Investment bonds and long term care
Investment bonds and long term care
How could life assurance investment bonds be assessed in an assessment of residential care needs? Other assets, such as the family home, fall under different rules.
When financial assistance for the cost of residential care is sought from a local authority, the income and capital of the individual applying for assistance will be assessed. Different local authorities can though take very different views.
The Department of Health document ‘Charging for residential accommodation guide’ (CRAG) provides some clarifications on how such investments may be assessed, and is available at www.dh.gov.uk.
The National Assistance Act 1948 stipulates that where a local authority pays towards the cost of a person’s care in a care home, the authority must assess what the person can afford to pay for that care and then charge accordingly. Local authorities use the National Assistance (Assessment of Resources) Regulations 1992 to assess an individual’s ability to pay, and CRAG offers additional guidance to authorities in this area.
The charging arrangements are reviewed annually and the latest version (April 2010) of the Charging for Residential Accommodation Guide (CRAG) provides that individuals with assets below £23,250 are entitled to apply for financial help. Where assets are below £14,250, this amount is disregarded. Generally all income is included in any assessment, but there are some additional exemptions. For capital between £14,250 and £23,250 an individual is treated as having £1 of income for each £250 or part thereof between the two amounts.
Treatment of Investment Bonds
CRAG specifically addresses investment bonds (section G – ‘Capital’).
Section 6.004 states:
‘Councils are advised that if an investment bond is written as one or more life insurance policies that contain cashing-in rights by way of options for total or part surrender, then the value of those rights has to be disregarded as a capital asset in the financial assessment for residential accommodation. In contrast, the surrender value of an investment bond without life assurance is taken into account’.
This means that currently a single premium investment bond should not be brought into account when an individual is assessed for residential accommodation. Capital redemption contracts, however, would be included in any assessment following this definition.
Treatment of withdrawals from an Investment Bond
Section 6.005 states:
‘Income from investment bonds, with or without life assurance, is taken into account in the financial assessment for residential accommodation.
Actual payments of capital by periodic instalments from investment bonds are treated as income and taken into account provided that such payments are outstanding on the first day that the resident becomes liable to pay for his accommodation and the aggregate of the outstanding instalment and any other capital sum not disregarded, exceed £16,000’.
Principally this means that where withdrawals from bonds are paid they will be treated as income purely for the purposes of the financial assessment for residential accommodation while residing in the local authority accommodation, if they and any other capital sum exceed £16,000. It would imply that if withdrawals were terminated (where possible) before entering care, these payments would not form part of the assessment, although careful consideration needs to be applied on this point to ensure that the significant motivation for ceasing withdrawals is NOT to increase the local authority payments.
This would apply to personally owned bonds as well as bonds held in trust for the settlor’s benefit or where an interest is retained such as a discounted gift trust.
Deprivation of capital
Section 6.062 to 6.074 specifically highlights examples of how individuals, before entering accommodation, could deprive themselves of assets. Section 6.067 provides an example where capital has been used to purchase an investment bond. The guidance states that Councils will give consideration to see if this was made with a significant motivation being to increase the payments from a local authority. Placing assets into trust is also highlighted as a possible method of deprivation of capital.
Consultation paper in 2010
A consultation paper was issued in January 2010 with responses required by 23 April 2010. One of the areas that was highlighted for consultation was whether investment bonds with life assurance should be taken into account in financial assessment. The recently published 2011 CRAG report has made no change to the assessment for investment bonds with life assurance.
Planning options immediately before entering accommodation are limited and could impact any financial assessment.