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.
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. The local council should then provide a written record of how they calculated the amount that will have to be paid by that individual, and how much the local council will contribute. 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; Wales, Scotland and Northern Ireland.
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?
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.
- Ross is 67 years old, divorced and healthy. He has 2 children, 4 grandchildren and 1 great-grandchild and is keen to minimise the IHT payable on his death and to make provision for his family, both during his lifetime and on his death.
- However, he is concerned about the increasing costs of care and doesn’t want to be a burden to his family if he fell ill.
- He has a property of £750,000, investments and savings of £400,000 and pension income of £25,000 each year, which is sufficient to maintain his standard of living.
After speaking to his family and his professional adviser, Ross decides to invest £325,000 into a flexible reversionary trust to provide him with an IHT-efficient investment, but also giving him access to capital if needed. The maturity dates on the policies are set to mature evenly over a ten-year period to provide flexibility.
For the first ten years, Ross is in no immediate need of any payments, so the trustees defer the maturity dates.
Unfortunately, at age 77, Ross suffers a stroke and wants care in his own home to assist in his daily living rather than move to a residential care home, whilst he recovers. After assessment, the value of his property means he would have to self-fund his care, but his pension income is not sufficient.
Ross asks the trustees to allow policies to mature each year to assist in funding his home care, which they agree to. That year they let the required number of policies mature to provide sufficient capital to meet these costs and they defer the remaining policies to subsequent years.
During the following year, his health improves and so the level of care he needs reduces. Therefore, the number of maturities required is also reduced.
Later that year, Ross is able to be fully independent again and does not need any adaptations to his home. The trustees therefore agree to again defer all future maturity dates, as they arise, until his circumstances change.
Sadly, Ross passes away six years later. His investment at this time is valued at just over £524,000 thanks to the investment management provided by his professional adviser over the years. The trustees decide to distribute part of this to his adult children and grandchildren, whilst the balance remains invested by the trustees for future generations.
In summary, the flexible reversionary trust:
- Provides access to flexible payments: the trustees are able to provide payments to Ross to help him pay for his living and/or care expenses. He is then able to stay in the comfort of his own home whilst receiving care, avoiding the need to sell his property.
- Provides the ability to assist the family: it is a discretionary trust, which means that the beneficiaries can receive distributions from the trust at any time.
- Gives control over who benefits and when: the trustees decide on the timing, and appropriate amounts, to be paid to the beneficiaries; possibly guided by a letter of wishes that Ross had provided.
Once Ross had survived seven years from his original investment, the initial gift was outside of his estate and free of IHT – giving his estate a potential saving in IHT of over £100,000. All the growth was outside from day one too.
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
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.