Ethical financial advice for self-funders

The recent mis-selling scandal surrounding the HSBC subsidiary, Nursing Home Fees Agency, has brought into sharp focus the need for the provision of ethical financial advice to potentially vulnerable elderly people. At the heart of the scandal was the familiar story of salespeople being incentivised to sell products that generated high commissions, with little regard to their suitability. In particular, Life Assurance Bonds with early surrender penalties in the first five years were regularly sold to individuals with a life-expectancy less than that.

Ethical Financial Advice for Self-Funders

The recent mis-selling scandal surrounding the HSBC subsidiary, Nursing Home Fees Agency, has brought into sharp focus the need for the provision of ethical financial advice to potentially vulnerable elderly people. At the heart of the scandal was the familiar story of salespeople being incentivised to sell products that generated high commissions, with little regard to their suitability. In particular, Life Assurance Bonds with early surrender penalties in the first five years were regularly sold to individuals with a life-expectancy less than that (Source: Money Marketing, 8th December 2011).

People entering care as self-funders often need to generate an exceptionally high return from their savings to make up the shortfall between their income and the care fees they are paying. Often the return needed is much more than can be generated in the form of investment income alone, such as dividends or interest, meaning that regular withdrawals of capital have to be made to supplement that income. This process can lead to an exponential erosion of capital - the higher the withdrawals, the less income is generated, the higher the withdrawals become, and so on. The danger, of course, is that the self-funder will outlive their savings. Meanwhile, incurring any penalties on such withdrawals just accelerates the erosion.

One solution that takes most of the risk out of the equation is to purchase an "Immediate Needs Plan". This is a form of impaired life annuity, based upon the age and health of the self-funder, and guarantees to pay the shortfall for the rest of their life, however long that may be. The downside of this is that a large proportion of the available capital can be expended to purchase the annuity, which is lost upon death. However, it can be seen as a win-win situation for all concerned; the self-funder has the peace of mind of knowing their care is provided for life, the family has the same peace of mind and know any remaining assets may form part of their eventual inheritance and the care provider benefits by having a guaranteed income for the life of that resident. Clearly, there are other solutions that should be considered and, in any event, nothing in this article is intended to be advice to follow a particular course of action and should not be construed as such.

At Towergate Financial, the independent financial advice arm of the Towergate Insurance, specialist, qualified advisers who work in this area are tasked with helping self-funders, their families and/or advisers, to arrive at an informed decision on how best to fund care. "We have devised a process that carefully and clearly demonstrates the options available", says Clive Barwell, Head of Later Life Advice at Towergate Financial. Clive is one of some 130 advisers in the whole of the UK to be accredited by the Society of Later Life Advisers, a consumer protection organisation endorsed by the Consumers Association and Age UK. "We charge the same fee whether we invest the capital, buy an annuity or arrange a combination of both" continues Clive, "so there is no incentive for our advisers to favour one route over another. This, we believe, leads to the provision of ethical advice entirely suited to the individual needs of the self-funder".

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