Question

I have a special needs child who needs permanent care. I am concerned about what will happen to him when my wife and I pass away.  What should we do now to ensure that he has sufficient funds to live on when we are no longer around?

Answer

I have helped several people in this kind of situation and there are a couple of things that we need to look at. There are two things that you need to do:

1.    You need to ensure that, should you and your wife pass away, there will be sufficient funds to care for your child for the rest of his life.
2.   You also need to ensure that the correct legal structures are in place to manage these funds and care for your son once you have passed away.

How to calculate how much you need

You need to establish how much money it will cost to look after your son each year as well as what the typical annual cost increases for this type of care would be. Once you have this, you can calculate how much money will be needed to provide this level of income for the rest of your son’s life.  Your financial advisor should be able to work out how much capital will be needed to provide this level of income. 

The easiest way to fund this would be for you and your wife to take out life insurance.  Remember that when you do this, you must make allowances for estate duty as the proceeds of the insurance will be dutiable. 

As this insurance will run for the rest of your lives, you must choose a sensible premium pattern that is not age related.  This means that the premiums will be a little higher initially but when you hit your 50s, the premium increases will still be affordable.

Special Trust

You need to set up a special trust to manage your son’s finances when you’re no longer around. A special trust may only benefit your son and comes with tax benefits.

Give some thought when it comes to choosing the right trustees.  They must have your son’s care at heart and be able to make sensible financial decisions.  As the trust will be around for the rest of your son’s life, you need to put structures in place on how to replace them should they pass away.  The trustees would manage any investments for your son and do the necessary payments for his care.  These would include the proceeds of the life insurance policies.

When you retire

If you structure your pension cleverly, when you retire, you can use your retirement fund to provide an income for your son once you and your wife pass away. The type of annuity that you choose will therefore be vitally important.

If you are on a defined benefit fund (where you get a pension based on your service and final salary), you need to check with the retirement fund counsellor to establish what benefits they have for adult dependents.  These benefits are often small and you may need to speak to a financial specialist to see what other options are available to you.

If you are on a defined contribution fund (where you get a lump sum of money to purchase an annuity when you retire), you have two choices. 

• You can choose a living annuity, and as long as your drawdown is correctly managed, there should be funds to help subsidize your son’s living expenses for the rest of his life.

• If you need a higher income and want to have a guaranteed life annuity, you need to be careful as life annuities do not provide an orphan’s pension. You can, however, provide for this by choosing a life annuity that offers a payback of your capital when you die.  This lump sum could then be used to provide a lifetime income for your son.

As you can see, setting up the right structure for you son is quite complex and I would recommend that you speak to a skilled financial advisor to help you get the correct solution in place.