Investment Bonds: A Shield For LTC Fees

Individuals will have to pay for their own long term care if they have income and capital above certain limits.

Certain savings such as investment bonds are disregarded.

This article looks at how local authorities in England consider investment bonds for long-term care and how they are potentially a beneficial investment for protecting your assets from care fee assessments.

This is the first in a series of articles looking at ways of protecting your assets for future generations.

Note: What Do I Mean By Bond?

When I say bond, I don’t mean fixed rate cash bonds, national savings bonds, corporate bonds, Gilts or any type of fixed interest security.

I specifically mean life insurance investment bonds.

Investment bonds are usually classed as a single premium ‘life insurance’ policy because a portion of your ‘life insurance’ policy can be paid out upon death, but they're really an investment product.

These were a staple recommendation from financial advisers for many years but soon fell out of favour in the late noughties with the increase in ISA limits but many will remember being offered With Profits* bonds and being told about the advantages of the 5% withdrawal rules.

* Investment bonds are no longer a choice of With Profits. The investment choices are much more comparable to ISAs with many similar funds available from most providers.

Background

Local authorities have an 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’ under section 21 of the National Assistance Act 1948.

With effect from 1 April 2015 the provisions of the Care Act 2014 applied to local authorities in England. The Act established an entitlement to public care and support for all adults with needs for care and support.

Local authorities have to make sure that people who live in their areas:

• Receive services that prevent their care needs from becoming more serious, or delay the impact of their needs

• Can get the information and advice they need to make good decisions about care and support

• Have a range of providers offering a choice of high quality, appropriate services

Charging for Residential Accommodation Guide

In previous years, I would always refer to the Charging for Residential Accommodation Guide (CRAG) for information about the rules for long-term care costs.

Although the appropriate version of this still applies in Scotland, Wales and Northern Ireland, in England it was replaced by the Care and Support Statutory Guidance. This is available on the GOV.UK website here. I’ll still say CRAG until I can think of an acronym for CSSG

Capital Limits

The provision of accommodation costs 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 are as follows:

• Upper limit: £23,250

• Lower limit: £14,250

This means that no assistance with costs would be provided where an individual has capital of more than £23,250 and reduced assistance will be provided where capital is between the upper and lower capital limits.

Examples of capital that is taken into account includes; buildings, land, National Savings, stocks and shares, building society and bank accounts, unit trusts, cash and trust funds.

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 listed as being disregarded is the surrender value of any life insurance policy (or annuity).

Paragraph 53 of Annexe B of the guidance encourages local authorities to obtain legal advice with regard to the treatment of investment bonds.

53. The treatment of investment bonds is currently complex. This is in part because of the differing products that are on offer. As such, local authorities may wish to seek advice from their legal departments.

However, the subsequent paragraph 54 says that they must be disregarded if they include one or more element of life insurance.

54. Where an investment bond includes one or more element of life insurance policies that contain cashing-in rights by way of options for total or partial surrender, then the value of those rights must be disregarded as a capital asset in the financial assessment.

Investment bonds which include a small element of life cover (potentially as little as 0.1%) are therefore disregarded from the capital means test.

One provider has launched an ISA with a small element of life cover with a view that could also be disregarded (more to follow following investigation however I would say this is a too good to be true).

Deliberate Deprivation

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

The local authority may state deliberate deprivation has occurred if the motive for investing in a bond is to avoid the capital being included in the means test.

For example, if a person in ill-health moves capital into an investment bond before making a claim to their local authority for care fees funding then the council may include this capital in the means test.

The purchase of an investment bond in this regard is specifically mentioned in paragraph 9(g) of Annexe E of the guidance as an example of deliberate deprivation.

9. A person can deprive themselves of capital in many ways, but common approaches may be:

(g) Assets have been used to purchase an investment bond with life insurance.

However, paragraphs 11 and 12 then helpfully explain what aspects the local authority needs to consider before deciding whether deprivation for the purpose of avoiding care and support charges has occurred.

These include the motivation for the deprivation, timing and expectation of needing a contribution to the cost of their care.

A person may invest in a bond for tax planning, investment choice or performance. If the person is in good health at the time of the investment and social care is not imminent the local authority is less likely to apply the deliberate deprivation rules.

Considerations

If you are concerned about future care fees then you could think about an investment bond, subject to the deliberate deprivation considerations.

Please speak with me for a full review on how to protect your assets.