Life Assurance Bonds and Means Testing for Support with Social Care Costs
Information in this article should not be taken or relied upon as personal financial advice. Any individual requiring information or advice on their own specific circumstances or on their own account should contact a suitably qualified professional.
On 11 July 2012 the Government published its response to the Dilnot Commission’s Report in July 2011. Sadly the draft Care & Support Bill does not address the extent to which public funds will be used to support care funding costs, leaving the decisions on finance until the next treasury.
Many commentators suggest that the Commission’s proposal that costs above £35,000 should be funded by the State and that the capital “disregard” should be increased to £100,000 will not make it onto the statute book. In the meantime families continue to look for ways of protecting assets from depletion under the current rules.
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CRAG & Life Assurance Bonds
The means test bible in this context is the Charging for Residential Accommodation Guide (CRAG) and it includes quite detailed help. There is guidance on the treatment of life assurance bonds, which have been treated as a sort of “protected” asset that would be excluded from the means test under the general provision that life assurance policies do not come into account.
Life assurance bonds are more generally called investment bonds but it is important to ensure that an investment under consideration does actually have a life assurance element. Some products that look like life assurance bonds may actually be Capital Redemption Bonds or some sort of deposit product. If there is any doubt, the product provider or a suitably qualified financial adviser should be asked to check the documents in question.
The reason why it might seem strange that there is even a possibility that these policies would be excluded in a means test is that they are clearly a form of investment and are accessible as they will include cashing in rights and partial surrender options (albeit with possibly adverse tax consequences). However, the CRAG guidelines (6.002B) do seem clear that an existing bond will be disregarded at the point of assessment (subject to there not being a deliberate strategy to reduce available capital – see later comments).
Rather more predictably, regular (periodic) withdrawals from such bonds, even where these are technically repayments of capital will be brought into account in the income part of the means test (6.002C). Cancelling existing withdrawals after a probable need for admission to residential care emerges would likely be caught under the deliberate deprivation of assets rules, although practice could vary from one authority to another.
Whether or not it is a good idea to move investment assets into life assurance bonds in anticipation of a future claim for support with Residential Care Home costs depends on the likely time delay. In looking to bring assets back into account under the “deliberate asset deprivation” rules, motive and timing will be relevant factors considered by local authorities. There is case law, generally involving residential properties, such as Yule v South Lanarkshire (1999) and Beeson v Dorset County (2001), which throw some light on the way local authorities are expected to interpret the rules, but this is likely to remain a “grey area”.
It would certainly be very unhelpful if a financial adviser has made an investment proposal that suggests, in the customary letter of recommendation, that buying a life assurance bond is attractive because “it will protect the investment if there is a need for care fees funding later”. That will unfortunately have happened in some cases. There may well be other tax planning reasons for arranging a bond instead of buying investments in other structures, but occasionally financial advisers will become too enthusiastic in listing product benefits to re-enforce a sale and this might be problematic if they suggest protection from means testing is a “benefit”.
The longer an individual has owned a bond prior to claiming State funding support for care home fees, the less likely the asset will be brought into account, as clearly for someone to be motivated to shelter assets, there must be some reasonable likelihood that the owner will need the care services in question in the foreseeable future.
Although it may appear attractive to minimize available assets and income to claim maximum support from the local authority the client may find that ‘all that glitters is not gold’. Instead, the unfortunate client may discover that the public funding available is wholly inadequate to fund their needs in a way in which they and the family would want. Having access to top up funding will usually be desirable.
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