Monthly deallocation of units cease. The Bond is split into two parts. The fund is valued at, say £60,000.

The investment growth of £35,000 in our example is switched into a deposit fund. The cost of the Long Term Care benefits are met out of this fund plus any additional growth. This continues for 5 years or until the fund is exhausted.

The original sum of £25,000 is reduced if any regular or partial withdrawals had been made in the two years prior to a claim.

Costs

It is important to note that for either the Capital Growth or Capital Reserve Option, the cost of benefit will rise as an individual becomes older. In our example the cost would rise to £43.08 per month by age 60 and £92.07 by aged 65. A female would rise from £18.92 at age 55 to £77.88 at age 65.

While these rises might appear to be steep it has to be compared with a monthly cost of £54.00 for a male aged 55 purchasing an ordinary Long Term Care policy for the same benefits.

PROTECTION SELECT OPTION

The primary difference between the PROTECTION SELECT OPTION and the other two options is that the whole of the fund may be used in the event of a claim. For this reason it requires a lower initial investment.

Prior to a claim the cost of Long Term Care provision is taken from the Bond fund by monthly deallocation of units.

In the event of a claim, the monthly deallocations cease. The cost of Long Term Care benefit will be met by taking charges from the Bond fund. The whole of the fund including any growth could be used up to pay for Long Term Care payments.

After five years, if the Bond fund has not been used up on Long Term Care charges, the remainder of the fund belongs to the investor. Otherwise, as soon as the Bond fund has been exhausted, Scottish Amicable European will continue to make the Long Term Care payments.

Example

A male age 55 would need to invest £17,300 for cover of £10,000 per annum indexed at 8% per annum.

The monthly rates of deallocation will vary depending on the investment growth achieved by the bond.

If a claim becomes due then the deallocation of benefits cease.

The whole of the value of the Bond is used to pay the Long Term Care benefits.

Withdrawal

There is a facility to make partial withdrawals under the Protection Select Option, but this will effect the level of cover. Regular withdrawals are not available under this option. Unlike the Capital Growth and Capital Reserve Options, investors do not have access to any capital throughout the claim period.

This option is designed for a person who is able to invest a sum of money and accept that it will effectively not be needed by them and if they do not make a claim, it will form part of their estate. It therefore needs to be money which is very unlikely to be needed for any other purpose.

Other considerations are:-

Under the Capital Growth Option up to four people can be included for Long Term Care benefits.
The bond can be taken out on behalf of parents or other relatives as a means of protecting other assets such as their home.
Many people would like to gift capital now, so that the potential Inheritance tax liability on their estate is reduced. However, they are reluctant to do so in case they need the money at a later date, perhaps to meet the need of Long Term Care.

Trust Arrangements

To meet the needs of those who would like to be able to gift capital now in a tax efficient manner, while at the same time make Long Term Care provision, Scottish Amicable European have designed a scheme, built around the Long Term Care Bond, which is designed to solve these problems. This scheme is available with the Capital Growth Option.

The Gift Trust Scheme

This scheme allows an individual to make a gift of capital to chosen beneficiaries, while at the same time providing insurance cover for the cost of Long Term Care should this be needed.

The type of trust needed will depend on the particular circumstances of each client. Therefore, where the Gift Trust Scheme is not suitable, Scottish Amicable European will provide backup to legal advisers as appropriate in helping arrange an appropriate trust.

The benefit of being able to ensure provision of Long Term Care while achieving potential IHT savings makes good sense for individuals who are wanting to plan their affairs efficiently.

There are many other considerations apart from the ones within this overview. For example, charges and fees. It is considered by many that the encashment charges are high during the first five years. The encashment charge in year 1 is 10% tapering down to O% in year 6 and onwards.

The deductions for setting up the bond are made up as follows:-

Administration fee £2.00 per month.

Fund management charge - between 1.5% and 2%.

Establishment charge - 1.75% per annum of fund value levied for five years from investment date. After this period, bonus unit allocations of 0.75% per annum of the fund are made monthly.

CONCLUSION

The Scottish Amicable European is not the route for everyone to pursue. However, for someone with investment monies who is wanting to provide for Long Term Care, "The Long Term Care Bond" from Scottish Amicable European is well worth exploring.

The way the cover is charged i.e. on a monthly costed basis, together with the tax efficiency of an offshore investment, adds to the appeal of this product. In addition, the fact that it can be written into trust to make it an Inheritance Tax friendly investment makes it suitable for a growing number of clients.

Ken Hart can be contacted for further advice at Clifton Consulting Limited, 94 Whiteladies Road, Clifton, Bristol, BS8 2QX, Tel No. 0117 9744800.

Clifton Consulting Limited is a member of Countrywide Independent Adviser Limited which is regulated by the Personal Investment Authority. Please note the PIA do not regulate all Long Term Care plans.