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   Immediate needs annuity    Impaired life annuity    ISAs
   Individual savings account    Internal transfer    ICTA 88
   Insured personal pension    Investment bonds    IFA
   Independent financial adviser    Indexation  

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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. Before making a decision regarding long term care, learn more about annuities, compare annuity rates and secure a personalised immediate needs annuity quote offering guaranteed rates.

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. At retirement the individual can use the pension fund to buy an annuity and has the option to use an open market option to search for the highest pension annuity. Once you have purchased an annuity it cannot be changed, so learn more about annuities, compare annuity rates and before making a decision at retirement, secure a personalised pension annuities quote offering guaranteed rates.

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.

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.

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