The insurers are the latest to declare with-profits bonuses, dictating the value of pensions, bonds and endowments.

Aviva, with two million with-profits savers, will announce its bonuses on Friday. Friends Life plans an announcement later this week. It has 600,000 with-profits plans sold under its Friends Provident and Axa Sun Life names.

But savers should not be too optimistic after a tough year for financial markets. Patrick Connolly of financial planner AWD Chase de Vere in Bath, Somerset, says: ‘Aviva has historically been one of the stronger companies. I would expect it will hold most annual bonus rates and reduce some final bonuses slightly.’

The expectation is for more bonus cuts at Friends Life.

With-profits funds hold a mix of assets, typically shares, government and corporate bonds and property. The aim is to smooth returns over time with insurers deciding how much to pay out each year.

Standard Life has been the biggest name to report so far this year, last week announcing further cuts in bonus rates affecting up to one million of its savers.

The payout on a benchmark 25-year £50-a-month endowment is now £28,439, down from £28,900 a year ago.

That means there are only ten weeks left from today (Thursday 26th Januayr) for you to claim valuable savings allowances and protect pensions against new penalties.

FMWF.com’s parent Financial Mail has drawn together a panel of experts and distilled their ten top recommendations for saving tax over the next ten weeks.

The panel comprised Sarah Lord, the managing director of Killik Chartered Financial Planners in Mayfair, central London; Helen Kanolik, of HelenK Financial Advice in Wimborne, Dorset; Mark Butterworth, technical manager at national adviser Skipton Financial Services; and Philippa Gee, who runs Philippa Gee Wealth Management in Church Stretton, Shropshire.

SHUFFLE YOUR ASSETS

HUSBANDS and wives should consider switching assets between each other wherever possible.

Aim to put income in the name of the person with the lowest income tax rate or who has some unused personal allowance – the portion of income on which you pay no tax.

Mark Butterworth says: ‘It pays to rebalance deposit accounts and other income-producing assets.

‘If one spouse is a non-taxpayer or lower-rate taxpayer, then transfer money into their name to save on total tax paid.’

MAXIMISE CASH ISAS

CASH Isas are the starting point for tax-free saving. They are deposit accounts where all interest is paid free from tax. Savers can contribute a maximum of £5,340 this tax year, rising to £5,640 from April 6. Advisers say it pays to put every penny you can afford into a cash Isa.

Sam Hatfield, 32, is using a cash Isa to shelter an inheritance from his grandmother. He received £12,500 last year and expects a second payment once her house is sold.

Sam, who runs a Cancer Research charity shop in Burgess Hill, West Sussex, has put the money into savings accounts with Yorkshire Building Society. This month he paid the maximum £5,340 into a cash Isa.

Sam, who is single and lives in Chailey, East Sussex, says: ‘You need to make your money work for you.

‘I don’t want to take any risks investing it in the stock market or to tie up money for the long term. A cash Isa seemed to be the best option.’

CLAIM WHAT IS DUE

THE payment of tax credits – Government help for working couples and families – depends on your income each tax year.

It is worth telling Revenue & Customs promptly if that income changes. The value of the credits can rise if your income has gone down if, for example, your working hours have been cut or you have been made redundant.

Philippa Gee says: ‘There is no need to wait for the end of the tax year or to be sent a renewal form.

‘It is one of the rare occasions where it is worth getting in touch quickly.’

Gee also says it is worth reporting any increase in income. Rises of less than £10,000 will not affect your credits in the current tax year.

But prompt notification makes any overpayment of credits next tax year less likely. The tax credits helpline is 0345 300 3900.

EQUITY ISAS

FOR those willing to take on more risk, stocks and shares Isas are the next logical step. These can be used to shelter funds investing in shares, bonds and property.

There is no further income tax to pay on any dividends or payments from funds held in an Isa. And any profits when the investments are eventually sold are free from capital gains tax.

The maximum that can be saved into a stocks and shares Isa is £10,680 this tax year, rising to £11,280 from April 6. These allowances are reduced by anything that is already saved into a cash Isa.

Jonathan Chilton has got into the habit of paying as much as he can afford into an equity Isa.

Jonathan, 30, who works in marketing for a legal publisher, saves each month into a series of investment funds through online broker Fidelity FundsNetwork.

‘As you get older, you start thinking more about the future and saving becomes important and I’ve tried to do what I can each year,’ he says.

His payments are invested in four different funds – Invesco Perpetual’s Global Smaller Companies and High Income funds, M&G Global Basics and Fidelity South East Asia.

Jonathan lives in West Hampstead, north-west London, with girlfriend Nicola Benford. In his spare time, Jonathan plays and is a coach for the London Blitz American football team. He says: ‘As my career has progressed, the tax-efficiency of the Isa has become more important.’

REDUNDANCY?

IT is a depressing sign of these tough economic times that dealing with the financial implications of a redundancy makes it into this year’s tax top ten.

The first £30,000 of any redundancy settlement is tax-free, but the rest is taxed as income. And if you lose your job towards the end of the tax year, a redundancy lump sum on top of salary already earned could trigger a big tax bill.

Helen Kanolik says: ‘If you are a higher-rate taxpayer, or the redundancy payment pushes you into a higher tax band, see if you can get the payoff deal structured so that part of the payment is deferred into the next tax year.’

Gee says: ‘Depending on your age and future work plans, it may also be beneficial to have a portion of any redundancy paid into your pension.’ This could be the works pension or a private pension.

LOCK IN GAINS

CAPITAL gains tax is charged when you sell assets, including shares and property, for a profit.

It is levied at 18 per cent for basic rate taxpayers, rising to 28 per cent if you pay income tax at 40 or 50 per cent. Fortunately, an annual allowance means the first £10,600 of any profits is free of tax.

Sarah Lord says: ‘The CGT exemption is one of the things people forget or fail to use fully.’ But those who hold substantial portfolios outside an Isa, for example as a result of funds recently inherited, should think about selling a portion every tax year to bank profits and use up the CGT allowance.

Another strategy is to invest in growth funds that pay no income. Then you can sell a small slice each year, using the CGT allowance to take the equivalent of tax-free income.

BOOST THE PENSION

HAVE you done all you can to bolster pension savings? Contributions into a pension qualify for tax relief.

This boosts the value of every £1 of taxed income that you pay in by 25p for basic-rate taxpayers. Higherrate taxpayers can claim back even more. There is a £50,000 annual limit for pension contributions, though you need to have earned at least this sum during the year.

However, big earners, or perhaps those who have been made redundant, may be able to invest more. You can now carry forward any unused allowances from the three previous tax years.

Kanolik says: ‘If you are self-employed or running your own business, check to see whether it is worthwhile drawing some cash from the business before the year end as pension contributions.’

With rumours swirling that tax relief could be targeted in March’s Budget, advisers recommend topping up pensions sooner rather than later.

CHILDREN

THIS is the first tax season when the whole family can top up their Isas. The Junior Isa, launched in November, allows family or friends to save up to £3,600 each tax year into a tax-free account on behalf of children. Like the adult Isa, the ‘Jisa’ can be held in cash or invested in stocks and shares.

The account is open to anyone aged 17 or under who does not already have a Child Trust Fund (CTF). But once paid in, cash cannot be withdrawn until the child turns 18.

And those with a CTF – effectively anyone born between September 2002 and January 2 last year – also benefit from higher contributions this year.

The CTF rules have been revised to increase the maximum payment to £3,600.

INHERITANCE TAX

THE first £325,000 of any legacy is tax-free. Beyond this, IHT can be levied at 40 per cent, taking a large bite out of a lifetime’s work.

However, making annual gifts to family or friends can reduce the potential for an IHT bill. Each person can give up to £3,000 per tax year, plus as many gifts as they like worth up to £250 to different individuals.

None of these will affect the £325,000 nil-rate band. You can still give away bigger sums, however if you die within seven years of making these gifts they can reduce the nil-rate band.

Graham Flack, 74, and his wife, Marion, 78, use the gifting rules to pass down money to help their son, Andrew, and his children. The couple, from Yelvertoft, Northamptonshire, capitalise on the annual allowances to pay, between them, £300 a month to Andrew, 47, their only child. They take advice from Skipton Financial Services.

Graham, who served with the RAF Regiment before working as a development manager with British Aerospace in Saudi Arabia, says: ‘We want to run down our resources in a modest sort of way. It is about striking the right balance so that we have enough for our needs too.’ Marion has Parkinson’s Disease and Graham wants to ensure that they can cover any of her future care needs.

PROTECT SAVINGS

THOSE who already have big pension funds, or have earned the right to a big final salary pension, may need to act to protect themselves from future taxation.

The Government is reducing the pension lifetime allowance on April 6 from £1.8million to £1.5million.

Final salary pensions are valued at the rate of 20 times annual income. This means that someone who is already entitled to a pension of £75,000 a year or more could hit the new barrier.

Pensions are tested at retirement. Anything over this limit will be taxed at 55 per cent, but anyone who thinks they might break through the new allowance can protect their fund if they register with the Revenue before the end of the current tax year.

Lord says: ‘There is no flexibility on deadlines and it may well affect more people than the Government has realised.

‘We’ve recently seen three longserving police officers who all needed to register.’

Ben, 31, not his real name, has realised he needs professional help and has called National Debtline, run by the charity Money Advice Trust.

At the other end of the phone at the National Debtline call centre in Birmingham is Josh Parkes. His job is to help Ben understand his options and to help him get himself out of the crisis. Ben is far from alone. The combination of credit crunch, recession and financial austerity means that hundreds of thousands of people are facing significant debt troubles.

By the time Ben rings at 11.30am, Josh has dealt with seven other calls. By the end of the day, Josh, 28, who has worked there for three years, and his fellow advisers will have handled about 1,000 enquiries.

National Debtline is one of three national charities that provide professional and free help to tackle debt problems (click here for more).

Una Farrell of the Consumer Credit Counselling Service charity says: ‘Borrowers used to get in touch because they had lost their job or got divorced, but now we see a lot more people who have had pay frozen or their hours cut and find debt has been a gradual accumulation of factors.’

In Ben’s case, his options are limited.He has lost a job in engineering and is struggling to adapt to his new circumstances. Josh quizzes him on his outgoings to build up a monthly budget statement.

Even though Ben is single and has no dependants, the cost of his rent and basic household bills still outstrips his benefits. And each month his debt is creeping up. As he tells Josh: ‘I thought I was on top of it, then I found I wasn’t.’

Ben wants to know what the worst situation might be. Josh sketches out the pros and cons of a bankruptcy and arranges for factsheets and copies of the monthly budget statements to be sent out. Borrowers often leave it too late to ask for help. In Ben’s case, some of the problems might have been averted if he had called earlier.

Debts with credit cards, store cards and personal loans are still the most frequent problems for borrowers. But other issues are becoming more common.

David Cheadle, who runs the National Debtline call centre, says: ‘More people are having problems with short-term payday loans because of high interest charges.’

Another growing problem is debt from essential household outgoings, with families struggling to keep on top of last year’s big rises in energy costs. Household bills now account for about one quarter of all debt problems, says Citizens Advice.

Vicki Smith, 47 and pictured above, turned to National Debtline last summer after running up debts on a string of credit cards and a £10,000 personal loan. ‘It was my fault,’ she says. ‘I just like spending and I’m the sort of person who should never have a credit card.’

At its worst, £500 of her £650 a month earnings from her job as a part-time care worker was going on debt interest. This left little to help boost the family finances. Vicki and husband Tony, 53, have two daughters, Alex, 14, and ten year-old Clare.

Vicki entered a debt repayment plan through an agency – paying £42 a month for the privilege – but this failed to cap her interest or halt calls from lenders. National Debtline arranged an effective repayment plan with her main creditors and she now pays £216 a month, with the money split between the lenders.

Vicki, from Portishead, Somerset, says: ‘Debtline helped me to prioritise which debts should be paid. I’m not getting the aggressive calls for payment any more.’

While borrowers face their struggles, the debt charities have their challenges too. One is coping with the massive increase in calls when their own funding is under pressure.

National Debtline gets about a third of its running costs from the Government and the rest from lenders. Cheadle says: ‘The Government and banks are under pressure and there is a bit more uncertainty in our funding. We are looking to broaden our sources of income, for example by talking to utility companies.’

>> For advice on how to tackle your debt click here.

THE CCCS runs an online Debt Remedy service at cccs.co.uk for those who prefer the anonymity of the internet. This allows you to create a personalised advice plan and budgeting strategy.

Alternatively, you can speak to a debt adviser by calling 0800 138 1111 between 8am and 8pm Monday to Friday. CCCS also administers debt repayment plans at no cost to the borrower.

CITIZENS ADVICE 

THE charity and its volunteers provide face-toface debt help through a network of local offices. Many offer a drop-in service for an initial assessment interview, with follow-up sessions arranged by appointment.

You can find your local Citizens Advice branch by entering your postcode at citizensadvice.org.uk, or at cas.org.uk for those in Scotland. There is also general information on managing debt on adviceguide.org.uk.

NATIONAL DEBTLINE 

THIS offers phone-based debt help. Call 0808 808 4000 between 9am and 9pm Monday to Friday and between 9.30am and 1pm on Saturday. Those who are comfortable trying to help themselves online can use mymoneysteps.org, which is run by National Debtline with the support of Barclaycard.

There is a separate Business Debtline service for those who are self-employed or running small firms. Call 0800 197 6026 or visit bdl.org.uk.

Meanwhile, the Government is keen to help pensioners trade down to smaller homes and free up much-needed accommodation for young families. Financial Mail reviews the latest developments and asks whether they will benefit homeowners.

What is equity release and who is buying it?

EQUITY release allows older property owners to free the wealth tied up in their homes while retaining the right to continue living there.

In the last quarter of 2011 borrowers withdrew £216 million through equity release. This is the highest level of withdrawals for two years, according to trade body SHIP.

Andrea Rozario, SHIP’s director general, says: ‘There is more confidence coming back into the market.

‘We’ve seen lenders, including Partnership and Stonehaven, launching products with new features, such as enhanced terms for those with medical conditions.’

Vanessa Owen, head of equity release at insurer LV=, says: ‘People are also turning to equity release for debt consolidation. They are using the money to repay existing loans and credit card bills.’

What has happened to interest rates?

THE most popular type of equity release product is a lifetime mortgage. Interest is not levied monthly but rolls up and is added to the outstanding loan. This is repaid only after the homeowner dies or goes into care.

Several lenders have reduced their interest rates this month. Aviva is down from 6.82 per cent to 6.72 per cent while LV= has cut the rate for borrowers aged between 60 and 80 from 6.69 per cent to 6.59 per cent. Just Retirement has also trimmed its rate by one tenth of a percentage point to 6.4 per cent.

These rates still seem expensive

RATES for lifetime mortgages are fixed for the loan’s duration, which might be 20, 30 or even 40 years.

So they are not priced in the same way as conventional mortgages. Lenders also have to build in the cost of guarantees such as the promise that the mortgage debt will never be bigger than the value of your property.

Why are rates falling?

LENDERS are competing for new business. Steve Lowe, director at Just Retirement, says: ‘There has been no change in the economic fundamentals. We are responding to what rivals are doing.’ Owen at LV= says: ‘There is healthy competition out there and advisers would be knocking on our door and asking why if we weren’t offering good rates.’

Will lower rates encourage more equity release sales?

THE decision to draw on property wealth is a complex one and interest rates are just one part of the equation. Rozario expects steady growth this year rather than a rush.

Can I gain if I remortgage?

FALLING rates may help borrowers who already have an equity release loan to remortgage to a better deal. This would result in their debt growing more slowly in future.

Dean Mirfin, director at equity release adviser Key Retirement Solutions, says: ‘There were thousands of mortgages taken out five to ten years ago with Northern Rock at rates above eight per cent.

‘These borrowers could now switch to take advantage of a more competitive rate.’

Take the example of a couple who borrowed £50,000 from Northern Rock at 8.29 per cent six years ago and now owe £80,000.

By switching to Key’s best rate of 6.1 per cent, their debt would be £8,200 smaller after five years and £28,250 smaller after ten years. The calculations assume that the £2,500 costs of switching are added to the new mortgage.

Stewart Moffat and Beryl Blood are seeing their interest bill grow more slowly thanks to a remortgage. The couple, from Solihull, West Midlands, had a long-standing equity release loan with Aviva at 8.25 per cent. But they were able to switch to one with Saffron Building Society at 6.3 per cent.

Stewart, a former design consultant who is 86 today, says: ‘Interest on the loan was piling up a bit, but switching to Saffron will cut almost £60,000 off the bill if we survive another ten years.’

Sorting out the mortgage has allowed the couple to concentrate on their passion for Hawaiian music. They regularly attend gatherings across Britain, with Stewart playing the ukulele.

So there are charges with remortgaging?

YES. Some lifetime mortgages have early repayment charges for a set period, for example within the first five years.

With others, the redemption fee depends on the prevailing income paid by Government bonds. And if this is below a target level, which varies with each loan, there can be big charges to pay it off early.

This is because the lender wants compensation for the income it loses if a loan is redeemed early and today’s market cannot match the existing returns.

There will also be application and legal fees to pay if you remortgage.

The scheme could provide an alternative to traditional equity release products.

Housing Minister Grant Shapps said last week councils should be more active in offering assistance to those wanting to move into smaller properties or sheltered housing. The local authority would then let the former home to a family that needs more space.

The council would take on responsibility for letting and maintaining the pensioner’s former home. Rent from the property would be used to cover the costs of the owner renting a smaller home, with any surplus potentially added to their estate after death.

Many pensioners currently use the proceeds of equity release to help with the costs of heating and maintaining their existing home, which can become a financial burden. Shapps says: ‘Older people, who should be enjoying their homes, have watched helplessly as their properties have become prisons.’

But there are fears that pensioners living in a two or three-bedroom property could feel under pressure to give up what may have been a family home through the generations.

Andrea Rozario of trade body SHIP says: ‘There are likely to be huge costs and high levels of administrative work attached to the scheme. And it begs the question of how many older people will choose to leave their family homes and move into a smaller property potentially away from family and friends.’

Downsizing, in the process releasing equity, is another obvious alternative.

Volatile markets saw the single currency dip to a 15-month low against sterling last week, with £1 buying almost 1.2 euros at the best retail rates.

Joanna Williams, head of marketing at International Currency Exchange, says: ‘You can’t foresee where rates are heading, but it might be worth stocking up while the euro feels relatively good value.’

The simplest option for travellers is to buy euro currency itself, though there are risks in keeping money at home – it is vulnerable in any break-in and home insurance limits cover on stolen cash.

Another strategy is a pre-paid currency card.

Cash can be loaded from sterling when exchange rates are in your favour, but stays on the card until your trip abroad. Like a debit card, it can be used to draw currency from an overseas ATM or for spending in shops and restaurants.

Cards can be reissued if lost or stolen, giving travellers greater security than cash. But money on cards is at risk if providers go bust.

Providers include The Post Office (postoffice.co.uk); International Currency Exchange (iceplc.com); and Caxton (caxtonfxcard.com).

Property for first-time buyers is more affordable today than at any point in the past eight years – provided they live in the right part of Britain and can put together a substantial deposit.

In almost half of local authorities, the typical first-time buyer home is now within reach of someone on average earnings in that area, according to a Halifax survey. At the market peak in 2007, homes were unaffordable for first-time-buyers in 95 per cent of areas.

Martin Ellis, housing economist for Halifax, says: ‘Significant falls in prices coupled with a slight upwards drift in earnings has made a home much more affordable in many parts of Britain.’

Halifax takes the average price of homes sold to first-time buyers in each local authority area then compares this with average earnings locally. If the property costs less than four times the typical annual salary, the area is deemed affordable; more than four times and it is rated unaffordable.

Property is accessible everywhere in the North East and across most of the North West, Yorkshire, Wales and Scotland (see graphic).

How first-time buyers fare across Britain

Continuing low interest rates mean the cost of paying a typical first mortgage are also more manageable. A first-time buyer would need to earmark 26 per cent of takehome pay to the mortgage, against a longterm average of 34 per cent.

At the peak of the market, first-time buyers would typically need to spend half their disposable income on the mortgage. But there is a clear North-South divide. Large areas of the Midlands and the South of England and all of London are still no-go areas for a single first-time buyer.

Ellis says: ‘Here, you will either need to be doubling up and buying jointly with another earner or have substantial assistance from the family to have any chance of getting on the housing ladder.’

And buyers will still need a substantial deposit – a significant barrier to many first-timers. While there is a growing range of mortgages available to those with a deposit of at least ten per cent, even getting this sum can be a struggle.

Help from family allowed Carol Ward and Andrew Dudley to enjoy a first Christmas in their own home last month.

Carol, 27, a merchandiser for a High Street women’s clothing chain, and Andrew, 34, an environmental consultant, bought the two-bedroom terrace house near Chelmsford, Essex, last August.

The couple had been saving towards a deposit for more than two years, but they also needed assistance from Carol’s family to help them raise a 15 per cent deposit on the £188,000 home.

Carol, who also has to pay almost £3,500 a year in rail fares to commute to London, says: ‘We’re in no doubt that without the help from my parents we’d have been saving for many more years.

‘It is so hard to put money aside when you have rent, living costs and train fares.’

The couple took a two-year fixedrate mortgage through Halifax with affordable monthly repayments. Carol says: ‘Given uncertainty with the economy and jobs, we wanted to be able to cover any rising costs.’

Great offers if you can put cash down

A growing range of mortgages for those with a  ten per cent deposit is giving first-timers a lifeline.

HSBC has one of the cheapest deals on the market – a two-year discounted rate of 3.84 per cent with no fees to pay. 

The bank also has a January offer of a lifetime tracker at the base rate plus 4.09 percentage points, currently 4.59 per cent. Both deals are free of fees and available up to 90 per cent of the cost of  the house.

Coventry Building Society last week launched a members-only 90 per cent first-time buyer deal with  a rate of 5.25 per cent, fixed until the end of  March 2017.

There is a £199 booking fee, but there is a free gift of vouchers worth £500 for Ikea. The offer is open to those who have been Coventry members for at least three years, and to their children and grandchildren.

Yorkshire Building Society offers first-time buyers a two-year fixed rate of 5.19 per cent. Again this is  fee-free and also pays £500 cashback.

Yorkshire spokeswoman Tanya Jackson has this advice for prospective mortgage borrowers:  ‘Keep on top of your spending and ensure you pay all day-to-day bills promptly while you are saving for a deposit.

‘This means that your credit record will be as  clean as it can be when you come to apply for  a mortgage.’

Other lenders go further. Nationwide Building Society runs a ‘Save to Buy’ scheme, offering mortgages of up to 95 per cent loan to value to those who save regularly with Britain’s biggest society towards a deposit for at least six months.

However, interest rates are generally higher than  on the 90 per cent loans.

Britain’s biggest insurance companies will announce how their withprofits funds fared in 2011 and declare annual bonuses. These bonuses dictate the growth in value of millions of endowments, bonds and pension policies.

Zurich is likely to be first to announce. The company, which has 120,000 with-profits customers from the former Allied Dunbar and Eagle Star funds, could declare as early as the end of this week.

It will be followed by Friends Life and Aviva. Standard Life, Legal & General and Prudential are among the big names set to announce their bonuses next month.

And Phoenix Group, which manages closed with-profits funds for 1.7 million former customers of insurers including Britannic, Pearl, NPI and Royal & SunAlliance, will also be declaring its bonuses publicly this year for the first time.

With-profits funds can invest across a range of assets, including shares, bonds, property and cash.

Unlike conventional investments, the value of a with-profits policy does not move up and down directly in line with the assets in the fund.

Instead the insurance company aims to smooth growth, holding back some of the gains in the good years to dish out in the bad years. This makes bonus declarations all the more important.

Sarah Lord (pictured above), managing director of Killik Chartered Financial Planners, in Mayfair, central London, says: ‘Bonus time is when you should be reassessing these investments and considering whether it is still in your best financial interests to stick with them.’

There are two types of bonus on traditional with-profits policies. Most valuable are the annual bonuses. Once granted these bonuses cannot be taken away, which means insurers must ensure they have enough money in their funds to be certain of honouring their promises.

Increasingly, insurers are focusing on terminal bonuses. These are paid when a policy matures and are not guaranteed. Lord says: ‘If the annual bonus of your policy has been bumping along at zero per cent or one per cent, then it might be time to leave. There are other withprofits plans promising bonuses of three or four per cent, which are decent returns for cautious savers.’

The performance of with-profits funds depends on the proportion of assets that are invested in long-term growth assets, such as equities and property. Stronger funds, such as Prudential and Legal & General as well as Standard Life, can afford to hold a higher proportion of savers’ money in these assets.

This should mean that they grow faster over time, but will suffer more in years such as 2011 where stock markets struggle.

Laith Khalaf, pension investment manager with Hargreaves Lansdown in Bristol, says: ‘The with-profits market contains such a mixed bag of funds that it is very difficult to generalise.

‘Based on the returns from other types of funds, a with-profits investment might be anywhere from down five per cent to up 12 per cent over the past year.’

Many weaker with-profits funds have to be cautious in the way they invest and hold a high proportion of assets in Government bonds, known as gilts.

Turbulence in the eurozone means gilts have fared well. The average gilts pension fund gained 16 per cent in value in 2011.

Khalaf says: ‘We may well find that many of the more cautious funds such as Equitable Life were the best performers in 2011.’

But good growth does not necessarily translate into bigger bonuses. Chris Wiscarson, chief executive of Equitable Life, says: ‘We’ve had a very good year for investments with growth in the assets in 2011 similar to the 8.4 per cent we achieved in 2010. But you cannot go declaring all that as a bonus, because our liabilities have also increased.’

Wiscarson says that Equitable is confident of maintaining an annual bonus rate of about two per cent.

Should I get out of with-profits? Read more at our sister site thisismoney.co.uk/exit

Mighty HSBC was humbled last week by a record fine of £10.5 million. Sales staff at the bank routinely signed up thousands of elderly people to bonds that were supposed to give them an income to fund care fees.

But the advice was flawed because in many cases investors, who handed over an average of £115,000, were likely to die before the bond delivered decent value. HSBC has had to set aside at least £30 million for compensation (Read more here).

The reckless selling focuses attention on just how vulnerable older people and their families are when faced with the challenge of arranging care.

Janet Davies, a director of Symponia, a national network of specialist care advisers, says: ‘There are all these emotions, including guilt and fear, when someone needs longterm care. People are faced with baffling terminology and a care system they are unfamiliar with. They don’t know how to deal with it or where to go for help.’

Marking the start of FMWF’s new WHO CARES? series Financial Mail answers the key questions on how care is structured, who pays for what, and where older people and their families can get the advice they need.

WHO MIGHT NEED IT?

ABOUT one in five men and one in three women aged 65 today will need to enter a care home in the future. Others will need care and help with everyday living in their own homes. Oliver Thomas, director of Bupa Care Homes, says: ‘We are living longer and we are healthier, but even so there comes a time when some people will need substantial support and care.’

WHAT ABOUT COST?

LOCAL authorities are responsible for assessing your care needs. Costs will depend on where you live and what your exact needs are. Andrew Dixson-Smith, managing director of specialist adviser Care Fees Investment in Caterham, Surrey, says: ‘Having a registered nurse at home might cost £20 an hour, and a basic carer about £10 an hour. Even having help for a couple of hours in the morning to get up and a couple of hours at night to get to bed can quickly add up.’ He says residential care costs in a quality home can range between £900 and £1,000 a week in London and the South-East and between £600 to £700 a week in parts of the North-West and Scotland. The differences reflect higher average wages and property costs.

HOW IS IT FUNDED?

THE NHS will only pay in full for those with the most serious medical conditions. Those with some nursing needs may get a tax-free nursing care allowance worth up to £108.70 a week, depending on where they live.

On top of this, many older people can claim Attendance Allowance if they have a long-term need for assistance with basic tasks of living. This benefit is worth up to £73.60 a week and is open to all regardless of their wealth. Dixson-Smith says: ‘The NHS won’t pay towards personal care so many of those with conditions such as dementia get no help at all.’

Beyond any NHS support, care – whether in your own home or in a residential home – is subject to a means test by the local authority. Only those with assets below a threshold qualify for State help. The rest have to pay the remainder of care costs themselves.

Your home is excluded from the means test for as long as you or a dependent elderly relative lives there. But 12 weeks after this no longer applies, for example because a spouse living there dies, the local authority will count the value of a home as your assets.

WHAT ARE THE MEANS-TEST THRESHOLDS?

IN England and Northern Ireland, State help starts once your assets fall below £23,250 and care is funded in full once they are less than £14,250. In Scotland, the figures are £23,500 and £14,500. In Wales, there is a single threshold of £22,500. Once your wealth dips below this, care is funded in full. In Scotland, there are additional payments of £159 a week for everyone in care homes for personal care.

CAN YOU PLAN IN ADVANCE?

YES. But few do so. Dixson-Smith says: ‘Most people come to us when the writing is on the wall.’ Only three in ten people think they might need to save for future care needs, according to Bupa. Bupa’s Thomas says: ‘People generally don’t think about the consequences of getting older. But it will happen and the more you can put aside to save the better your choices in later life will be.’

SO HOW CAN YOU PAY FOR IT?

IT is rare for income from pensions and any benefits that can be claimed to fully cover care fees. The typical client Dixson-Smith helps faces a £25,000 to £30,000 annual shortfall.

So in many cases the only way to fund care will be through the sale of a home. The key for older people and their families is how to use this money wisely to ensure there is enough to cover your fees while in care.

One option is to buy a care annuity, which involves handing over a lump sum to an insurer in exchange for a set income for the rest of your life.

Each annuity is underwritten on the basis of a medical questionnaire and the rate reflects the health of the person in care. The worse your health, the less an insurer will charge per £100 of lifetime income.

Provided that the annuity is paid direct to the care home, all income this produces is tax-free.

Davies says: ‘You should get a quote for an immediate care annuity as a matter of course. This will give you an idea of what a person’s life expectancy while in care might be and allow you and an adviser to have a proper discussion around all the options.’

HOW CAN AN ANNUITY HELP?

LINDSAY and Jeff Everett decided that an annuity was the best way to secure the future care of Lindsay’s mother, Mary Ratcliffe. Mary, 89, had to go into a home in November last year. She had become frail, had started to lose her sight and was then diagnosed with vascular dementia.

Jeff, 55, a software consultant, and Lindsay, 49, (pictured above) had to decide how best to manage Mary’s finances and to fund the cost of care. Mary’s care home, in Reigate, Surrey, costs £810 a week. While her pensions and Attendance Allowance cover some of this, there is still a huge gap to bridge. Jeff says: ‘We had to sell Mary’s flat to provide money for the fees. But we wanted to have a plan on how to manage these fees in the longer term.’

The couple, who live in Warlingham, Surrey, turned to Care Fees Investment for help. It suggested an annuity to cover the gap. The Everetts agreed and signed Mary up to a care annuity with insurer Partnership. This cost £157,000 and will pay out £31,000 a year to the care home.

WHAT ARE MY OTHER OPTIONS?

YOU could invest the proceeds of the property sale in the hope the income produced plus a gradual drawdown of the capital will cover fees. Dixson-Smith says: ‘We assume care fees rise by five per cent a year and that investments can give a three per cent income. Then for each client we can give a clear projection of how long their money might last.’ Some families will choose to mix and match between annuities and investments.

WHERE CAN I GO FOR HELP?

FEWER than one in ten of those who pay for their care have had any specialist advice. And only a handful of local authorities point families in the direction of independent advice.

Look for advisers who are accredited by the Society of Later Life Advisers (societyoflaterlifeadvisers.co.uk, 0845 303 2909). As well as holding advanced qualifications, they are interviewed to ensure they have the right skills to help older people.

Specialists include Care Fees Investment (carefeesinvestment.co.uk, 0845 077 5655), Symponia (symponia.co.uk, 01789 491325) and Saga Personal Finance (saga.co.uk, 0800 096 8703). Payingforcare.co.uk, funded by insurer Partnership, also provides information on the care system.

HOW MIGHT THINGS CHANGE?

THE Government set up a Commission on funding care to look at longterm reforms. It reported in the summer, calling for a £35,000 cap on the amount anyone should be asked to pay towards care. On top of this, those in a home would have to pay the ‘hotel’ costs of their accommodation, capped at between £7,000 and £10,000 a year. Finally, the means-test threshold would be increased to £100,000.

Andrew Dilnot who chaired the Commission, says its plans spread the burden more fairly between the individual and the State. But it would cost taxpayers at least £2 billion a year. The Government is considering the proposals and is expected to respond with a White Paper next year, though any change would not come into effect until 2014 at the earliest.

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