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Nov 30
0

Our view on the Autumn Statement

By | Budget

National Insurance

The headline announcement in the Autumn Statement was the reduction in the main rate of Class 1 National Insurance Contributions (NICs) paid by an employee. Whilst speculation had mounted prior to the Statement that the cut to NICs would be 1%, Jeremy Hunt extended the cut to 2%, reducing the main rate (i.e. the rate payable on earnings between £12,570 to £50,270) from 12% to 10%. This will take effect from 6th January 2024 and provide a maximum saving of £754 per annum.

From the perspective of pension contributions, many employers now offer Salary Sacrifice arrangements, which provide NICs savings for both employers and employees. The reduction in the main rate of Class 1 NICs does slightly reduce the benefit achieved from a Salary Sacrifice arrangement; however, such an arrangement remains a tax-efficient way to structure regular pension contributions.

For the self-employed, Class 2 contributions have been abolished for those with profits above £6,725 a year. The main rate of Class 4 contributions has been reduced from 9% to 8% on profits between £12,570 and £50,270. Employer rates of NICs remain unchanged at 13.8%.

Extended support for VCT and EIS

The Statement confirmed continued support for Venture Capital Trust (VCT) and Enterprise Investment Schemes (EIS) until 2035, which is welcome news. VCT and EIS were previously subject to a “sunset clause” which would have ended tax relief on investment in new VCT and EIS shares in 2025. The announcement provides clarity to the sector and continues to underline the Government’s intention to support small and growing businesses with funding through tax efficient investments.

Pension rules clarified

Following the announcement in the Spring Budget 2023 that the Lifetime Allowance for pension savings is to be abolished, the Treasury and HMRC have provided further guidance on how the new regime will operate from 2024/25. The most important clarification was in respect of the tax treatment of funds in a Defined Contribution pension, where the member dies before the age of 75. Subject to confirmation in the Finance Act, it appears that annuity and drawdown income payable to nominated beneficiaries will remain tax-free beyond 6th April 2024.

IHT – no change…yet

Despite significant press speculation in the run up to the Autumn Statement, no announcements were made to alter the current Inheritance Tax (IHT) rules. Treasury receipts from IHT continue to grow year on year, and reducing or abolishing IHT would leave a gap in the public finances that would need to be filled elsewhere. It therefore remains the case that careful planning is needed to consider whether any mitigation to reduce or eliminate exposure to IHT is required.

Given that there is at least one more Budget before the next general election, we would not entirely rule out changes to IHT next year; however, it is likely that families will still need to consider and plan ahead to ensure that intergenerational wealth is cascaded in a tax-efficient manner.

ISA changes

Whilst some of the more radical changes that the Government could have made to Individual Savings Accounts (ISAs) have been left out of the Autumn Statement, some useful adjustments have been made to the ISA rules from April 2024. From the next tax year, investors and savers will be able to open more than one ISA of each type in the same tax year. Under current legislation you can only open one ISA of each type (i.e. one Stocks and Shares ISA and one Cash ISA) in a tax year, and the new rules introduce interesting opportunities to split Stocks and Shares ISAs across different providers, or save into both a fixed rate and a variable rate Cash ISA with different deposit takers. It will also be possible to arrange partial ISA transfers from contributions made in the current tax year.

The total ISA allowance remains at £20,000 and this is the hard cap on contributions across all different ISA types in a single tax year. This is slightly disappointing, given the fact that the ISA allowance has remained at £20,000 since the 2017/18 tax year, and inflation has eroded the real value of the ISA allowance over time. Junior ISAs will continue to have a £9,000 limit per tax year.

State Pension

The “triple lock” on State Pensions remains in place and therefore State Pensions will increase by 8.5% from next April, as this was the published rate of average earnings growth in September 2023. As a result, the full New State Pension will increase to £221.20 a week from April, or £11,541.90 per annum.

Those in receipt of State Pension will need to consider the effect of fiscal drag on other income they receive such as personal pension income, or savings or dividend income above the Personal Savings and Dividend Allowances. As the bands for Income Tax are frozen until 2028, the increase in State Pension may well push more income into the basic rate, and potentially higher rate, tax bands. It would, therefore, be sensible to consider using tax allowances where possible to shelter investment and savings income.

Planning Opportunities

The Autumn Statement provided clarification on the pension rules that will apply from 6th April 2024, and also ended some of the uncertainty around the long term future of VCT and EIS investments. The measures announced may also present some useful opportunities in the way ISAs are structured from the next tax year; however, with tax bands still frozen, it would be sensible to review the tax-efficiency of existing investment portfolios. Speak to one of our advisers to discuss your financial planning requirements in light of the Autumn Statement.

Nov 23
0

Trust investment decisions

By | Trusts

Whether a trust is created through a will, or established through a lifetime gift, the trustees will need to take a number of important decisions when a trust commences. One of the key decisions is how the trust funds are to be invested. By way of reminder, the Trustee Act obliges trustees to seek advice at this stage, unless the trustees feel advice is not necessary (due to the value of the trust fund) or if the trustees feel they have the necessary expertise to reach the decisions themselves.

Deciding on a trust investment strategy

The trustees need to have the interests of the beneficiaries at the heart of each and every decision reached. This extends to the initial assessment of the terms of the trust, where trustees need to understand the purpose of the trust, which will help define the investment objectives. For example, trustees will need to consider whether the trust needs to provide an income to a beneficiary, or if the target is to achieve capital growth, and how long the trust is likely to be in place for.

In addition, any specific terms included within the trust deed need to be considered together with any investment limitations. A good example of such a limitation would be where a will trust leaves funds for a beneficiary upon trust, until they attain the age of 18. If the beneficiary was aged 17 at the time the trust was created, the trustees are likely to reach a different conclusion as to the most appropriate investment approach than if the beneficiary was aged just 2 at the creation of the trust, as the time horizon for investment is very different.

One of the key principles of the Trustee Act is to ensure that the investment strategy is suitable for the purposes of the trust in question. This places the onus on trustees to ensure that the level of risk adopted is sensible, and that the investments provide adequate diversification across a range of different assets.

Another important aspect that is sometimes overlooked is the need to consider the tax treatment of the investments held within the trust. Trusts generally suffer a punitive rate of Income Tax and Capital Gains Tax, and setting up an investment portfolio in a tax-efficient manner can make a substantial difference to the overall net returns received by the beneficiaries.

Reviewing trust investments

Once an investment strategy has been established, there is a statutory requirement for trustees to review the trust investments. Trustees cannot simply establish an investment portfolio for the trust and then neglect to carry out regular reviews, as this could well be seen as dereliction of duty. There are many reasons why investments need to be reviewed regularly; investment performance can vary over time, and the trustees need to make sure that the investments held by the trust perform well compared to other investments of similar risk.

Furthermore, investment market conditions change regularly, and as the last three years has demonstrated, market sentiment can swing from positive to negative quickly in response to global events. As market and economic conditions change, the trust investment strategy will need to adapt to the prevailing conditions, and arranging a regular review can help trustees make decisions to change the investment strategy if necessary.

In addition to the requirement to review investments regularly, trustees also need to make sure that they keep good records of the decisions reached for audit purposes.

Powers of delegation

Trustees cannot ask another to step into their shoes when it comes to important decisions about the distribution of trust assets, or their fiduciary duties; however, trustees can delegate the management of trust investments to a professional, who acts as an agent of the trustees. It is important that this appointment is made under a formal agreement and the boundaries of the investment management agreement need to be clearly defined.

It is often the case that trustees will appoint investment managers who act under a discretionary agreement. This is where the investments are reviewed and changed regularly by the investment manager, without approaching the trustees for their prior approval. This type of arrangement can reduce the onus on trustees to respond to recommendations made by the investment manager, and ensure that the recommended changes are made in a timely manner.

FAS Trustee Service

The FAS Trustee Service aims to provide trustees with a comprehensive advice and review service, which enables trustees to meet their obligations under the Trustee Act.

When we first meet with trustees, we discuss the trust deed in detail and look at the important considerations that the trustees need to take into account. When devising an appropriate investment strategy, we can look at a range of options open to the trustees, and provide independent advice on the asset allocation together with other considerations, such as the amount of funds trustees should retain as cash. We also can provide advice on the most tax-efficient solution, based on the precise circumstances of the trust.

Our comprehensive review service provides trustees with peace of mind, as a thorough review of the trust investments is carried out at pre-determined intervals. We meet with trustees to discuss the investment performance, and other factors relevant to the trust, which can assist trustees in their decision making. We follow-up each meeting with a detailed written report, helping trustees in their compliance with the Trustee Act.

If you are a trustee of a new trust, speak to one of our experienced advisers about the FAS Trustee Service. Likewise, if you are a trustee of an existing trust, and haven’t reviewed the trust investments for some time, then contact us to carry out an independent review of the existing arrangements.

Nov 09
0

Going big in Japan?

By | Investments

For many years, Japan has been considered as “tomorrow’s story”, where there is much promise, but returns disappoint. That is until this year, where the Japanese Equities market has shown considerable strength. There is good evidence to support further outperformance; however, investors would be well advised to look to the past to understand why Japanese markets have struggled over an extended period, and the steps that policy makers need to take to avoid treading a similar path in the future.

Learning from history

The Japanese stock market has endured over 30 years of underperformance, following a significant economic bubble that formed in the late 1980s. At the time, Japan was growing more rapidly than many Western economies, and spurred on by lax monetary policy and growing investor appetite,  the Nikkei 225 – the most widely reported stock index in Japan – increased from an index value of 13,000 in 1985 to reach a high of 38,915 in December 1989. Across the board, asset prices rose, with the bubble spreading to other asset classes, such as real estate, where values of stocks and property reached overly optimistic levels of valuation.

Asset bubbles tend to end in a disorderly manner, and following the boom, the Nikkei 225 fell heavily in the early 1990’s. Following rapid acceleration during the previous decade, the Japanese economy moved into an extended period of low growth, due to the lingering effects of the asset bubble. The Bank of Japan moved to reduce interest rates to near zero, a level at which rates have broadly stayed ever since, in an attempt to reignite economic growth.

Economics and demographics

One of the reasons why Japan’s economic performance has been an outlier, when compared to other Western economies, are the demographics of the Japanese society. Population levels in Japan are in decline, and the World Economic Forum reports that more than 1 in 10 people in Japan is aged over 80. This has helped keep a lid on domestic consumer demand and there has been a tendency for the population to save, and not spend, despite receiving little in the way of interest. As the population ages, those in working age could see wages increase, leaving consumers with more money in their pockets to spend.

Deflation has been a constant threat that the Bank of Japan have had to deal with. Elevated inflation around the World has been seen as an enemy over the last two years, and whilst high levels of inflation generally harm economic prospects, extended periods of zero inflation, or deflation, have a similar negative effect.

The last year has, however, seen a change in fortune for the Japanese economy. Partly due to the global effects of the pandemic, Japan has seen the first significant bout of inflation for decades, with inflation rising from close to zero in early 2022 to reach 4.3% in January of this year. Whilst inflation has now moderated to stand at 3% in September, the return of meaningful inflation is welcome news and may see domestic demand increase and consumer confidence grow.

Regulatory reform

In addition to the welcome return of modest levels of inflation, Japan is embarking on a number of initiatives to boost investor demand. Traditionally, Japanese companies have been keen to hold large amounts of cash on their balance sheets, and regulators have announced measures to encourage these companies to return funds to shareholders, in the form of increased dividends or share buybacks. There have also been announcements improving the tax breaks offered to encourage Japanese households to move away from traditional cash savings and invest in their economy through share ownership.

Valuations are attractive

When using recognised metrics, Japanese Equities appear to be attractively valued when compared to most other global markets. This may well see a spark in overseas buyer interest, after many years where investors have been reluctant to hold significant allocations to Japan. Indeed, Wall Street veteran Warren Buffett’s announcement that he intends to increase allocations to Japan in April was seen by some as an endorsement of the value in Japanese Equities.

Artificial Intelligence and advanced manufacturing have been drivers of global markets over the last 12 months, and Japan is well placed to benefit from the quest to achieve further automation of human tasks, given the nation’s strong history in areas such as robotics. Japan also has a number of companies who provide solutions that can meet demand for a more energy-efficient and greener future, such as Toyota and Honda.

The importance of diversification

There are several reasons that support the view that Japanese Equities look attractive; however, risks do remain, and whilst the regulatory reforms may prove helpful, there is still significant pressure on central bankers to steer a successful course as inflation slows around the World. This is why we recommend allocations to Japan are held as part of a diversified investment portfolio, which is an important method of controlling investment risk. Allocating funds to different regions, where performance does not necessarily correlate, and to different asset classes – such as Government and Corporate Bonds and Alternative Investments – can help reduce overall portfolio volatility.

Speak to one of our experienced financial planners to discuss the asset allocation of your portfolio.

Nov 02
0

The role of a trustee

By | Trusts

Trusts can be very useful vehicles that can help manage assets. Unfortunately, many people find trusts confusing and daunting, and acting as a trustee carries significant levels of responsibility.

What is a trust?

In simple terms, a trust is an arrangement where assets are held and managed by an individual or individuals (known as trustees) on behalf of another individual or individuals (known as beneficiaries).

Trusts can be created for many different reasons and to suit different purposes. Many trusts are created in a will, whereby the will instructs the trustees to look after funds for another person or group of people. Some trusts are created by an individual when they are alive, with a view to passing on assets to help reduce tax. Other trusts are established when an individual is incapacitated or too young to look after the funds themselves.

The role of a trustee

Whatever the trust arrangement that has been established, each trust needs to have at least one trustee (although it is desirable to have at least two). The trustees have legal responsibility for the funds held in trust, and have a duty to manage the assets held in trust and ensure that the trust meets its purpose and objectives.

Trustees owe a fiduciary duty to the beneficiaries, to act honestly, in good faith and with loyalty. Every decision made by a trustee needs to be made in the best interests of the beneficiaries. Trustees also need to act unanimously when reaching decisions in relation to the trust assets.

A trustee may be appointed in a will, and it is normally the case that the executors of the will automatically become trustees of any trusts created by the will. When a trust is created during an individual’s lifetime, the person creating the trust (known as the “settlor”) will need to choose the trustees who will carry out the role. Many opt to appoint family members or friends to act as trustees. This may prove beneficial as the family member or friend may well have good knowledge of the family’s circumstances; however, the individual taking up the role may not have any experience of the legal obligations placed on them, or the time that will be taken in fulfilling their duties.

An alternative to appointing a family member or friend is to appoint a professional trustee, such as a Solicitor. By appointing a professional trustee, this will ensure that an impartial, experienced individual is handling the decisions on behalf of the settlor.

Getting guidance on acting as trustee

For those who are appointed as a trustee in a will, or an individual appointed as trustee of a lifetime settlement, it is important to fully understand the purpose of the trust and seek guidance on the specific requirements, in particular in relation to assets held by the trust. These will be contained in the will (in the case of a trust created on death) or in the trust deed for a lifetime trust. This will set out the specific instructions that the trustees must follow and can cover a number of aspects, from how monies are to be held, the investment powers that the trustees have, and when funds should be paid to beneficiaries. It can also provide directions as to how income generated by assets held in the trust is to be dealt with. When a trust contains residential property, trustees may have further duties to comply with, such as ensuring that the property is adequately insured, and maintaining and repairing the property.

Trust investment powers

Most trusts provide the trustees with wide investment powers, which leaves the trustees with a decision to reach when deciding how trust funds are invested. Under the Trustee Act, trustees have a duty to obtain proper advice before making a decision, unless the trustees reach the conclusion that there are exceptional circumstances where advice is not needed. This could, for example, be where the amount of money left in trust is considered to be too small to warrant advice; however, this judgement call needs to be made by the trustees’ themselves.

FAS Trustee Service

At FAS, we have considerable experience in providing independent investment planning and advice to Trustees, through our Trustee Service.

We appreciate that the precise requirements of each trust will be different, and we therefore initially take the time to fully review the trust documentation to understand the terms of the trust and highlight the important considerations. We can manage Trust investments on an advisory or discretionary managed basis, with all investment decisions made by our experienced in-house Investment Committee. The majority of trustees choose our discretionary managed service, as this ensures that the trust investment portfolio is reviewed and rebalanced at least four times a year. This also helps reduce the amount of administration involved when making changes to the trust portfolio.

Given that the Trustee Act requires trustees to review a trust regularly, we carry out an in-depth review at pre-determined intervals. This comprehensive review covers the investment performance, matters relating to the trust and ensures that the trust portfolio can readily adapt to any change in circumstance. These regular reviews, and follow-up reports, can also assist the trustees in their audit trail to demonstrate their compliance with the requirements of the Trustee Act.

If you have been appointed as a trustee, or wish to review an existing trust, speak to one of our experienced advisers.

Oct 26
0

The quest for real income

By | Investments, Savings

Base interest rates have increased sharply over the last 18 months, as Central Banks aim to tackle high levels of inflation. As a result, interest rates on cash deposits have increased and those who look to produce an income from savings and investments can now generate relatively healthy levels of interest from deposit accounts.

On the face of it, cash is a risk-free investment, as the initial cash balance deposited does not fluctuate in value; however, the hidden risk in holding cash is the eroding impact of inflation. Let’s look at a typical savings account that is paying 4% annual interest before tax, which was opened one year ago. At face value, holding a deposit in this account will have earned 4% return and you will still hold your capital value. The hidden risk is that the real value of the cash deposited – i.e. adjusted for inflation – will have fallen. At the time of writing, the rate of UK inflation over the last 12 months has been 6.7%, which means that the amount deposited will be worth 2.7% less in real terms than when the account was opened. There are other risks of cash too, as the highest paying accounts restrict access to your money, and attention needs to be paid to the limits afforded by the Financial Services Compensation Scheme.

As we move into 2024, we expect interest rates to fall as inflationary pressure eases further, and the eye-catching rates on offer now may be a distant memory in twelve months’ time. This leaves investors who are holding cash needing to find another home as a way of generating income. This is where Equity Income investments have a real advantage over time, and as part of a diversified portfolio, can look to generate an attractive and rising income yield.

Look to dividend income

Part of the return from holding Equities are the regular distributions of excess profits, in the form of dividends. Most mature companies declare dividends to shareholders at regular intervals, and a company that enjoys a strong performance may well look to increase its’ dividend payments over time, which could potentially offset the effects of inflation.

There are a number of global stocks that have a track record of increasing dividends year on year, with the likes of Coca- Cola, IBM and Johnson and Johnson being prime examples of US listed global companies who have consistently raised their dividends each year for the last 25 consecutive years. The UK also has a smaller list of companies who have consistently raised their dividends, such as British American Tobacco and Diageo.

Dividend income is only one part of the potential return that can be achieved from holding Equities, as holding company shares can also offer scope for capital gains over time. Whilst Equities will introduce short-term volatility – which is not a feature of cash accounts – the long-term track record of returns generated by Equities markets highlights the capacity for Equities to significantly outperform returns achieved from cash deposits.

Spreading the risk

Dividends are, however, not guaranteed, and by holding individual Equities you introduce stock-specific risk. Changes in the fortunes of the company in which shares are held can not only impact the share price, but also the potential for dividend growth. Indeed, a company that begins to struggle may look to cut its’ dividends, or cancel it altogether.

As a way of mitigating this risk, we would suggest that holding Equity Income funds is a more appropriate way of gaining access to companies that pay an attractive dividend stream. This can help avoid the potential for issues with one particular company or sector having too great an impact on the overall fund value. Whilst there are a limited number of passive investments that specifically target stocks with increasing dividends, the majority of Equity Income funds are actively managed. This is where a manager or management team will look to select positions and build the portfolio, with a view to holding companies that offer an attractive and increasing dividend yield, and good prospects for capital growth over the longer term.

Equity Income funds cover most geographic areas of the World, providing access to dividend producing companies from the UK, US, Europe and Far East. There is also a wide range of Global Equity Income funds, where the fund manager can select the most appropriate positions from anywhere in the World.

As the performance of an actively-managed Equity Income fund relies on the skill of the manager, it is important to select the right fund – or blend of funds – to seek out the best performance. The level of income, and overall return, achieved from within the Global Equity Income sector can vary significantly from the best to worst performance over time, and this is where careful analysis of the fund, portfolio strategy and management style are crucial. The FAS Investment Committee regularly meets with leading fund managers from all sectors, including those who manage Equity Income funds. These regular meetings strengthen our quantitative approach to fund selection, so that we can truly understand the methods and rationale behind the portfolio selection process.

Equities as part of a diversified portfolio

It is important to point out that Equity Income funds are one of a range of different options for those seeking an income from their savings or investments. Cash deposits absolutely have a place in most sensible financial plans; however, the amount held in cash needs to be considered carefully, as the hidden eroding impact of inflation over time can easily eat into the real value of deposits.

Speak to one of our experienced advisers to discuss the options to generate an income.

May 01
0
pebbles at a beach

How A Financial Planner Can Help During Divorce

By | Divorce

Divorce is one of the most emotional experiences a person can go through and dealing with the financial implications of this can be one of the most daunting parts of it.

Most people use a solicitor to work through the legal aspects of their divorce but a Financial Planner can really help if your dissolution or financial situation is fairly complex. Needless to say, the financial decisions you make at this time will impact the rest of your life so its important to get the right type of advice at the outset. Handling things on your own can cause you to overlook things, but the appointment of an experienced Financial Planner means that you will be able to explore and be advised on all of the financial options available to you.

In this article, we present some of the key financial aspects of divorce that you need to think about and suggest some common mistakes to avoid.

Immediate Financial Aspects of Divorce to Consider

Naturally after a separation, the immediate financial concern is figuring out how to stay afloat. This is a very unpleasant time, as you go into survival mode. Can you afford to pay your bills, and will you be able to avoid falling into debt with some careful budgeting?

Your prime focus will be the need to provide financial stability for yourself and any dependents you are responsible for. Avoid making any drastic banking decisions such as switching to another provider, especially if you have not agreed this with your former partner.

Money is often tight after a separation, and it’s important that you do not fall into debt. Moreover, it’s crucial that you protect yourself as much as possible from the effects of your former partner falling into debt. As you will still be legally married at this point, this debt certainly will affect you.

If your spouse is the sole name on the mortgage for the family home, then you might want to consider registering a Notice or Restriction. You have a legal right to live there, and this helps in preventing your spouse from taking the unilateral decision to remortgage or sell the home.

Considering the Family Home

One of the trickiest aspects of any divorce is figuring out what to do with the marital home.

It might be in your children’s interests and in your interests, for one of the adults to remain living in the property. However, this might actually be a hindrance to you in terms of moving on with your life.

You also need to consider whether keeping the family home is the most sensible financial decision. Depending on your circumstances, it might make sense to stay put. In many cases, however, the more rational option is to move somewhere more affordable.

You will be faced with monumental, highly-emotional decisions. However, in our experience, we can help clients to bring a lot of clarity to this difficult situation. Indeed, many clients have contacted FAS after their marriage dissolution, thanking us for raising the question about the family home and for the guidance we have been able to provide and in helping them towards making a decision they might not have had the strength to carry out alone.

Other Important Areas of Divorce Planning

You are most likely to have marital assets other than your home which you will need to plan accordingly after a separation.

This is a key time for you to review your assets thoroughly with the help of an experienced Financial Planner. At FAS, we can help you establish what your assets actually are, where they are located and whether these are still appropriate for you, given your dramatic change in circumstances.

For instance, some common questions our Financial Planners present to clients include:

  • Has your attitude to investment risk changed since change in circumstances?
  • Is it now appropriate or sensible to keep your Buy-to-Let property?
  • Do you need assistance with any existing pension arrangements or Pension Sharing Orders?

Pensions may or may not need to be divided following your Divorce. It depends on your particular situation. In light of this, working with a suitably qualified Financial Planner can help you look at how this affects your own retirement planning.

Financial Mistakes to Avoid During Divorce

 

Focusing on the home and neglecting other areas.

Many people become highly attached to the family home during Divorce, especially where children are involved.

This can often lead to many taking over the mortgage borrowing during a divorce settlement in order to keep the family home but at the expense of losing a proportion of their spouse’s pension. In most cases, it is better to sell the marital home, buy something smaller, and take a slice of the former partner’s pension. Of course, this isn’t the right choice for everyone, which is why seeking the right guidance is essential.

 

Accepting an equal pension split

Whilst equally splitting your partner’s pension provision might seem the fairest course of action, you should carefully consider this option before agreeing to it. This will not necessarily result in an equal level of income in retirement. Quite often, it is better to push for an equal income share, rather than a simple 50:50 split of the capital so discussing options with a Financial Planner makes sense.

 

Failing to check valuations

This is where our Financial Planners often provide the most value during a client’s Divorce. Both spouses are legally required to disclose all their assets during Divorce, including businesses and pensions. However, these two areas are quite complex and it is possible to conceal actual values. A Financial Planner who is experienced in this field will be able to help you obtain the relevant documents you need in order to value these assets, ensuring you get a fairer deal in the final settlement.

Nov 28
0
wooden path on beach pebbles

A Short Guide to Funding Long Term Care

By | Financial Planning

The demographic map of the UK is changing. Most of us are now living longer; in 2017 those aged 85+ were 1.35m in number, and this figure could reach 2m by 2031. Although this is wonderful news in many ways (more time with our loved ones!), it also brings significant challenges when it comes to financial planning.

First of all, it implies that people’s retirement funds will need to stretch further compared to previous generations. In 1980, for instance, an Englishman aged 65 had a 1/1000 chance of reaching 100 years old. Today (nearly 40 years later), those odds have shrunk to around 1/100.

This increased longevity is likely to put additional strain on the already overstretched State Pension and is one of the reasons why most employers are no longer offering employees Defined Benefit pensions (which pay a guaranteed lifetime income in retirement). Careful financial planning will, therefore, be needed more than ever to ensure we have the income we need in our later years.

Secondly, increasing life expectancy is also projected to accompany an increase in health problems amongst older people. In particular, research shows that the number of retired people with diabetes, depression, cancer and dementia is likely to at least double by 2035. Many of these conditions require some level of professional care, which come at a significant cost.

Given these trends, projections and figures, it is little wonder that at FAS we are often asked about what people can do to prepare for the possible costs of their future long-term care. In this short guide, we’ll be sharing some of our thoughts on this important subject. If you want to discuss your care strategy with one of our experienced financial planners, please do give us a call.

The Cost of Care

In 2019-20, the precise amount you pay for care depends on a range of factors including:

    Where you live in the country.
    The level of care you need (e.g. 24/7 intensive or temporary and residential).
    The quality of the care home in question.
    Your financial situation.

At the moment, there are around 400,000 people living in care homes across the UK; a figure which is set to rise to 1.2m by 2040. Residential care costs can vary greatly, but typically range from £600-£900 per week. Indeed, some people face annual care costs exceeding £50,000.

Ways to Fund it

£50,000 and similar figures are clearly eye-watering for most people to look at. After all, just 3-years in residential care could cost £150,000; enough to wipe out a significant portion of an Estate, and by extension a family’s Inheritance. How, then, can you prepare your finances for this large, yet unpredictable cost in the future?

In 2019-20, those possessing less than £23,250 in assets are entitled to financial support from their local council, to help cover the fees. If you (or a dependent, child or spouse/partner) continue living at home whilst you receive care, then the value of your house is not normally counted within the means-test determining whether you are eligible for council support.

We do not recommend that you deliberately deprive yourself of assets in order to try and get around this system. Not only does this leave you financially vulnerable, but the council is also likely to detect such deprivation strategies and calculate your care fees as if you still owned the home/assets you have sold or given away.

What, then, are some of the other options you can consider with your financial planner when it comes to creating a strategy for long-term care funding?

Own Income & Family

Some people are in the fortunate position where their siblings, children or other loved ones can contribute towards the costs of their care. This, combined with your own pension income as well as other savings and investments, could be enough to meet your care costs.

Property

Many people are cash-poor but asset-rich by owning a property. In such circumstances, downsizing or Equity Release could be an option to access funds needed to cover care costs. These are hugely important financial decisions with far-reaching implications for your financial plan, so we recommend that you speak with a financial planner about any decision or strategy involving using your property to fund your long-term care costs. It might be that other, more appealing options are available to you.

Care/Immediate Needs Annuity

With the help of an experienced financial planner, it is possible to find a good insurance plan which can help you meet your care costs. These plans usually involve paying a company a one-off lump sum in exchange for a guaranteed lifetime income (tax-free), which would be paid directly to your care home. The amount you pay for the annuity will vary depending on factors such as your age and health.

Invitation

Many commentators have described the UK’s care system as in a state of “crisis”, and many people are understandably worried about how they will cover these possible future costs. However, at FAS we can help you can assess your options with a clear mind and with the best information available.

This content is for information purposes only.