Physical or mental disability is distressing. A person is no longer able to do what they want to do,...
Physical or mental disability is distressing. A person is no longer able to do what they want to do, needs almost constant help and, in the worst circumstances, becomes totally dependent on others. Yet a disabled person still has to cope with life - decisions have to be made, financial matters have to be dealt with and so much of life simply carries on as before.
A little time spent planning in advance can make an enormous practical difference later, should disability strike. The chance of needing long term care is high, with about one in four people over 85 needing to live in a residential or nursing home. The cost is also high - the bill can be as high as £25,000 per annum for a place in a nursing home.
Unless your client is one of the lucky few who can afford not to worry about the future and what long term care arrangements need to be made, it is important to encourage them to seriously consider the long term care insurance options available to them.
Start planning
Some people believe that there are ways of avoiding the means test and getting the local authority to pay for long term care. Perhaps, with the right degree of determination and a lot of luck, this might be achieved.
But for those wanting to believe this need only consider a recent judicial review ruled in favour of Fife Council that it was right in its view that it did not have to provide care even where a person with assets of less than the £16,000 threshold had given away other assets that would put them over the £16,000 threshold. This case demonstrates just how important it is to plan properly.
This means looking at what the cost of care may be if it proves necessary to buy it, then at how much of that cost the individual is willing to pick up from their capital and income. Finally, the various insurance plans which could make up the difference should be considered.
Care costs differ considerably between different parts of the UK. A nursing home place will cost on average £25,000 a year in London and around £18,000 in other parts of the country, so it is important to do the sums correctly to avoid over or underproviding. While most people would undoubtedly rather stay at home as long as possible, this is not always practical. In addition, it can be significantly more expensive, so that in working out the benefit needed, using the cost of a nursing home is not a bad starting point.
Almost all long term care plans cover care both at home and in a nursing home so that the benefit can be used to pay for substantial amounts of home care while this is still a practical proposition.
Early birds
There is a right time to consider, recommend and arrange long term care insurance. The risk of needing care is like all risks. If we knew when or if it would strike, we would not need insurance. But we do not. So on that basis alone, the sooner cover is thought about, the better. In addition, long term care insurance gets more expensive with age as a person's health will start to decline, so there are benefits to taking out cover at an early age.
We are still waiting for the Government's long-delayed response to the recommendations of the Royal Commission into long term care. IFAs will want to be sure that in recommending long term care insurance they take as much account of this as possible. Of course, the difficulty lies in the fact that we do not know what the Government plans to do, although the indications are that it may alter the funding arrangements for residential and nursing care in some way, making some additional contribution to care costs.
Further complicating the issue is that not only do we not know the what, we do not know the when either. So for the moment, plans must take account of current legislation and calculations must be made on that basis. It is a fairly safe bet, however, that it would be folly to assume that long term care insurance is about to become superfluous as a result of Government generosity.
The next generation
Planning for the next generation takes two forms - planning to have something to leave, which interlinks with long term care planning, and planning to ensure that what is left ends up in the right hands. The second part is arguably easier. IFAs should encourage - almost force - every client to make a will, ensure that it is valid, that it is clear and unequivocal and that it is kept up-to-date.
Following retirement, it is vital to keep a watchful eye on the adequacy of pensions and income-producing investments. There is no merit in living poor to die rich, so people need to be ready to adjust investments to meet changing needs and economic conditions.
The traditional enemy of inheritance is, of course, tax. While no one likes to pay tax, it is easier to find an acceptable way of paying inheritance tax - through a properly arranged life assurance written in trust (joint life and survivor if appropriate) - than to find an entirely satisfactory way of avoiding it. Some may take issue with this, but arrangements that involve losing full control of one's assets, or that mean that a person can no longer change their mind, or which are undertaken solely to avoid a possible tax bill, do not necessarily present the best options available. The best advice to give a client is to stay in the driving seat, keep it simple and, if they need to do so, arrange in advance to fund for the tax.
Inheritance tax does not affect a person's assets until £234,000 and by the Chancellor's own admission only about 4% of estates are liable to the tax. If it is intended to provide small legacies, there is a good deal of scope to make gifts ahead of death in order to reduce the size of the estate. Each year any number of people may be given up to £250, with an additional £3,000 on top of these smaller gifts. This could be, say, one gift of £3,000, three gifts of £1,000 or part of a larger gift.
While more substantial gifts may not fall outside the scope of inheritance tax immediately or completely, it makes sense to consider them sooner rather than later to get the benefit of taper relief or full relief which may be available.
Gifts made a full seven years before death do not rank as part of the estate. Any gifts made more than three years and less than seven before death qualify for scaled down tax rates, as low as 20% of the full rate - in other words just 8%.
Equity release
Using a home as capital is not a proposition that many clients consider until they have to. After all, it means that income, capital or both are no longer sufficient to meet their needs. Almost inevitably it is a Hobson's choice.
The first requirement is to work out what the need is. Does the client need more regular income or is this a one-off requirement, say to make repairs to the house or to meet an unexpected bill from some other quarter? Is it necessary to find a solution that handles both?
The next question is the repayment issue. If the need is additional income, then a scheme requiring repayments will have to be examined carefully. Repayments may be viable if the need is for a lump sum, which is otherwise unavailable.
Finding solutions to these issues is helped by considering the options. Equity release plans, for example, allow a person to release some of the value of the home. The client borrows money, the lender is a secured creditor and the arrangement provides for interest, payable now or deferred on the advance and repaid in due course.
In contrast, home reversion plans involve giving up ownership of part or all of the home but with the continuing right to live in it. That may be a step which some are not prepared to take. Either way, the amount that can be released is unlikely to be much more than about half the current value of the house and maybe less. The lender will want to be sure that the loan, including any deferred interest on the advance, can be repaid.
Marketing
To a large extent, marketing to retired people should not be looked at as any different to marketing to younger people. The issues facing the retired group may be different, but the messages and style of presentation need not be. An often-made mistake by marketeers is to patronise older people by virtue of their age. Literature often contains dreamy images of perfect looking couples with their grandchildren, and product names can be even more patronising. Research shows that the main requirement is simple messages with sensible practical product names and modern images. Nostalgia is not needed.
IFAs should follow the same tack and treat their older clients with the same respect that they treat their younger ones. The only real difference is that the IFA is likely to find that older clients will take more time to read the literature and therefore ask more questions.
Peter Gatenby is general manager at Age Concern Financial Partnerships
