Protecting Your Savings and Assets in Later Life

I am worried about losing all my savings and even my home should I have to go into a care home later in life? Having worked and saved all my life – what can I do to protect my assets and not be a financial burden to my family?

Addressing the issue of long-term care could be your greatest legacy. The number of British people aged 75 or over is expected to double by 20301. Yet few of us are adequately prepared for an extended old age, whether in terms of saving or preparing for accommodation or care needs.

Most of us will see a financial adviser about our pension, but in general we don’t want to think about getting old and we certainly don’t like to imagine ourselves being unable to live independently. But if you don’t save, or don’t think about the costs of care, the reality is you might not get what you need or would want.

Currently, if you need end-of-life care, your local authority will carry out a means test to work out who pays – but regional differences are considerable. If you live in England, for example, and your capital and savings are above £23,250, you will have to fund the cost of personal care and accommodation yourself. In Scotland, the personal care you receive in a care home is free if you’re over 65, but you’ll have to pay accommodation costs if your capital and savings are more than £26,000. Clearly you don’t need to be rich, or even moderately wealthy, to have to pay towards your care costs.

The Care Act means a cap will be introduced in 2020 on what people should have to pay for care themselves. Social care is a devolved matter for Scotland so the Care Act generally applies only to local authorities in England, Wales and Northern Ireland. The reforms are intended to help people make informed choices about the best care options for them, and to enable them to pay in a way that suits them. The government had hoped this would stimulate a market for end-of-life care; not many products have since been created but some insurers are starting to add an element of care provision to their life insurance plans.

‘Whole-of-life’ policies pay out a fixed sum on death to cover the financial impact of losing a family member. These options are commonly used to meet Inheritance Tax liabilities and funeral expenses. However, some are evolving to help meet the costs of care. Some whole-of-life policies now pay out a reduced sum early if you have been assessed by a medical specialist as suffering an illness, accident or infirmity which leaves you unable to perform everyday activities.

Whole-of-life cover is usually arranged 10, 20 or 30 years in advance, whereas other options for later-life protection are taken out at the point of need. One of the most underused solutions is an immediate needs annuity (INA). With an initial lump sum payment, you can take an INA out when care is required and thus ensure a guaranteed income for as long as care is needed. Although it’s got the term ‘annuity’ in it, is not like a traditional annuity. It is not based on interest rates, which are currently at historic lows. It probably won’t cover all of the care costs, but it pays very high levels of return – anything from 20% to 25% – and it is tax-free if the money is paid directly to the care home.

Of course, you could just use your investments such as ISAs and unit trusts to pay for care. But that doesn’t give you the reassurance of an immediate needs annuity. But, INAs are not without disadvantages – in the case of death, they don’t get passed on to beneficiaries.

A quarter of people should need to spend very little on care, but one in ten will have more serious needs and could face care costs in excess of £100,000.2 While selling your home could be an option to free up the money needed, many view this as a very distressing last resort, so it’s important to anticipate future care needs and buy the right kind of financial protection.

Even if you do have to pay for care, you may still be entitled to some benefits like the attendance allowance and the personal independence payments. Individuals should always seek financial advice before arranging later-life protection. Your local authority should be able to provide you with more information on claiming benefits and care services in your area.

1 National population projections, 2014-based, Office for National Statistics, October 2015
2 Caring for our future: progress report on funding reform, Department of Health, July 2012

How can I protect my pension from Inheritance Tax or even falling into the hands of unintended beneficiaries?

Most of us hope that our wealth will be available to be enjoyed by our family when we are gone. The assets we might think about protecting are savings, property and possessions, but we don’t always think about what would happen to other benefits in the event of our death. Sadly, factors outside your control might mean that proceeds of these benefits are collected by the taxman or claimed by unintended beneficiaries.

If you’re in employment, there is a good chance that there is some form of pension scheme established for your benefit. While this is primarily designed to provide a pension in your retirement, company schemes can also offer valuable death-in-service benefits, should you die before retirement. These benefits are separate from the accrued pension that you pass on, and typically amount to three or four times your salary at the time of death.

For obvious reasons, you may have chosen for such benefits to be paid to your surviving spouse, civil partner or partner; consequently, the benefit is not treated as an asset of your estate. However, once the benefit has been paid to the survivor, it becomes an asset of that person’s estate. When that survivor dies, it could potentially create (or increase) an Inheritance Tax (IHT) liability of 40%. This is where an Asset Preservation Trust (APT) can play a key role. An APT can hold the death-in-service benefit outside the survivor’s estate for the purposes of IHT, whilst the survivor can still access the funds. Not only does this mean the survivor has full use of the funds to invest or spend as desired, but the income or capital can create a debt on that person’s estate and further reduce the value of their own estate for IHT purposes. Indeed, there are few situations where an APT would not be appropriate for death-in-service benefits.

There are numerous other advantages to setting up an APT. Assets in the trust are not directly owned by your beneficiaries, should any form of long-term care provision be required, the local authority will be unable to attribute the value of the trust fund as their asset when conducting a ‘means test’. An APT can also prevent your spouse or partner from passing the money onto others who you might not necessarily have chosen to benefit. For example, without an APT, if your spouse remarries after you die, your own children may be excluded from benefiting from these funds.

A trustee for the APT will need to be selected at the outset and can be anyone you choose. If you have reasons not to select family members or friends as trustees, then professional trustees – who are not led by personal involvement and will therefore remain impartial – can be specified when the trust is set up. In addition, your expression of wish form – used to nominate who you would like to receive your pension in the event of your death – should be reviewed to make sure your money is headed to the right destinations, minimising the tax burden in the process.

Estate planning is about minimising IHT and ensuring your wishes are followed. Ensuring savings and investments are placed in trust is an important part of estate planning, but clearly this can extend to protecting other benefits. Setting up appropriate trusts and arranging financial affairs is not straightforward; it is therefore vital to get financial advice.

Perhaps you want protection from IHT payable on the death of your intended beneficiary or from claims by others such as banks and former family members. Or perhaps you simply want to ensure that the benefits go to the right people at the right time. Either way, an APT could well be the best solution.

To receive a complimentary guide covering wealth management, retirement planning or Inheritance Tax planning, please contact Paul Brady on 0121 355 2473 or email paul.brady@sjpp.co.uk.