By Josh Richardson, Managing Director and Chartered Financial Planner at Informed Financial Planning, a member of Legal Futures Associate, SIFA Professional
Informed Financial Planning have recently been working with a Local Authority (LA) to provide financial advice to individuals they look after in their role as a Public Authority Deputy.
Following a review into the clients under their care, the Office of the Public Guardian (OPG) identified shortfalls in the financial planning of the LA. It was noted the majority of individuals under their care held all of their assets in cash and had rarely received a return on these funds.
This was found to be against the best practice laid out for professional deputies by the OPG, which states that a professional deputy ‘must manage P’s investments to maximise returns while minimising risk.’
In all other areas the LA was praised for their work in the capacity as a professional deputy.
The individuals being looked after under the LA’s deputyship appointment primarily fell into one of the following categories:
- In care due to serious health conditions and were self-funding;
- In care due to serious health conditions with all care fees covered under NHS continuing healthcare; or
- In care due to being detained under the Mental Health Act 1983 (MHA), with all care fees covered under s.117 MHA.
In most cases this had resulted in large cash balances building up within deputyship bank accounts or within cash funds held with the Court Funds Office. Many of these cash balances had accumulated over many years, with minimal reviews conducted into the suitability for the client in care.
These cash balances predominantly came from the sale of property or, where clients had fully funded care, through the build up of personal income, such as state benefits and pension income.
The LA was therefore ordered to review all clients’ positions to determine the most appropriate format in which to hold their funds.
Informed Financial Planning are an independent, chartered financial advice practice and have Society of Later Life Advisers (SOLLA) and Society of Trust and Estate Practitioners (STEP) accredited advisers. Due to this we were provided with the opportunity to work with the LA to identify the best course of action for their clients.
Individual cases and approach
Whilst clients could be placed in one of the above three categories, naturally every case had its differences in relation to client circumstances. Therefore, a blanket approach was never an option for us or the LA in terms of the advice provided.
Some clients had relatives, who were ultimate beneficiaries of client estates, and some had no family. Some clients spent very little monthly on top of their care fees, and some spent a significant amount, particularly those clients who smoked. These were just a couple of key factors the LA had to account for when making decisions on investments.
In all cases it was agreed that clients would retain the higher of 6 months of outgoings or £5,000 as an emergency fund. This was to both cover unexpected costs and also to be used to enhance their clients’ lives where possible i.e. to help the client use their own money to improve their lifestyle, as they perhaps would have done had a professional deputy not been required.
Investments and risk management
With several clients being elderly, a low-risk investment approach was selected by the LA in line with OPG guidance. This was predominantly the case with those clients in care with significant health issues.
Where individuals were younger, which was often the case with those detained under the MHA, a low-medium risk selection was chosen. It was determined that these individuals had a longer anticipated lifespan compared to those in other categories listed above.
The client’s ability to bear investment losses was accounted for in all work and was particularly important with those self-funding their care from their personal assets.
To ensure risk levels were adhered to, risk managed model portfolio solutions were utilised for any investments deemed appropriate for clients. A variety of tax wrappers, including ISAs, general investment accounts and bonds were utilised dependant on income tax positions and levels of investment, and these will be monitored for suitability through our ongoing work with the LA.
In some cases, the decision was taken to retain funds entirely in cash. The LA, as anyone does, had to account for the fact that investment values and any income associated with the investments could rise and fall and were not guaranteed at any time and that they may not have received back the full amount invested. This was a predominant concern therefore where individuals had low life expectancies and there was insufficient justification to invest funds for the longer term due to the risk associated with investments.
Immediate needs annuities (Long term care annuities)
In most cases, due to care being involved, immediate needs annuity quotes were obtained for the individuals.
The use of these quotes was twofold. Firstly, it enabled the LA to obtain a full health assessment of their client, providing a potential insight into the longevity of the individual concerned. Secondly, if appropriate, the recommendation could be made to purchase an immediate needs annuity to secure care funding for the client for their future prior to proceeding with the investment of funds.
Whilst the market for these policies has reduced recently, immediate needs annuities still offer clients a potential solution to limiting the burden of care fees on their finances over their lifetime.
The purchase of these does however depend on the deputy, or individual’s, desire to take on the ‘risk’ associated with them, mainly in relation to the timing of the annuitant’s death.
In the case of one gentleman under the LA’s deputyship care, he held around £475,000 in cash savings. The client was 91 and was a self-funder in a care home, where he was receiving care for dementia alongside other illnesses.
With a reasonable level of income coming in from guaranteed sources, there was a shortfall between this and his care fees of around £27,000 a year.
For the cost of around £90,000, an immediate needs annuity would have provided the client with around £28,000 a year towards his care fees, with this income increasing by 7% a year.
It was ultimately the LA’s decision not to proceed with this annuity. Weighing up the risks, they felt it was a justified risk to continue paying the client’s care fees out of his savings.
Whilst forms of capital protection can be applied to these annuities, for example to protect against death in the first 6 months, the client’s illnesses suggested to the LA that he would not survive the circa 3 years it would take for the client to be ‘better off’.
In other instances, however, especially when the LA’s clients have suggested that leaving an inheritance is an important factor for them, these annuities have been accepted. This has allowed them to secure the client’s care funding alongside limiting the burden of care fees on their remaining assets, which could now be passed as an inheritance.
As a firm we believe that any case involving care should have this option assessed prior to making any formal investment decisions.
In all cases however the LA and others must consider that annuities carry inflation, interest, credit and liquidity risks. If an annuitant dies early, the insurance company may keep the premiums associated with the contract. Additionally, annuities carry restrictions on cancellation periods, therefore it is essential that people, including the LA, understand the risks associated with these contracts prior to entering the arrangements.
Through our work together, the LA are now confident their clients’ finances are set up appropriately for their circumstances. These will be reviewed at least annually to ensure they are meeting their duties and guidance laid out by the OPG.
We work with several professional and lay deputies, as well as attorneys, to assist the financial decision making over others’ affairs and with our in-house expertise believe we are well positioned to achieve the great outcomes seen with the above local authority.
This financial advisory company is listed on the SIFA Professional Directory of financial advisers (North East Region) – to view their details please Click Here