The purchase of an investment bond in this regard is specifically mentioned in paragraph 9(g) of Annexe E of the guidance for England:
9)A person can deprive themselves of capital in many ways, but common approaches may be:
g) Assets have been used to purchase an investment bond with life insurance.
Paragraphs 11 and 12 then helpfully explain what considerations the local authority needs to take into account when deciding whether deprivation for the purpose of avoiding care and support charges has occurred.
These include the motivation for the deprivation, timing and expectation of needing a contribution to the cost of their care.
Whilst the other nations have individual CRAGs, in the respect of deprivation the wording is similar and include the following:
- 6.57: Trust should only consider questions of deprivation of capital when the resident ceases to possess capital which would otherwise have been taken into account; and
- 6.63: The timing of the disposal should be taken into account when considering the purpose of the disposal. It would be unreasonable to decide that a resident had disposed of an asset in order to reduce his charge for accommodation when the disposal took place at a time when he was fit and healthy and could not have foreseen the need for a move to residential accommodation. The local authority should bear in mind, however, that deprivation can be considered for resources disposed of at any time...
From an advice perspective, when advising clients who may require long term care it is important to clearly document the reasons an investment bond wrapper is suitable.
There are a number such as tax efficiency, simplicity, tax deferral, switching of investment funds and so on, however due to the deprivation rules, the favourable treatment of a bond wrapper for assessment is a benefit rather than a reason for using it.
In January 2009, a professional adviser was fined £28,000 by the FSA, as it was, at that time, for failing to adequately advise investors about the risks associated with certain transactions.
Part of the reasons for the action issued by the FSA was that the professional adviser had issued a suitability letter saying that investment bonds had been recommended ahead of other tax efficient wrappers.
This wsa because local authorities, when assessing whether individuals have the means to pay for residential care, do not include investment bonds in their financial assessment.
The FSA pointed out that a local authority may decide that the purchase of an investment bond was deliberate deprivation, and may include the bond in their financial assessment.
Sign-up for our next series of webinars here.
Canada Life offers a range of wealth management solutions, including retirement income planning, estate planning and investment solutions from a choice of jurisdictions, including the UK, Isle of Man and Republic of Ireland.