It was almost 10 years ago that the Government started to focus on the problem of increased longevity, when it introduced a new pensions regime as part of its efforts to encourage people to save for their old age.
Life expectancy has lengthened and the Government wants to develop people's awareness that pensions are not necessarily the end of the road and that outgoings may be even higher in the final year of retirement, when the costs of long term care (LTC) may have to be met.
As with pensions, the plan is to provide some form of recognition or reward to those who take steps to protect their own financial interests and thus reduce the burden on the taxpayer. It is unsurprising, therefore, that proposals put forward in a recent Green Paper amount to a number of variations on well-established themes.
For those whose entry into LTC is imminent and those who have adequate means, an annuity scheme is the obvious solution. Apart from the benefit of partially tax-free receipts from such a "purchased life annuity", this limits the cost to a defined figure and could also be useful in reducing the impact of inheritance tax. Therefore, it represents sensible financial planning in that the commitment need not be made until most of the unknowns have been eliminated.
The Green Paper's "partnership" proposals envisage that a degree of asset protection might be made available to those purchasing annuities, and Commercial Union has suggested that payments under annuities which are made specifically for LTC purposes should be payable gross.
For those with sufficient pension provision, it is proposed that investors should be offered the option of weighting income payments towards their latter years, when the cost of care may have to be met. The proposed extension of income withdrawal facilities to include members of all types of pension schemes will enable those who advise retired people to manage pension portfolios post-retirement so as to achieve the required result, with income payments restrained initially and then maximised when the need arises. However, a practical problem with such a proposal is that since pension receipts are taxed as income, it is difficult to calculate with any precision the funding levels available for LTC.
One of the objectives expressed by the Government is that people should not have to sell their homes to pay for LTC. Clearly, if residential care is required, then the house will have to be sold, but if domestic support is all that is required, then this objective will be cheaper and will put fewer strains both on government finances and on the limited supply of specialist accommodation. It is with this in mind that Home Income Plans (HIP) are being dusted off and rehabilitated after a period of bad press largely caused by schemes which were invested in single-premium investment bonds.
It is notable that none of the major institutions are now involved in the HIP market. This is because changes in tax law have undermined the economics of such schemes and it is no longer feasible to achieve a constant relationship between borrowing and lending rates which will ensure a stable income. However, the widespread acceptance that HIP funding is likely to appeal to many elderly home-owners enhances the prospect that ways of adapting the concept to LTC provision may be found.
Finally, those whose assets are close to the limits for state support are to be encouraged to purchase LTC cover on a "partnership" basis. Instead of having to run down their assets to the detriment of beneficiaries until such time as they become eligible for state benefits, those affected can retain assets subject to making pro rata or related provision. However, a careful balance will need to be struck between the preservation of capital and the availability of income to fund care costs.
The Green Paper is of concern to all solicitors involved with the elderly, and consideration of LTC will need to become a necessary part of the estate planning process.
Solicitors seeking guidance in this sector can obtain details of firms which specialise in the provision of LTC advice and are happy to field outside enquiries by calling Solicitors for Independent Financial Advice (Sifa) on 01372 721172.