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Immediate needs annuity
For a family with an elderly relative that now requires 24 hour care after suffering an illness, it is often the case that they cannot cope themselves and have to admitted the relative to a nursing home. The long term care costs for a nursing home do vary for different locations in the United Kingdom, however they usually cost more than £20,000 per year.

It is also possible to use a purchase life annuity instead of an immediate needs annuity using a lump sum to pay for the cost of a nursing home where the value of the estate is large, say £100,000 or more. It would also be possible to buy an impaired health annuity for the elderly relative, however, the immediate needs annuity can be paid tax free to the nursing home and therefore is more tax efficient.

However, if the individual has capital of more than £20,000 in England there would be no assistance from NHS funding or the Local Authority. This means that if the estate is large, a significant amount of its value could be used on nursing home care if the elderly relative lives considerably longer than expected and very little eventually left to the beneficiaries, such as children or grandchildren. Fixed rate escalation can be added to an immediate needs annuity to protect it against the rising cost of long term care.

The annuity rate for an immediate needs annuity is dependent on the medical conditions they suffer from, the age of the individual, features of the annuity and the activities of daily living they can or cannot perform.


Impaired health annuity
In general, individuals that qualify for impaired health rates have a significantly reduced life expectancy (usually less than 5 years to live). It could be that a family now require long term care for an elderly relative in a residential care or nursing care home due to a serious illness and they want to protect the estate from the high costs, in which case they can consider an immediate needs annuity.

The leading causes of death in the UK account for 80% of all deaths for males and females that are over the age of 50 are heart disease (37.0%), cancer (24.0%), stroke (12.0%) and major organ failure (8.5%). Any individual who has survived or currently suffering from these conditions can be considered by underwriters for an impaired life annuity.

When considering the income to pay an impaired health the insurance company should use a combination of mortality tables and underwriting guides developed from the mortality experience of impaired lives.


Income and Corporation Taxes Act 1988
The legislation governing the approval and tax treatment of a personal pension was introduced by the Finance Act 1987 and was incorporated in the Income and Corporation Taxes Act 1988 (ICTA 88), chapter IV, part XIV. The specific sections for personal pensions are sections 630-655 and that for a retirement annuity are sections 618-629.

For an occupational pension scheme, to benefit from the tax advantages afforded by the Inland Revenue, the employer may establish an approved scheme under section 590 of the ICTA 88, although most opt for an exempt approved scheme issued by the Pension Schemes Office (PSO) due to the extra flexibility of these schemes. The PSO publishes practice notes that set out the maximum occupational pension scheme benefits and conditions for tax approval and in particular practice notes (IR12 (1997)) that were last re-issued in August 1997.

Also important is section 601-602 of the ICTA 88 that relates to a defined benefit scheme in surplus where assets exceed liabilities by 5.0% or more and the appropriate action to be taken by the scheme trustees and employer.


Independent financial adviser
An adviser that is in a position to review all the available products and companies on the market as the basis for recommendations to clients, is known as an independent financial adviser (IFA). From midnight on the 30 November 2001 all IFA firms were regulated directly by the Financial Services Authority (FSA), formally the Personal Investment Authority (PIA).

For an IFA to give advice on a pension transfer, for example in relation to a pension sharing order as a result of an external transfer, a further qualification, such as G60 Pensions forming part of the advanced financial planning certificate (AFPC) will be required under permitted activity 13 of the FSA Handbook of Rules and Guidance.

There are 77,000 registered individuals of which 26,000 are IFAs, 10,000 are IFAs formally registered with professional bodies such as solicitors and accountants and 41,000 operate as direct sales forces or tied agents. Of the 4,300 IFA firms the largest 30 account for 80% of the registered individuals in this segment.


Indexation
Due to the impact of inflation during the 1980s and 1990s, the benefits from occupational pension schemes could be easily eroded. The Pension Act 1995 introduced regulations requiring exempt approved schemes to increase pension benefits in payment by at least the appropriate percentage known as the limited price indexation (LPI), that is the Retail Price Index (RPI) up to a maximum cap of 5.0% per annum. These indexation regulations do not apply to voluntary contributions made by the scheme member such as additional voluntary contributions (AVC), which are excluded.


Individual savings accounts
Introduced from 6 April 1999 to replace personal equity plans (PEP), individual savings accounts (ISA) were guaranteed by the government to run for at least 10 years offering investors a vehicle for tax efficient long term savings.

ISAs have similar investment features of both TESSAs and PEPs. The maximum allowance to a single ISA manager is £7,000 per annum into a maxi ISA where the investment must be applied to stocks and shares including unit trusts and investment trusts. Alternatively, the £7,000 per annum allowance could be invested in a mini ISA with £3,000 to cash, £1,000 to life assurance and £3,000 to stocks and shares with the option of having a different ISA manager for each segment.

In addition, those with a maturing TESSA will be able to invest the original capital of up to £9,000 into a TESSA-only ISA. This capital cannot include any interest or bonuses which can be invested in the individuals annual ISA allowance.


Insured personal pension
An insured personal pension is where a life insurance company manages the assets and where the Financial Services Authority (FSA) must authorise the fund managers. This arrangement will include private managed funds (PMFs) but will not apply to self invested pension arrangements such as self invested personal pensions (SIPPs) or small self administered schemes (SSAS) where the investment decisions are the responsibility of the member.


Internal transfer
A pension sharing order will create a pension debit against the scheme member in favour of the spouses pension rights. Where dual membership exists, the former spouse will be allowed to make an internal transfer and become a member of the scheme in his or her own right.

As a member of an occupational pension scheme, it will depend on the scheme rules whether the former spouse will qualify for discretionary benefits. Where the former spouse fails to provide details of how they want their pension credit applied, the regulations will enable trustees of dual membership schemes to make them a member without their consent.


Investment bonds
Single premium unit-linked or with profit bonds are the most common route for both basic and higher rate taxpayers to invest through non-qualifying investment bonds.

The advantage of these investment bonds is that the income within the providers funds rolls up after tax at a rate that is lower than an individuals personal tax at the basic rate, although not as tax efficient as individual savings accounts (ISA).

The investor can take an income of up to 5% of the original investment per annum without an immediate tax liability, and this includes all higher rate tax payers. The income can be continued for 20 years until all the annual allowances have been taken.

On full or partial encashment, the tax liability may be much higher than the gains actually realised. This will depend on how the investment bond was structured initially as either a single policy or by segmentation, the total income of the policyholder at the time of encashment and the calculation of the top-sliced gain applied to the bond. This is particularly relevant for parties on divorce.


Judicial separation
In judicial separation proceedings the partner will obtain from the court a decree of judicial separation and this means a legal separation of the partners although they will still be married but not have to live together whereas in divorce the decree nisi followed by the decree absolute is required before the proceedings are final.

A decree of judicial separation will only be granted, as with a divorce, on the grounds that the marriage has irretrievably broken down. The partner must prove; adultery of the other partner; unreasonable behaviour of the other partner; desertion by the other partner after two years; separation with consent after two years; and separation without consent after five years. As with nullity, judicial separation can be granted within 12 months of the marriage.

However, before the court grants a decree of judicial separation it will have to establish that the arrangements the partners have made for the children, if any, are acceptable to the court. Judicial separation will allow the partners to apply for a court order to settle disputes of children, matrimonial assets or financial matters during ancillary relief proceedings, such as an earmarking order issued against the members pension rights within a pension arrangement of the other partner, however, a pension sharing order will only apply to divorce or nullity.


Know your customer rule
The requirement of the adviser to evaluate an existing or prospective client's circumstances and investment objectives as would be reasonably expected in order to provide the best advice to the customer.


Legal Aid
In many situations a party to the divorce will not have the income to pay for legal costs, although there is value in the matrimonial assets. Legal Aid can therefore provide the funds to the party until the matrimonial assets are divided or sold. Ultimately, the cost of Legal Aid is paid for by the taxpayer.

It is usually the case that the husband will be in full time employment and the wife is at home looking after the children and has no income of her own. Therefore, the wife can successfully apply for Legal Aid whereas her husband must pay for the legal costs out of his income.

If the Legal Aid applicant is not successful, there will be no requirement to repay the associated costs. On divorce the matrimonial home is usually the largest asset and if the Legal Aid applicant is successful, some of the costs are then exempt, currently £3,000. Anything in excess of this amount can be recovered by the Legal Services Commission by applying a charge against the property. This means the cost of legal advice is deferred until the property is sold.

Legal Aid also applies for fees associated with the valuation of pension arrangements. Whilst each application for Legal Aid is considered by the Legal Services Commission on its own merits, the Legal Services Commission has agreed to cover fees for a pension audit service on a fixed fee basis. For example, a fixed amount not to exceed £450 plus VAT.


Level annuity
At retirement an individual can select a level income for both a pension annuity (compulsory purchase annuity) connected with a pension fund or a purchased life annuity where they have a lump sum.

By purchasing a level annuity income, an annuitant will receive a greater income initially than if they purchase an annuity with RPI escalation or fixed rate escalation. If inflation remains low, it could take more than 20 years for an annuity with escalation matches the return from a level annuity. An alternative would be a With Profits annuity where the annuitant can select an income that matches the level annuity income, but could still increase in the future if bonus declared are higher than the Anticipated Bonus Rate (ABR) selected by the annuitant.

By choosing a level annuity, if the annuitant is aged 65 and dies at the age of 85, there would be no difference between a level and escalating annuity at current rates of inflation. However, if inflation rises during this time then this could significantly reduce the buying power of a level annuity income and hence reduce the annuitant's standard of living.


Life assurance
A sum assured on the life of an individual usually as a spouses benefit or defendants benefit and payable on death of the life assured. This is known as death in service benefit when provided in addition to a final salary pension.


Lifetime allowance
Based on the pension simplification rules from April 2006, a lifetime allowance is the maximum amount of pension savings that can benefit from tax relief and has been initially set at £1.5 million. This figure will rise over time and the proposed amounts are as follows:

Limited price indexation
All approved schemes and exempt approved schemes such as final salary and money purchase occupational pension schemes that are contracted out and contracted in, must escalate pension income from retirement age at limited price indexation (LPI).

Protection from inflation is provided by LPI at the retail price index (RPI) with a 5.0% ceiling. LPI applies from 6 April 1997 and includes protected rights benefits from contracted out final salary pensions as well as personal pensions in respect of Department of Social Security (DSS) rebates for the 1997/1998 tax year onwards.


Long term care
Many people with elderly relatives are aware that long term care is a problem and has many associated costs. These costs can quickly erode assets such as savings and the family home. Long term care costs can vary significantly for different locations in the United Kingdom and for residential care or nursing care.

Residential care may cost an average from £13,400 to £16,400 depending on the location in the UK, whereas nursing care could cost an average from £16,700 to £24,400 depending on the location in the UK.

According to the ABI, in the UK there are 9 million people over the age of 65. Of those aged over 70 approximately 20% receive some form of home assistance and 4% receive home assistance on a continuous basis. There are 500,000 people in residential care and the total cost of long term care in 2001 exceeded £4 billion.

If the individual has a medical condition and can no longer look after themselves, state benefits could be payable to contribute to the cost of long term care, whether the individual is still at home or in a nursing home. To qualify for other benefits to fund long term care, means testing is used to evaluate the individual.

Where the assets of the individual are less than £12,250 in England (£11,750 in Scotland and £13,500 in Wales) all the funding for long term care can be provided by the Local Authority or in the case of a major medical condition, by NHS funding. Where the assets are greater than £20,000 in England no funding is provided by the Local Authority but it may be possible to receive partial NHS funding. Partial funding by the NHS is determined by the local primary care trust usingnursing care bands. Once all benefits are considered, any shortfall must then be met by the individual although by using an immediate needs annuity this long term care cost can be capped.


Lump sum
A tax free lump sum payment commuted to cash from a pension scheme fund, normally paid when the pension is drawn on the first day of retirement. For a defined contribution scheme such as personal or stakeholder pension and money purchase scheme the tax free lump sum is currently 25.0% of the fund value.

Since Pension Simplification from 6 April 2006, all pensions can commute tax free cash on the 25.0% of fund value basis including an occupational final salary and money purchase schemes.

Previous to A-Day this lump sum was derived from a formula based on the members final remuneration and number of years in employment. This would be either 2.25 times the pension income at retirement age or, if greater, 3/80ths for each year of service up to retirement times the final remuneration for the year up to a maximum of 1.5 times final remuneration.


Lump sum death benefit
Associated with occupational pension schemes are lump sum death benefits. In the event of the death of a scheme member, a tax free lump sum will be paid to the beneficiary that is usually the spouse. In small to medium size companies this death in service benefit is offered through a life assurance arrangement that is separate from the company pension scheme.

In large companies the scheme will self-insure the risk. The benefit is calculated as a multiple of basic salary and is typically four times but could be as low as two or as high as ten depending on the scheme rules. On death this lump sum will be paid to the beneficiary free of tax.

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