Michael Young, who is chairman of the Society of Trust and Estate Practitioners (STEP), issued the warning about the use of trusts designed to avoid paying for long-term care.

According to reports, he suggested that advisers recommending these care fees avoidance trusts could face similar sanctions to those recently imposed on the care fees arm of HSBC.

Assets held within a trust are usually excluded from the financial assessment when determining whether fees should be funded by the local authority, as long as the purpose of the trust was not the avoidance of care fees.

As a result of the tough economic climate, local authorities are likely to apply a more aggressive stance when applying the ‘intentions test’ applicable to trust assets.

If they determine the purpose of a trust was to deliberately deprive an individual of assets that would be means tested for long-term care purposes, it is likely the trust assets would be included in the value.

Here at Informed Choice we are often approached by will writers and similar salespeople who have recently been promoting trust schemes to exclude assets from a long-term care assessment.

Asset protection trusts with the sole purpose of removing assets from the financial assessment for long-term care need to be avoided.

Losing access to your money in a trust environment and then discovering that the local authority will not pay for your care could have financially devastating consequences.

As with all things financial, the simplest solutions are usually the most effective. If you are offered a long-term care planning solution that appears too good to be true, it probably is!

Photo credit: Flickr/zebble

The cost to investor confidence in the wider financial services sector is probably greater than this.

Elderly investors entering care homes are a particularly vulnerable group of individuals. As a result of this FSA fine and the associated press coverage, thousands of elderly people and their families are bound to be asking “who can we trust for care fees advice”?

It would appear that, in the case of HSBC and NHFA, the advisers were being encouraged to sell products rather than deliver holistic advice to their customers.

Investment Bonds were being inappropriately sold by NHFA advisers to elderly people whose life expectancy was shorter than the term of exit penalties attached to the products. This meant that unplanned withdrawals to cover rising or unexpected care costs could only be met by paying hefty charges.

There were other issues identified by the FSA, including a lack of consideration of the tax situation of the investor, which is critical when making an investment recommendation.

Despite these failings at the care fees advice arm of a major bank, Investment Bonds can form part of a suitable investment recommendation for care fees planning. When used appropriately, Investment Bonds continue to be a useful tax planning tool in certain situations for investors who require income in the form of regular withdrawals.

The combination of understanding attitudes towards investment risk along with personal circumstances, goals and objective is critical to ensuring that Investment Bonds are considered alongside other financial planning options for paying care fees.

In the case of NHFA, the quality of advice appears to have been at fault, rather than the underlying products in the form of Investment Bonds. This unfortunate chapter in the provision of care fees advice highlights the importance of working with a specialist adviser who is wholly independent and not driven by commission targets.

When seeking advice on care fees planning, we believe there are several key things to consider.

You should always meet with your prospective care fees planner and ask them lots of questions to establish their understanding of your objectives as well as their own experience and qualifications. Shop around if necessary to find the right adviser to meet your goals.

Only ever work with a care fees adviser who charges a fee for their professional services. This will help to remove the influence of commission generated by a product sale from the equation.

Using a fee charging adviser should also ensure neutrality across the different product options, so each choice is considered based on what is right for you, rather than what will line the pockets of the adviser or their firm.

Always get their recommendations in writing before you make a decision on the right course of action. Asking your care fees adviser for a comprehensive report will give you the opportunity to reflect on their recommendations and seek a second opinion if you feel this is necessary.

It is important that your care fees adviser includes the options and underwritten pricing for an immediate care annuity within their report. Even if you have dismissed this option as too expensive or inappropriate for your needs, it at least creates a sound starting point for future discussions.

Ask your care fees adviser lots of questions to ensure they fully understand what you are trying to achieve, including an understanding of your attitude towards investment risk. Any care fees adviser who is rushing towards a product solution is unlikely to be acting in your best interests.

Finally, it is important to take the time to understand the impact of charges on any money you are investing. This is particularly important if your circumstances might change. The illustration and key features document provided by your adviser will contain this important information.

No competent care fees adviser will ever object to you asking them lots of questions. In fact, your adviser should be inviting lots of questions so they have the confidence you understand their recommendations.

Do speak to us if you need specialist and independent financial advice on care fees planning.

Their plans include the creation of a ‘good care guide’.

This good care guide could take the form of a TripAdvisor style website, with family members and care home residents able to rate and review their care providers.

It would also include the latest formal reviews from inspectors, so families could find all of the pertinent information about a care home or provider in a single location.

The proposals would also extend the scope of inspections, with Healthwatch scrutiny teams speaking to care home residents about their experiences in the home.

Healthwatch would have the legal powers to visit any home with at least one state-funded resident.

The government is also considering creating a law to allow them to visit those homes with private-only residents.

These proposals could make it much easier for people to make an informed decision about the care home or care provider they select in later life.

As things stand, this important decision is often made with insufficient information.

The availability of a good care guide website combined with more rigorous inspections is a positive step towards improving standards of care for the elderly.

Photo credit: Flickr/Harry Wood

The bad investment advice was provided by the now defunct HSBC subsidiary NHFA Limited in respect of funding long term care fees.

They advised 2,485 elderly customers between 2005 and 2010 to invest in asset-backed investment products, typically investment bonds, to fund long-term care costs.

This represented nearly a quarter of the customers advised by NHFA during that time.

The FSA found that the advice was unsuitable because the typical life expectancy of these customers was less than the five year timescale required for the investment bond products. As a result of early withdrawals and product charges, capital was eroded faster than it should have been if these customers had received suitable advice.

A third-party review of the NHFA customers who were advised to use investment bonds found that 87% had received unsuitable advice.

In the Final Statement, the FSA points out that HSBC did not consider the individual needs of its elderly customers. It failed in many cases to recommend suitable products, such as savings accounts, to meet their individual circumstances and objectives.

The advisers at NHFA also failed to consider the tax status of customers before making recommendations.

This is a significant fine and censure because the customers of NHFA and HSBC were particularly vulnerable. The average age of these customers was 83 years old and therefore they had little time left to make up any financial loss incurred as a result of bad advice.

NHFA was one of the biggest providers of independent financial advice in the UK to those who required help with care fees planning.

An important FSA principle is that a firm must take reasonable care to ensure the suitability of its advice for any customer who is entitled to rely upon its judgement. It appears that HSBC failed in its duty to uphold this principle.

In addition to the £10.5m fine, HSBC will also have to undertake a costly past business review and expects to pay redress to customers of around £30m.

It is really disappointing to read about the details of this fine as it is yet another example of how poor financial advice from the banks is undermining confidence in the increasingly professional retail financial services sector.

Whilst NHFA was providing independent financial advice, since 2005 it was owned by a bank. It seems that the combination of banks and financial advice rarely results in a good outcome for investors, particularly elderly customers.

The provision of independent financial advice in respect of care fees planning is a specialism of ours here at Informed Choice.

We will be reviewing the FSA Final Notice in detail and our next team meeting to ensure there is nothing we can learn from these examples of bad practice at NHFA and HSBC.

If you or a relative needs advice on care fees planning, always ensure you meet with a professional Independent Financial Adviser who holds the mandatory CF8 care fees qualification and considers all of the planning options before delivering suitable advice.

Update: Informed Choice chartered financial planner Nick Bamford was a guest on ITV News on Monday evening, talking about the topics covered in this blog. You can watch his TV appearance here.

Photo credit: Flickr/Will Survive

New research from Safe Home Income Plans (SHIP), the trade body for equity release product providers, has found that those hoping to pay for care from income and savings typically face a 26% shortfall.

The analysis of data found an average cost of £51,906 to cover the typical two year stay in a residential care home. During that same period of time, the average over-55 would only receive £27,796 in income, leaving a shortfall of £24,110.

This shortfall is often covered using savings and investments. The research found that this can usually provide an additional £10,468 of funding, which continues to leave a shortfall of £13,642 for the typical stay in a residential home.

These figures exclude the cost of any specialist medical care or assistance. There are also massive regional differences in the figures, with the biggest average shortfalls identified in East Anglia and London.

The cost of residential care is highest in London and the South East, but these regions tend to have people with larger incomes and available assets to cover the cost of care. Whilst there are still substantial shortfalls in the South East, the gap between cost and wealth is wider elsewhere.

Every person needing care finds themselves in a different financial position. Whilst shortfalls are often inevitable when assessing the cost of care and available funding, it is essential to seek professional independent financial advice from a care fees planning specialist to make the most of your income and assets.

The figures from Key Retirement Solutions found that one in four of the estimated 345,000 people paying for care in the UK have to resort to state funding each year when they run out of money.

As a result of having to fall back on Local Authority funding, the standard of care being enjoyed when privately funded can dramatically reduce down to a more basic level, with personal choice of care provider or home removed.

An important part of our care fees planning service for clients is helping them to understand what is affordable and whether they will run out of money in the future. It is always far better to be aware of this at outset, rather than discover you have run out of cash once a high standard of private care, in your own home or at a residential home, has been established.

Part of the solution for those requiring care can involve the purchase of an immediate care annuity, to secure part or the entire income shortfall for life. The cost of these products will vary depending on age, health and income shortfall and is established following an underwriting process we help you complete.

Immediate care annuities can often be combined with a cash savings or investment strategy to complete a well rounded plan, not only for care fees funding but for managing wealth and inheritance in later life.

Whilst he remains confident that the government will eventually implement his proposals, the timing of this implementation now looks likely to be delayed.

In order to put the Dilnot proposals in place, the government will need to secure the support of insurers. This will enable a pre-funded long term care market to develop, as one does not currently exist due to the risks associated with increased life expectancy.

If and when the Dilnot proposals are fully implemented, care fees will remain an expensive item of expenditure in later life.

Recent comments from Partnership, a provider of care fees products, warned that people are underestimating the cost of long-term care which is outside of the proposed £35,000 cap on fees proposed by Dilnot.

Based on the Dilnot model, a self-funded care home resident would still pay 90% of care costs, according to Partnership.

Another care provider, Bupa, has previously said that only 10% of care home residents would benefit financially from the Dilnot proposals.

The next step in this long and drawn out political programme of long-term care reform is a White Paper from the coalition government. This is expected to be published in the first half of next year.

When it comes to long-term care, the political agenda always seems to move very slowly.

Would you like to know more? Click here to get in touch and arrange a meeting with an Informed Choice Financial Planner.

The latest Real Retirement Report from Aviva found that whilst most people are worried, concerned or terrified about meeting care costs, very few have made any formal provision.

Of those over-55s who believe they should have to pay for care in retirement, they say that an average of £3,610 is a fair cost for a lifetime of care.

Looking at suggested funding strategies for care in later life, the Real Retirement Report found the most popular option was for the “better off” to contribute to their own cost of care, with the Government paying for everyone else. 51% of respondents felt this was the best option.

Meeting the cost of long term care continues to be a very difficult subject, despite the government initiated review by Andrew Dilnot concluding that social care costs in England should be capped at £35,000.

Under the current rules, those with assets over £23,250 are expected to fully fund the cost of care.

The Local Authority only picks up the tab when assets, including the value of property in some cases, falls below this threshold.

The independent Dilnot report argued for this threshold to rise from £23,250 to £100,000. Doing this would result in fewer people having to fund their own care fees.

Despite these proposals, planning for the cost of care remains a challenging and specialist advice area.

Those needing care should spend some time talking to a suitably qualified and experienced independent financial adviser to ensure they understand the various issues and their options for meeting these costs.

Photo credit: Flickr/Borya

Consultant clinical psychologist and psychoanalyst Rachael Davenhill has described the plans by Haringey Council to close three residential care homes and re-home 100 elderly people as raising the risk of ‘transplantation shock’.

Transplantation shock is the experience of elderly people being suddenly moved from one form of long-term care to another.

This can be dangerous and even life threatening.

For care residents over the age of 80 with dementia, the first three months of any move are the most dangerous in terms of increased mortality rates.

One way to reduce this transplantation shock is to move staff and residents together, to ensure the best possible level of continuity.

With local authorities under increasing pressure to manage smaller social care budgets, and some companies in the private care sector facing financial difficulties, it is important they are aware of these risks and the steps they can take to mitigate transplantation shock.

One factor self-funders should now consider when choosing a residential home is the financial stability of the care home operator. The best way to reduce transplantation shock is to avoid it entirely; by selecting a home for the long-term and securing funding by seeking professional advice.

Photo credit: Flickr/sektorkind

As part of this warning they pointed to the possibility of the NHS blocking beds unless the fees paid to care home operators was increased.

It is a significant move for Bupa to call for “fairer fees” for care home operators. This follows the recent high profile failure of care home operator Southern Cross Group.

Around 70% of the residents in Bupa care homes are currently funded by local authorities.

Across England as a whole, local authorities now pay for over half of the 390,000 care home residents.

Care home operators are coming under increasing financial pressure due to the gap between price inflation and inflation of the fees paid by local authorities.

Bupa reported that the average increase in fees paid by local authorities was 0.3% in 2011/12. This compares to price inflation which is currently at 4.2% as measured by the Consumer Prices Index.

Price inflation within care homes is often much higher than increases to consumer or retail prices. The typical costs associated with running care homes tend to increase faster than the average inflation figure.

Bupa forecasts a possible care home shortfall of 100,000 beds within ten years unless more is done to increase investment in the sector.

Despite the recent Dilnot proposals, we feel it is unlikely that local authorities will be able to find the level of additional funding Bupa suggests is necessary given the current state of the economy and public finances.

Photo credit: Flickr/m00by