View more on these topics

Value judgement

Defining poverty is never easy. Defining wealth is much easier. For inheritance tax purposes, we are talking around £234,000.

Yet, for long-term care purposes, wealth currently means precisely £16,000. As an IFA, it probably means that, by this benchmark, most of their clients are “wealthy”, many of them, by this standard, obscenely so, even if all they do own is a three-bedroom semi.

So, how does owning this wealth affect an IFA&#39s clients if it comes to the crunch?

The significance of being wealthy in the context of LTC is simple. If a client needs LTC in a residential home or a nursing home and he or she has wealth of more than £16,000, they will have to pay all the costs of their LTC until their capital has been reduced to £16,000.

It really is quite a sobering thought. A client has built up savings and investments of around £100,000.

Four years of LTC could see all this spent. At the end of that, the client has no guarantee that he or she can continue to get care in the same home in which they have spent all their savings.

Each local authority has a maximum it will pay for any care home package and that may not extend to cover care in the home the client has chosen. This is how the means test works in detail:

If a client needs care in a home and has wealth of more than £16,000, then there is no question – he or she pays in full.

If he or she has wealth of between £10,000 and £16,000, all their income (less a token £15.45 a week for personal expenses) has to be put towards the cost of care, to which they must add £52 a year out from every £250 of their savings in excess of the £10,000 threshold.

If the client has wealth of less than £10,000, then all their income (again, less the token £15.45 a week), although no capital, has to be put towards care costs.

Wealth for practical purposes includes almost all forms of savings and investments. It includes a person&#39s share in a family business, for example, and it also includes a person&#39s own home except when a qualifying dependant still lives in it as their home.

The rules are different when it comes to a client getting domiciliary care in his or her own home. The good news is that the person&#39s own home is never taken into account. After all, he or she is still living there so that would be impractical.

But the rest of this means test can be even harsher. Local authorities can set their own means-test limits, which are often significantly lower than those applying to residential care, and they can apply them to couples taken together as opposed to the individuals who are means tested separately for residential care.

If you have heard that the Government is making life easier by relaxing the means tests later this year, then do not hold your breath.

It is making changes but it will not benefit clients very much. In short, the concessions will mean that:

The £16,000 limit described above goes up to around £18,500 and it will increase in future years in line with inflation.

The £10,000 limit described above goes up to around £11,500 and it will increase in future years in line with inflation.

A client&#39s home will not be included in the meanstest calculation until he or she has been in a home for three months, even if no qualifying dependant lives in it but other savings and investments will continue to be spent on care if over the limit.

Any “nursing care” a client needs will be paid for by the National Health Service and will not included in the nursing home bill the client has to pay. At its very best, this could save the client around £100 a week. In practice, it is likely to be a lot less for most people in homes.

Even for a person in a nursing home, it is quite possible for there to be no element of “nursing care” in their care. They may require a huge amount of “personal care” – help and supervision but not nursing – which means that the full bill is still theirs to pay.

This means that those people who used to pay their own bills will still have to do so and that for the most part those bills are not going to be substantially reduced.

In blunt terms, this all means that paying care bills without planning for them can make a very substantial dent in a client&#39s financial position and in the worst case could reduce a client from a position of comfortable wealth to one of very uncomfortable lack of wealth. This is where the opportunity for advisers to sell by adding value comes in.

After all, what else has an IFA advised a client on during the time they have been working on his or her behalf? Essentially, wealth creation and protection. An adviser has worked to build up a decent pension for their client and partner. This is money for them to spend as they think fit.

They have worked to enable a client to buy the home and make it worth owning. They have worked so that the client can build up a business which they want to stay in the family, even after they have retired.

An adviser has worked to help a client build up savings and investments to cushion their retirement and leave it to the family when the time comes.

They have worked to minimise the amount which will be lost to the client as the result of taxation in whatever form. To give the best possible income, the best possible investment growth and the least possible tax when the money is passed on.

Yet, without LTC insurance, the adviser could find that they have added virtually no benefit at all. It has all been in vain. All these other benefits could be lost.

Think about it. Once a client has succeeded in building up wealth (£16,000, remember), as soon as the client needs residential LTC, that wealth starts to be used to pay for that care.

While for most people it is most unlikely that all their wealth will be used up in care home fees, it is by no means impossible.

In any event, would an adviser want to see a gap of £50,000 or £100,000 open up in a client&#39s finances? Would their clients? Do not let it happen.

Make sure clients know the rules, risks and consequences and, most important, make sure they know the solution.

Recommended

Aberdeen joins two Euro trusts to create a high-income Isa

Aberdeen Asset Management has brought together two of its investment trusts to form a new European high-income Isa. The Isa brings together the European growth & income and the European monthly income trusts. The new product offers tax-free income, currently more than 8 per cent, from the funds&#39 bond portfolios. There is also the potential […]

&#39Anti-euro stance is blocking business growth&#39

Reluctance to adopt the euro has replaced regulatory obstacles as the biggest challenge to UK fin- ance companies breaking into Europe, says economist Lord David Curry. The Labour peer and City University dean of business says that, with the developments in Brussels to foster the growth of a Europe-wide market, regulatory concerns are no longer […]

Malcolm Streatfield

I FA network Berkeley Wodehouse Associates&#39 chief executive Malcolm Streatfield is in a positive frame of mind as he ponders the future for IFAs and networks. But he takes time to mourn the demise of the Man from the Pru, having been with the company when it had a salesforce of 10,000 in the 1980s. […]

Shell tops green business tables

Shell has topped the Business in the Environment table of environmentally responsible companies.Shell heads the 184 FTSE companies and other global businesses committed to the annual Index of Corporate Environmental Engagement, followed by Scottish Power, British Energy, Severn Trent and J Sainsbury.The index compares companies against each other on the basis of their strategic environmental […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment