Now is the time to take control of funding care for later life, says Linda Whitney
It’s something many of us are thinking about – how our care in later life is managed and funded.
A social care overhaul is in the offing, with the government due to give a progress report on last year’s Dilnot Commission on the subject. Whether ministers act on the Dilnot advice whole or piecemeal, one certainty is that many more of us will have to cover the cost of care ourselves, possibly through dedicated investments.
How to go about it can be confusing, and it doesn’t help when big players in the field make mistakes.
Last December HSBC was fined £10.5m after its subsidiary, Nursing Home Fees Agency, mis-sold investments to people who were more likely to die than reap the benefits.
It’s enough to worry even the savviest investor, but with care home fees in the South East, for example, averaging around £29,000 a year – £42,000 with nursing care – the funding question must be faced.
Firstly, check whether you are entitled to free care, or some help with fees – charity Age UK can help here (call them on 0800 169 6565).
If you are self-funding, consult an independent financial adviser about options – and ensure that he or she has the CF8 qualification in long-term care funding advice.
An immediate needs annuity – available from Partnership and Friends Life only – is the most commonly recommended route. The annuity is paid direct to the care provider, so is free of income tax, and the payments are usually higher than pension payments for healthy people.
The annuity is guaranteed to pay out until you die and there are indexlinked options which allow for the increasing costs of care (rising by about 5 per cent annually). Insurance that pays all or part of the money back if you die in the first year is available.
If you require an annuity to cover immediate care needs, there will be a one-off premium to pay. There are provider charges, too, and usually about 4 per cent of the premium is paid to the adviser as commission.
“The average premium for these annuities that we have arranged over the past year was £115,000,” says Andrew Dixson- Smith of Care Fees Investment, a Member of the Society of Later Life Advisers.
Raising the money may mean selling your house, though if your estate is worth more than the inheritance tax threshold – currently £325,000 – the annuity can be deducted from your estate, helping to reduce the 40 per cent inheritance tax bill.
So what income can an annuity provide? The cost is based on age, gender and medical circumstances, but on average a £115,000 annuity will generate about £24,000 in care home fees payments annually – it’s usually bought to bridge the gap between care fees and other income from a pension and any state benefits.
Investments can be used to pay care fees, but choice is limited and your minimum life expectancy should be at least five years.
For under five years’ life expectancy, the choice should be nothing riskier than a savings account. However, with the best rate on a monthly income account currently under four per cent, you would have to invest hundreds of thousands to make enough to cover most or all of your care home fees without eroding your capital.
Tax cash from Constable
Your next tax payment could be hanging on your wall. A scheme to be introduced in the 2017 budget will allow you to pay tax bills with historical objects or works of art.
Individual donors can cut their income and capital gains tax bills by up to 30 per cent of the value of the object they donate.
“If you donate, say, a Turner worth £10m, you will be able to claim £3m off capital gains or income tax,” says Robert Blower of law firm Charles Russell.
The scheme will be similar to the long-standing Acceptance in Lieu (AiL) scheme, which allows people to donate pre-eminent objects in return for a reduction in their inheritance tax bill. However, the new scheme will allow donations in the giver’s lifetime and the tax cut can be spread over five years.
Financially, art owners might be better off selling their pre-eminent objects, says Blower. “If you sold your Turner at auction for £10m, you would receive about £7m after capital gains and auctioneer’s commission, whereas if you donate it, you will only get the £3m in tax reduction. However, the capital gains on the sale will be set aside, and you will get the satisfaction of donating something to the nation.”
Pre-eminent object can include pictures, manuscripts, pieces of furniture, photographs, heritage objects and historic documents. Even entire houses may be considered.
Items accepted under AiL, for instance, include John Constable’s Stratford Mill, painted in 1820, accepted in 1986 and now in the National Gallery, Clive of India’s elephant armour, now in the Royal Armouries, and Seaton Delaval, Sir John Vanburgh’s baroque house in Northumberland, now run by the National Trust.
Objects will be accepted on a firstcome, first-served basis and passed on to an institution to put them on public view. However, donors can express a preference for where they want their objects to go.
A panel of experts will make the decision whether or not to accept an item and at what value. There is no limit to the tax reduction available for each object or donor, but the overall limit of tax deductions for the new scheme and AiL combined will be £30m. Linda Whitney