With the future of long term care bonds in the balance, are there any alternative plans that fulfil the same function?
Long term care (LTC) bonds aim to protect the investor's lifetime savings from being used to pay LTC fees and to return as much of the investment as possible on death. Most are offshore unit-linked life assurance bonds, so a tax-efficient return can be made.
The size of the investment to secure the benefits depends on the investment growth rate assumed at outset over the investor's remaining lifetime. If this rate is not achieved, the bond's underlying investment fund, which pays the monthly costs of the LTC benefits, could run out before the investor dies, therefore not providing any benefits.
LTC bonds have regular fund-size reviews. In some cases, current reviews are throwing up significant shortfalls. This is the result of the relatively high investment growth assumptions taken five or more years ago compared with the less optimistic future growth assumptions taken for the review in the current investment climate. As a result, the degree of risk inherent in these products is being questioned.
Less risky products such as the lifetime care asset protection bond can provide similar benefits. The death benefit can always be written in trust for the beneficiaries, resulting in inheritance tax savings of up to 40% of the investment.
The asset protection bond consists of two insurance contracts. The investment is divided between the two at outset. One provides guaranteed LTC benefits, while the other aims to return the whole of the investment to the beneficiaries. Only the beneficiary's death benefit depends on future investment returns. The growth assumption is set at 6% before expenses in line with the Financial Services Authority's growth rate assumption for disclosing future fund values.
Brian Fisher
