So much of financial planning is about preparing for uncertainty and nowhere is this more true than in planning for care. It is impossible to predict with any certainty how much care any one person will need in their later years. What is certain though is we are all a bit older today than we were yesterday and that the older you grow, the more likely you are to need some form of care.
It is hardly controversial to suggest state funding of care is in crisis. In last month’s Budget, it was announced local authorities in England would receive a further £650m in social care funding next year. Welcomed and criticised in equal measure, not even the Chancellor is claiming the extra money will be enough to cover all the bills.
Further moves are expected from the government’s Green paper on the future of social care, which is expected to be published “shortly”. As the UK population continues to age, however – with the proportion of the UK population aged 65 years or over projected by the Office for National Statistics to grow to 20.7% by 2027 – a full solution to the crisis hardly feels imminent.
For advisers, how to plan for later life is an essential conversation to have with clients – and the sooner the better. Whatever does or does not happen in politics, those who are fortunate enough to be able to afford to may well want to retain the ability to have some say in how, where and by whom care is provided. For this objective, considered financial planning is crucial.
The other angle that needs to be considered, however, is that the majority of people do not, in fact, end up needing residential care – which is usually the most expensive form. So what should happen to funds set aside for care if they are not needed in their entirety? If clients are fortunate enough to remain reasonably fit and healthy to the end, they may wish to pass on any remaining money set aside for care fees to a younger generation.
Pensions, ISA savings and property all provide imperfect mechanisms for funding care. Although spending on leisure increases around retirement age, it is likely to peak around the mid-70s and then begin to decrease, potentially leaving some room for pension income to cover basic care fees.
Yet if costs increase significantly – particularly if residential care is needed – it may not be enough. Older clients may need reminding that ISA savings2 are subject to inheritance tax (IHT) – for values above the nil rate band – so a 40% tax charge on all that tax-free saving and investment can make those years of hard saving suddenly much less tax-efficient.
(A potential exception to acknowledge here is AIM ISAs, which may qualify for IHT exemption, on the death of the AIM ISA investor, after the qualifying investments have been continuously held for two years under the Business Relief rules – however, consideration of whether such investments are suitable for a client’s assessed risk profile is also of paramount importance.)
At the same time, those relying on the value of their home to see them through may need reminding that stories of forced sales of property to fund care are not uncommon – and certainly not ideal.
Retaining potential access
Some clients may have capital available to invest – including money invested in their ISA portfolio – but wish to retain potential access to it at a later date should circumstances change, with a need to fund care being a realistic potential outcome.
In such cases, a flexible, reversionary, interest-in-possession trust may be suitable as the trustees can make flexible reversions annually if needed, or defer them in whole or part to a future date if not required. The trustees can also distribute capital or make loans to the beneficiaries at any time. Investment growth in the trust is immediately outside the estate for IHT purposes, although time is needed for full benefit as seven years is required for the entire gift to be outside the estate.
Clients should also be cautioned away from making any rash decisions in anticipation of an imminent care need, as it is very likely to be treated as ‘deliberate depravation of capital’ and local authorities may seek to reclaim those assets.
Another option for clients with higher income levels is to make gifts into trust subject to the normal expenditure from income rule. This allows gifts, to be immediately outside their estate for IHT purposes, providing they are demonstrated to be from surplus taxable income, do not impact on their standard of living and are intended to be regular.
Needs change as we age and, despite uncertainty, it is possible to make sensible provision for the future. Understanding clients’ wishes and planning ahead can help ensure they have the comfortable and dignified later life they would wish for.
John Humphreys is inheritance tax specialist at WAY Investment Services