Top of the agenda

When IFAs are advising clients who are approaching retirement or those who have recently retired, there are two key questions that arise. First, how can my income, savings and assets best meet all my financial needs throughout retirement? And second, how can I protect my assets and pass on an inheritance to my children and grandchildren? However, the need to include long term care (LTC) as part of this planning is equally important, as if the need for care arises, it will impact on their ability to achieve these objectives.

There are five reasons why LTC should be included in discussions with more mature clients. The main reason is that the proportion of elderly people as a percentage of the total population is rising considerably. This means the number of people in work ' taxpayers ' is falling in relation to the number of people who may need care.

Ticking time bomb

This is a demographic time bomb the Government cannot ignore. Although life expectancy is increasing, peoples' quality of life is not. Approximately one in four people is likely to need care towards the end of their lives according to figures from Swiss Re. Therefore, there is a significant risk that a client's financial plans will be damaged by costs during later life. According to Laing and Buisson, the average nursing home costs are £19,604 so a substantial income is needed in order to guarantee that the fees can be paid indefinitely.

Competing pressures on public finances means the Government cannot pay for everything. Its funding limits have already been announced and these are unlikely to change in the foreseeable future. Last July, the Government responded to the Royal Commission with the NHS plan and although it is implementing most of the recommendations, it is not going the whole way on costs. The State will pay for nursing costs in nursing homes, but will not pay the costs of personal care or accommodation. In this way, the Government might pay on average £2,500 out of a total nursing home bill of over £19,000 per annum, according to Laing and Buisson.

The Government's policy is, therefore, to encourage people to make their own provision for retirement, including increasing their income to pay for LTC, and to help out only the poorest through means testing. In its response to the commission, it recognised that some individuals would want to take out insurance to protect their assets against the costs of LTC.

The funding debate is effectively over and as far as clients are concerned they will have to pay for long term care. The agenda has now moved on to protecting consumers through CAT standards and regulation.

However, there are other issues which also make long term care insurance (LTCI) an area IFAs need to consider moving into. The Government's consumer agenda seems intent on forcing charges down. Insurance providers are looking at their cost base as a result of the 1% cap and IFAs are caught in the squeeze through lower commissions.

CAT standards for LTCI are on the agenda and you will be pleased to hear that the 'C' stands for quality of cover not capping charges. IFAs have a central role to play and since LTCI providers are not squeezed on maximum charges, they are able to properly reward producers of LTCI business for the time they invest in advising on, and selling these products. As many of IFAs' traditional markets become commoditised, complexity is the friend of the IFA.

Advice in practice

So, how can LTC be woven into estate protection? One approach is to use estate protection planning as the main focus of the advice to leverage LTCI sales opportunities.

This can be best illustrated through a case study. Roy and Julie are both age 65 and, having worked hard all their lives, are both now retired. They have a modest but comfortable lifestyle, which they would like to maintain. Roy and Julie have a common will situation where they will leave all their money to the surviving partner, with the expectation that their two children and six grandchildren will receive an inheritance on the surviving partner's death.

Roy and Julie have a mortgage-free property worth £200,000 and liquid assets worth £150,000. Their net income is £19,500 per annum ' a mixture of £12,000 in pensions and £7,500 from net investment income. The net investment income unspent each year amounts to £4,500.

Roy and Julie's liquid assets were boosted fairly recently after Roy's mother died. However, the inheritance was a lot less than what it might have been as Roy's mother had been a private resident in a care home for the last four years of her life.

In discussion with their IFA they made it clear that their estate should not be significantly reduced for care costs, the taxman should not receive a significant part of it, and they do not want to get into long-term commitments which have to be funded from income. They want to maintain their lifestyle and leave a significant inheritance to their children.

A good starting point would be to consider their desire to leave tax-efficient legacies to their children. At present, 40% of Roy and Julie's assets (valued at £108,000) will go to the taxman when they both die. Roy and Julie have no plans for this capital and do not need all of the investment income from it. In order to provide a better legacy for their children, Roy and Julie should consider investing £50,000 in a new generation LTC bond.

If £50,000 is invested in an LTC investment plan the inheritance when they both die can be immediately increased from £30,000 to £71,460 after taking account of any inheritance tax (IHT) liability. This would increase to £75,000 if either of them lives for a further seven years, when the whole investment would be free from IHT. In addition their remaining assets would be protected from LTC costs of £10,000 per annum should either of them qualify for LTCI insurance benefits.

A total of £20,300 is invested in separate LTC plans for Roy and Julie (£7,310 and £12,990 respectively). This will provide £10,000 per annum in LTC benefits if either of them should fail three activities of daily living (ADLs), or suffer a form of dementia like Alzheimer's disease.

The balance of £29,700 is then invested in a bond with the minimum life cover set at £75,000 payable on the surviving spouse's death. This bond will be written in trust, so that the life cover can be paid to the beneficiaries free of inheritance tax when they have both died.

Making gifts

Assuming Roy and Julie both have their annual gift exemptions available from the current and previous tax year totalling £12,000, only £17,700 has to be shared between them as a potential exempt transfer. Roy and Julie will each have a PET of £8,850. If either Roy or Julie live for a further seven years, no IHT liability will incur as a result of the £50,000 investment. The worst situation is if they both die within seven years. In this situation, only the PET of the surviving spouse will be taken into account and this will generate a tax charge of £3,540, reducing the effective legacy for the children from £75,000 to £71,460. This is still £41,460 more than they would have had without LTCI.

Cases like these need good professional advice, which should be properly rewarded. If standard commission is taken, the £50,000 would generate commission of around £3,600, which is significantly higher than for other products. This level of remuneration rewards the investment of the IFA's time, but also gives the opportunity to maintain high service standards to clients.