With the increasing cost of living, the value of our pension pots and investments can erode much faster than we would like, or anticipate. Very few of us want to think about old age but if we are lucky enough to reach it, do you ever wonder who is going to take care of you during times of ill health and how are you going to pay for it?
According to the latest figures from the Office for National Statistics (ONS), in England life expectancy for men aged 65 years in 2012 to 2014 was 18.8 years, while women at this age could expect to live for an additional 21.2 years. This means that a 65-year-old man could expect to live to almost 84 years, while a woman of the same age could expect to reach her 86th birthday.
This leads into the increasing possibility of needing social care which, in most cases, isn’t free.
The cost of care
When care is needed, the local council will arrange for a needs assessment to be carried out. This helps them to decide on the level of care actually needed.
The local council will also carry out a financial means test, where they will look at the individual’s income, savings and property, to work out how much is available to contribute towards the cost of the care and support required. In England, if an individual has been assessed as having more than £23,250 in assets, then paying for care will be wholly their responsibility. Different limits apply to the other countries in the UK.
On average, home care costs can be anywhere between £15 and £30 per hour depending on where in the country they are being provided and the level of care required.
Residential care home costs can range from, at the lowest end, about £350 per week, up to some premium care homes which can be over £1,500 per week. Where nursing care is needed, the costs are usually about 20%- 25% higher. Again these figures can vary depending on where in the country the individual receives care.
You may think that if someone gives away some of their savings, income, or even property, to reduce the assets used in the assessment, they can avoid having to pay for care costs. However, not only will this result in a loss of control over where, or even how, care is received but also if the council thinks that it has been done specifically to avoid paying care fees (this is referred to as ‘deliberate deprivation of assets’), they may still include the asset in the assessment.
According to recent research from consumer group Which?, only 12% of adults aged 55 or over are actually putting money aside to specifically pay for their future care needs. But according to the Lord Darzi Review of Health and Care, published in June, around one in 10 elderly people face total care costs of more than £100,000.
The potential need for funds later in life can be a dilemma for some as they want to make sure they have provision to meet long term care costs. On the other hand, they may want to reduce the value of their estate for inheritance tax (IHT) purposes but still have access to the capital if needed.
However, with the right planning, not only can any unexpected expenditure be covered, but IHT can potentially be reduced as well. How?
Enter the trust
The use of a flexible reversionary trust can be one way of reducing IHT, whilst giving access to funds in the future if they are needed.
When using a flexible reversionary trust, the settlor gifts money into the trust, starting a seven-year clock on the gift, but retains access to flexible periodic payments.
The settlor invests in a series of investment bonds within this bespoke trust structure. Each of these bonds has a maturity date and, if they mature, the benefits are paid back to the settlor to use as required – such as covering long term care costs. Where the maturity proceeds are not needed, the trustees have the ability to defer the maturity dates. In addition to this flexibility, the trustees are able to surrender policies at any time for the beneficiaries, if needed.
This trust structure provides the opportunity to reduce a potential IHT liability but also gives peace of mind that an individual will not be forfeiting their financial security in the future. This is of particular use given our ability to live longer and having to adapt to changing circumstances.
As we are living longer, and with council budgets tightening, the social care system that supports us in our later years is under increasing pressure. With the right planning, not only can unexpected expenditure potentially be covered, but IHT can also be reduced. This is just one way of meeting care costs whilst still enabling a potential inheritance to be left for the family.
Francesca Gandolfi, Technical Manager, Canada Life
Francesca Gandolfi has over 20 years experience in the industry, having previously worked as a financial adviser focusing on wealth management, IHT planning, retirement planning, and later life advice.