Think clearly about money matters

Tuesday, 01 May 2012
Financial planning tips to advisors with potentially vulnerable clients.

Age is the greatest risk to mental capacity. UK charity the Alzheimer’s Society says that of the 750,000 people in the country with a form of dementia, about 98 per cent of these are over 65.1 Therefore, with an ageing population, you can assume the number of vulnerable people will increase – and so will the number of those indirectly affected, such as family, friends and appointed attorneys.

When someone faces the immediate concerns around care it is often too late to make any meaningful plans. For many people, it’s uncomfortable to dwell on the possibility of needing care in old age, but it is essential that clients accept they have a responsibility to themselves, their families and their attorneys. It is important to properly consider all this while having the capacity to do so. It is equally important that clients understand that the planning opportunities open to them in advance are much greater than those available at the point of need.

Planning for later days

The first step for any client is to be disciplined about keeping accurate records of their estate and ensuring that someone knows where they are kept, as it will be the first port of call for an attorney. Family structures can be complicated and clients may be reluctant to share information with relatives. However, the more open clients can be with everyone concerned, the easier it will be for their family or attorney. Clients should also keep a letter of wishes with their records and discuss its contents with loved ones.

With everything in order it should be the client’s priority to provide for a spouse or dependant if they lose capacity. Will that dependant have sufficient income to cover their ongoing living expenses? What adjustments may they need to make to their standard of living? Will they have sufficient capital in their own name to keep them in their accustomed lifestyle, and what state benefits could they qualify for?

Clients may be unaware of the increased flexibility and control offered by the lasting power of attorney (LPA) regime over the old enduring power of attorney (EPA) system. It is often worth spending time expanding on this issue. The controls over specific assets, such as the family home, that may be granted can offer a degree of certainty greatly valued by clients. Location, lifestyle and financial sophistication of any group of potential attorneys often help guide the decision regarding who should deal with health, welfare and financial matters.

Cash flow modelling is particularly useful in helping clients understand the financial implications of care. The scenario analysis and projections can be very accurate, as elderly clients tend to have fewer unknown variables to build into the model than younger clients. This also acts as a useful de-risking tool for legal advisors who can hold copies of the cash flow model reports on file to demonstrate that consideration has been given to the potential needs of the client.

From a tax-planning perspective it may be necessary to hold bank accounts in individual names. However, a complication arises when a person loses capacity and time is taken to register the power of attorney (assuming there is one). This can cause cash flow problems for spouses and family members where direct debits are paid out of one account. Clients should be made aware of this possible complication and arrange to hold sufficient capital in a joint account to cover this issue. Third-party mandates give a second person access to another person’s account for information purposes only, and can be useful if accounts are held separately

It is important that clients understand that planning opportunities in advance are much greater than those at the point of need

There is also a need to consider how clients wish their residential property or commercial properties to be managed and possibly sold if they lose capacity. This is particularly relevant for clients who also have land with unclear boundaries or tenant farmers.

Investing in the future

Clients should have a clear understanding of how their existing investment portfolios are structured to meet their needs and wishes over the longer term. While individual savings accounts (ISAs) are tax-efficient vehicles for savings, they are not so useful for care or estate-planning purposes. ISAs, like other investment wrappers such as unit trusts/OEICs, are included in means-tested assessments for care; investment bonds, however, aren’t currently included. Therefore, it may be in the client’s short-term best interests to draw capital from an investment bond to fund ISAs each year, but it may not be in their long-term interests from a care or estate-planning perspective. Although investment bonds carry advantages from a long-term care perspective, great attention should be given when using them within a portfolio to ensure they don’t fall foul of the ‘deliberate deprivation of asset’ rules.

It seems many clients disregard annuities because the headline rates are relatively low, at about 6 per cent for a healthy man and 5.7 per cent for a healthy woman of 65 years old.2 They also worry that they won’t live long enough to justify the initial capital outlay. However, clients should not discount them if they have medical conditions that can increase the annuity rate. Also, annuities are tax free if paid directly to a nursing home and they are an effective way of removing capital from a client’s estate for inheritance tax purposes.

Professional advisors should ensure that all these issues are addressed while their clients still have capacity. Failure to do so can cause future hardship for many.

  • 1., statistics page.
  • 2. Figures provided by AWD Chase de Vere’s annuity team.
Author block
Julian Frere

Julian Frere is a Senior Financial Planner of the Professional Planning Services team at AWD Chase de Vere in Bath, UK.

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