Life Bonds and nursing home fees

The payout is actually encashment of the units of the fund within the bond. You have to hope that the increase in the value in the units at least matches the payout rate you have chosen. 5% per annum is a common maximum amount because then there's no liability to tax until at least 20 years have past

it seems, a 101% pay-out of whatever the

These are a very common form of investment.

It's part of a fund that the company offers. This fund might be with-profits, or property, or equity or all manner of things. Just like if you had an endowment policy. And it comes under life policy taxation rules.

and there must

No. The bond, being a life policy actually, will simply self-encash when the person insured (usually the bond owner - but not necessarily) dies. Whether you want a bond (where the underlying fund growth is taxed by the Revenue at a rate which approximates to 20%) or an OEIC/unit trust where this is not the case and any taxation (mainly CGT) is in the hands of the owner, you will have to judge. The problem has normally been that to get a regular income from a unit trust investment has not been simple, other than by taking the dividends, which may not be enough. However, Fidelity now offers an arrangement where you can set up regular withdrawals of capital to use as income.

Also, unit trusts do not self-encash when the owner dies, because they are not life policies. They simply get transferred to whoever is named in the will. This means that, if the person dies when fund values are low, they need not suffer a loss as they would with a bond.

You might also like to consider an immediate care annuity where the money is paid direct to the nursing home thus avoiding income tax.

Rob Graham

Rob

Thanks, that's very helpful.

We need a return of about 7.5% to pay the shortfall in her fees, the advisor thought that up to 10% was possible on some bonds, which she would check. My mother's 88 mean that she's over the age limit for some companies to do this type of bond.

We also want to protect her money as much as possible so that the family inherit at least some money. I've had a quick look at the immediate care annuity and as far as I can understand it we'd lose the capital in the annuity unless we added 'escalation rates and capital protection'. Whehter this is good or bad idea I don't know but I'll research further.

The advisor did mention a possible penalty if my mother died within say 5 years there might be a penalty. Is that what they call an MVR?

I've got a pack from Help the Aged "in assocaition with NHFA". They've got some examples too, which I'll study.

Thanks again

You'd be able to take up to 10% on some bonds but the maximum amount is a contractual issue with the particular bond provider. There is no guarantee that the fund griowth would match that (or any other witdrawl rate, for that matter).

My mother's 88 mean that she's over the age limit for

Yes, it's a question of opinion.

No. An MVR is srtictly to do with with-profits and might be imposed in these circumstances. But what she probably menas is that a lot of bonds have an encashment penalty that reduces annually for say the first five years. Thye don't all, and often you have a choice, in that you get an extra alocation at outset which is clawed back if you take the money out too soon.

Rob

That's really helpful, Thanks very much indeed :)

For my 90 year old mother-in-law in similar circs we bought a simple purchased life annuity (PLA), with no guarantees of any return whatsoever. The annuity rate quoted gave us a break-even mortality of about 5 years, i.e. the return while she survives is around 20% per annum.

Under no circs will any capital be returned on death, but that's why the return during her remaning life was (and continues to be) so high. It's a very simple (and therefore hopefully efficient) bet on her life expectancy.

You might want to consider getting some PLA quotes to see how little capital you'd have to spend, compared with more complicated life products that might give you some capital back if your mother were to die early.

Incidentally, there seems to be no income tax on our PLA, given the lady's age. HMRC do a calculation of the proportion of implied 'capital return' and 'income' in each annuity payment, and in our case the implied capital return exceeds 100% of each payment, i.e. the taxable income proportion is zero.

That's good. If it hadn't been like that then you would have been better with an arrangement where the nursing home gets the fees direct, with no tax.

Rob

We looked at that. Memory is now hazy, but I think the 'care' based approaches were always more expensive (before taking tax effects into account) than the plain vanilla PLA. As much as anything because the more parties (medics, nursing homes...) and paperwork that got involved the more time, effort and fees seemed to get expended :-(

But also because the lady happens to be the youngest member of a large family, almost all of whom lived into their late nineties. We took the view that in no sense was she an 'impaired' life risk, and therefore a PLA based on standard mortality rates would be (literally) the best bet.

In message , Rob graham writes

It could be a Distribution Bond in which the natural income is distributed. This doesnt necessarily mean any units are encashed because the income is distributed directly.

In message , Noon writes

AAARRRGGGHHH ! That is sales speak. Do not speak any further to this person.

Good!

What NO! Her needs must come before anything else. Put this goal out of your mind.

No, its a contractual penalty. MVR only applies to with profits and if the adviser is suggesting with profits run away very quickly. There are loads of Life Bond products around with no penalty.

>

True.

Rob

In message , Noon writes

Life Bonds, or 'Investment' Bonds as they are otherwise know are a very commonly sold investment 'wrapper', especially by those advisers who are really just 'salesmen'. They are pushed a lot because the initial commission is up to 7%, that is why Banks etc., push them too. They are technically life assurance products which is why you get the nominal extra 1% payout on death.

They are pushed on the basis of some sort of supposed tax benefit but this is usually overstated an explained improperly.

The adviser is going about this the wrong way round. She seems to be recommending the wrapper first, not identifying the correct assets classes to use. In addition, she seems to be investing a Bond in which the funds inside it are manage by the Life Company, which is very bad. Life Companies are generally useless at managing money, albeit there are one or two exceptions. If a Life Bond is the best thing for you (but see below) then it is better to use one that allows you to use a portfolio of Unit Trusts from a variety of decent Fund Managers in it rather than allow the Life Company to manage it. You can select from thousands of funds to make a portfolio of different funds which in combination reflect the investors attitude to risk. In other words you can have a 'safe' portfolio in cash or near cash or something speculative in eastern gold mines etc., It is generally better to put them in an offshore. There are one or exceptions to this such as ' distribution' funds which used to be only available form Life Offices but now a few investment houses offer them as UT or OEIC funds.

HMR&C allow you to take up to 5% per annum (cumulative) of the initial investment without any tax consequences until you have withdrawn all of the original amount invested. This doesn't mean you are getting 5% return, it is just a withdrawal limit. anything over this can be taken with basic rate tax accounted for but there may be more to pay if the investor pays, or is on the verge of paying, 40% IT.

The tax problem (which bond salesmen don't properly explain) is that all gains made in the Life Office Bond )i.e. income AND capital gains) are taxed, but because of the way this is calculated the effective rate is about 17 - 20%. This sounds good because it is lower that basic rate IT, but in fact it is a rip off because the investor is not benefiting from the CGT allowance and is paying tax every year rather than just when a gain is realised. If you accept the point that Life Offices are useless at managing money and want a portfolio of Unit Trusts then you may very well be better not having the bond wrapper at all and buying them directly. Although any interest or dividends will be taxed the capital gains will be subject to personal CGT rules which means it is highly unlikely any tax will be paid unless the investment, the gains and the income taken each year are huge amounts. Some advisers will now say 'but what if she wants more than £8.8k a year (The CGT threshold). Well the £8.8k is the level of GAIN over which CGT is applied, not the amount withdrawn. i.e. if £100k grows to £110k and you withdraw the £10k, on

10/110s of that is taxable gain, i.e. £909.09, so you can see that the CGT benefit is huge. Many UT companies, and those who offer 'supermarket' platforms such as Skandia & Fidelity Funds Network upon which you can build a portfolio of UTs form different managers, allow you to take monthly/quarterly/ annual withdrawals. These will not be taxed as income and there is no 5% tax limit. Charges are far less, the maximum commission is usually 3% and for larger portfolios most advisers will charge less than this.

So, on tax, cost and return basis, UTs are miles ahead of onshore Life Bonds. If a bon were to be used then Offshore Portfolio Bonds are very good and these days are as cheap, if not cheaper, than their onshore equivalent. This is because the 18-20% tax referred to above does NOT apply but any withdrawals over the 5% are taxed on the perceived gain. The income and gains within the Bond sufferes no internal taxation and therefore on a like for like basis the investors will benefit form gross roll up and you will get a better return offshore. You can put the same UTs as would have had on shore within them. Offshore Bonds do not avoid or evade tax, they merely defer them, but the end result still makes you better off. Another advantage of offshore is that you can also have a special type of bond known as a 'Capital Redemption Bond' which has all the features of a Life Bond but there isn?t a life assured so that on death it doesn't have to be encashed and cause a taxable event, it can be passed on to other owners. They have a maximum life of 99 years. When used with the right trust these bonds can also be used to get the dosh out of the investors estate after 7 years AND give an income for life without them being a gift with reservation.

Ask the adviser why she isn?t recommending a portfolio of unit trusts or an offshore bond. Is she an IFA? or a representative of a particular company?

How much is being invested and does the investors total assets exceed £285k?

How much other income (?pensions) is there ? How much are the nursing homes fees ? What is the life expectancy ?

Are other fairly critical questions.

The fees will come to about £25,000 a year maximum. She has earned income of about £10,000 (I'm including Mobility Allowance and/or medium level Nursing Care allowance), leaving a shortfall of about £15,000. We don't know the exact shortfall as she isn't in a home at the moment, though the geriatric hospital is starting to talk about assessments, social workers and the like..

She has about £200,000 capital so it was worked out that she needed to have a return of 7.5% to go directly to the Nursing home. The capital is in the Building Society at the moment (we've only just had the money from the sale).

My mother's 88 and had a stroke about 5 years ago which has badly incapacitated her but hasn't any illnesses that are life threatening. She's lived longer than any other member of her family (uncles, aunts, grannies etc). What her actual life expectancy is I don't know how we find out.

I am not an expert (I'm sure they will be along later)

One option is an annuity:

has some tables you can play with unfortunately they only go up to age 74 but the rates would be MUCH higher for an 88 year old. (and a couple of phone calls to life offices should get some intial figures to play with) but unless the annuity includes a guarantee there wil be nothing left for the family.

Just putting the cash in a safe bank at say 5% will generate 10k pa, and of course one could eat into the capital for many years before it ran out. I'm sure there is a formula somewhere that would work out how long (and take account of inflation increasing the fees).

Putting some (say 50-75%) of the cash into 'investments' would probably increase the return (over the long term) and make the pot last longer.

With equities historically generating 10% returns pa (capital increases and dividends) that would more than cover the required fees. But is in no way guaranteed.

But, morally, if 'the family' decided not to do a guaranteed anuity which should guarantee the fees (in order to have some inheritance left) they should probably guarantee the fees out of their own resources.

Of course, there are many options if one decides to go down the 'investments' route and the choice will depend a lot on how financially aware 'the family' is. But life assurance companies are usually the worst choices.

Thanks for the help. We're learning more about the options, at least, and working out some questions to ask the IFAs.

Quick calculation in Excel, assuming fees starting at 25K going up by

4% p.a., Income going up by 2% p.a., Interest on capital of 5% and the money will last for 14 years.

After 9 years there will still be over 100k remaining and after 12 years (Your mother will be 100) there will be about 50000 capital remaining.

If the fees are fixed for her life (I've no idea how these things work) then the money will last 40 years. (If her income increases at 3% then the money will never run out in this scenario with a low in the capital of 127k at 22 years).

Even at 0% income growth and 5% fee increase p.a. the money will last until she is 100.

Of course, all of this assumes she won't have to pay any tax on that income or interest.

And, were you to go along this route then potentially, if your mother lived to 120 you could be out of pocket to the tune of about 1.2M assuming my original figures hold for 30+ years which is unlikely.

Tim.