Investment Bond

Investment bonds and long-term care assessments (excluding England)

The obligation to provide residential accommodation ‘for persons who by reason of age, illness, disability and other circumstances, are in need of care and attention which is not otherwise available to them’ is placed on local authorities under section 21 of the National Assistance Act 1948. There is also additional legislation that has been passed in constituent countries of the UK.

However, where a person is provided with accommodation, section 22 of that Act provides for them to be charged for the accommodation. If they are unable to pay the standard rate, the local authority must assess their ability to pay, and decide what lower amount should be charged.

The provision of the care is means-tested and the local authority provides a contribution, based on the means testing, towards the cost of residential care.

An individual is allowed to retain a certain amount of capital, but above this they are expected to contribute to their accommodation costs. The relevant capital limits for 2017/18 are as follows:

 
 
 Wales
 
 Scotland
 
 Northern Ireland
 Upper Limit
 £30,000
 £26,250
 £23,250
 Lower Limit
 Not applicable*
 £16,250
 £14,250


* The lower capital limit in Wales was abolished on 12 April 2010 and the effect of this was to produce a single capital limit.

Where the person concerned is one of a couple, the limit relates to capital in their own name plus their share of jointly owned capital.

This means that no assistance with costs would be provided where capital is more than the upper limit and reduced assistance will be provided where capital is between the upper and lower capital limits (but this does not apply in Wales).

The capital that is taken into account includes cash, bank and building society accounts, National Savings Certificates and accounts, premium bonds, stocks and shares, unit trusts, and assets held abroad.

Whether an individual’s own home is included depends on the stay in the care home being permanent (and not temporary) and there not being someone still living in the property who is their partner or an appropriate relative.

Investment bonds

One asset that is not included in the list of capital is life assurance policies. And investment bonds are specifically excluded, although capital redemption bonds are included because they do not include any element of life assurance.

The exclusion is contained in guidelines for Scotland and Northern Ireland on how local authorities should assess people for long-term care costs – the Charging for Residential Accommodation Guidance (CRAG).

In Wales, the framework has changed as a result of The Social Services and Well-being (Wales) Act 2014 becoming effective from 6 April 2016. However,the overall treatment of investment bonds is the same as for the other countries.

Please be aware that there are separate CRAGs (under the same name) issued by the Health and Social Care Integration Directorate (Scotland) and the Department of Health, Social Services and Public Safety (Northern Ireland). In Wales, the guidelines are Part 4 and 5 Code of Practice (Charging and Financial Assessment).

The wording about investment bonds is virtually identical in each version, however, and specific that these policies are disregarded in the assessment for costs.

For example, the Scottish CRAG (April 2016) states:

  6.002A

The treatment of investment bonds in the financial assessment for residential accommodation is complex because, in part, of the differing products that are on offer. For this reason councils should seek the advice of their legal departments when they arise. However it is possible to offer some general advice and councils are referred to the Social Security Commissioners decision R (IS) 7/98 which rules that an investment bond falls within the disregard by virtue of its intrinsic nature as a policy of life assurance.
N.B. The AOR are largely based on Income Support Regulations.

 6.002B

Local authorities are advised 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 in the financial assessment for residential accommodation (see paragraph 15, schedule 10 of the Income Support (General) Regulations 1987). In contrast, the surrender value of an investment bond without life assurance is taken into account.

 6.002C

Income from investment bonds, with or without life assurance, is taken into account in the financial assessment for residential accommodation. Actual payments of capital by periodic instalments from investment bonds, with or without life insurance, are treated as income and taken into account provided that such payments are outstanding on the first day that the resident becomes liable to pay for his accommodation and the aggregate of the outstanding instalment, and any other capital sum not disregarded, exceed £16,000. (See also 8.014A)

 

AOR - Assessment of Resources 

Income from Investment Bonds

8.014A

The treatment of investment bonds in the financial assessment for residential accommodation is complex because, in part, of the differing products on offer. For this reason local authorities should seek the advice of their own legal departments when they arise. However it is possible to offer some general advice.
 8.014B

Income from investment bonds, with or without life assurance, is taken into account in the financial assessment for residential accommodation. Actual payments of capital by periodic instalments from investment bonds, with or without life insurance, are treated as income and taken into account provided that any such payments are outstanding on the first day that the resident becomes liable to pay for his accommodation and the aggregate of the outstanding instalment, and any other capital sum not disregarded, exceed £16,000 (See also 6.002A, B and C).

 

One matter to be very careful about is that an investment bond is not specifically taken out because of care cost concerns.

There are two reasons for this; the risk of being accused of deprivation and the regulators view on the matter.

Anyone who places funds into investment bonds, where a motive for the investment is to avoid a care fees charge, runs the risk of triggering the deprivation rules and having the value of those bonds treated as a capital asset for the purposes of means testing.

The Guidance Notes are very clear on this point:

 6.057

The local authority should only consider questions of deprivation of capital when the resident ceases to possess capital which would otherwise have been taken into account…
 6.063

The timing of the disposal should be taken into account when considering the purpose of the disposal. It would be unreasonable to decide that a resident had disposed of an asset in order to reduce his charge for accommodation when the disposal took place at a time when he was fit and healthy and could not have foreseen the need for a move to residential accommodation. The local authority should bear in mind, however, that deprivation can be considered for resources disposed of at any time...

 

In January 2009, a professional adviser was fined £28,000 by the FSA (as it was, at that time) for failing to adequately advise investors about the risks associated with certain transactions.

Part of the reasons for the action issued by the FSA was that the professional adviser had issued a suitability letter saying that investment bonds had been recommended ahead of other tax efficient wrappers because local authorities, when assessing whether individuals have the means to pay for residential care, do not include investment bonds in their financial assessment.

The FSA pointed out that local authorities may decide that the purchase of an investment bond was deliberate deprivation, and may include the bond in their financial assessment.

Care Act
This legislation received Royal Assent in May 2014.
It only applies to England and is covered by a different briefing note.

This briefing note has been prepared for professional adviser use only.

The information regarding taxation is based on our understanding of current legislation, which may be altered and depends on the individual financial circumstances of the investor.

This briefing note is also available as a PDF

This website is for UK professional advisers only and is not approved for use by private customers.

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