Investment bonds and care costs

Investment bonds and care costs

In the UK the election campaigns run by the various political parties have included statements and debates around long term care provision, and the cost of care that could be covered by the state.

The cost of care has been increasing and the problem around funding for care will continue to grow over the coming years unless action is taken.

The legislation around long term provision varies across the UK. In England, provision is included in the Care Act 2014 and for those residing elsewhere in the UK provision is included under section 21 of the National Assistance Act 1948.

In both instances the assessment for residential accommodation is means-tested and local authorities will assess claimants.

The Charging for Residential Accommodation Guide (CRAG) still applies in Scotland, Wales and Northern Ireland and each country has its own CRAG. In England, the CRAG was replaced from 1 April 2015 by the Care and Support Statutory Guidance. 

Where care is needed, the cost of will be met by the local authority however the cost of the residential accommodation is means-tested. In England, Scotland and Northern Ireland there are upper and lower limits which can vary by country.

If an individual has assets in excess of the upper limit then they will fund the costs in full, over the lower limit they will have to fund part of the costs, and where assets are below the lower limit there is no requirement to fund.

For those living in Wales there is only an upper limit. Whilst we are only looking at capital assets, it is worth making the point that there are also assessments against income. 

Investment bonds

When a local authority makes a capital assessment one asset that is listed as being disregarded is the surrender value of any life insurance policy (or annuity) and it is important to look at the wording of paragraphs 53 and 54. These state:

  • 53: The treatment of investment bonds is currently complex. This is in part because of the differing products that are on offer. As such, local authorities may wish to seek advice from their legal departments.
  • 54: Where an investment bond includes one or more element of life insurance policies that contain cashing-in rights by way of options for total or partial surrender, then the value of those rights must be disregarded as a capital asset in the financial assessment.

So, the guidance does suggest that the local authority seek independent legal advice with regard to the treatment of investment bonds.

It also states that a bond on a life assurance basis should not be included in the capital assessment, meaning that a bond written on a capital redemption basis would be included. 

A similar position is available in the other countries of the UK. The exclusion is contained in the CRAG guidelines for Scotland and Northern Ireland on how local authorities should assess people for long-term care costs.

In Wales the framework has changed as a result of The Social Services and Well-being (Wales) Act 2014 becoming effective from 6 April 2016 and the treatment of investment bonds is consistent with the rest of the UK.

Deprivation of assets

One area to pay attention to is around deliberate deprivation – investing in an investment bond on a life assurance basis, specifically because of care cost concerns.

Anyone who places funds into investment bonds, where a motive for the investment is to avoid a care fees charge, runs the risk of triggering the deprivation rules and having the value of those bonds treated as a capital asset for the purposes of means-testing.