In sickness or in wealth

Could you lose thousands from your wages due to sickness?

A new report unveiled by LV= reveals that the average Briton spends almost a year (360 days) off sick. With on average 252 days in a working year, this equates to almost a year and a half of their working life.

Current health of the UK workforce

The first National Sickness Report from LV= looks at the current health of the UK workforce[1], gauges their attitude towards sickness, and looks at how they guard against the impact of long-term absence.

Long-term illnesses affecting working Britons

According to the figures, 131 million days are lost per year due to sickness absences, equivalent to six per worker in the UK, and over 13 million of these were lost due to stress and depression[2]. The research, conducted among full-time workers, reveals that stress and depression are two of the most common long-term illnesses affecting working Britons today. Workers who have suffered from stress or depression during their working lives say they took an average of two and a half months (81 days) off to recover.

The report reveals that more than a third (36%) of workers do not receive sick pay cover from their employer. This means that more than 7.8 million workers would only qualify for Statutory Sick Pay of £86.70 per week if they fell ill.

Average amount of time off to recover

Assuming the average UK wage is £26,664[3], an employee suffering from stress and depression who only receives Statutory Sick Pay could lose up to £4,671[4] – that’s a sixth of their salary (18%) – if they took the average amount of time off to recover.

Whilst the average amount of time someone has off with stress is 81 days, over 650,000 (2.9%) UK workers have been off with stress for more than a year during their career. Indeed, in the last three years 1 in 50 (435,800) workers have been off sick for more than a year. Of those workers who have been off sick, more than half (57%) underestimated how long they would take to recover when they fell ill.

It’s not just stress that could leave working Britons feeling the financial pinch, however. Other serious ailments, such as a bad back, could cost a worker in excess of £3,000 in lost wages.

Bridging the gap– the back-up plan

When asked about their company’s sick pay policy, more than half (52%) of workers admitted to being in the dark as to what they would be entitled to and a quarter (26%) admitted they didn’t know how they would manage to make ends meet if they were sick and without their regular income. Over a third (35%) of respondents said that they would dip into their savings to bridge an income gap. However, a quarter (23%) said their savings would run dry after just two months, and only one in ten said they have enough put by to support themselves for more than a year.

None of us are invincible

Whilst no one wants to think about getting ill, unfortunately none of us are invincible and the reality is that some people will need to be off work for a large chunk of time. When we buy a car, a washing machine or even a phone, we resign ourselves to the fact that at some point it might break down; however, far too few of us have a back-up plan in place that would protect our income if we found ourselves unable to work.

1. According to the Office for National Statistics ‘Labour Market Statistics’ (September 2013), there are 21,790,000 Britons in full-time employment
2. According to the Office for National Statistics Sickness Absence in the Labour Market 2012
3. According to the Office for National Statistics
4. According to the research conducted by OnePoll on behalf of LV= in September 2013, on average a worker ill with stress/depression will not return to work for an average of 81 days. Based on the fact that Statutory Sick Pay (SSP) of £86.70 per week is payable from the 4th consecutive day of absence average and would therefore be paid for 77 days or 11 weeks an employee would receive £953.70 whilst they were off. The average UK salary is £26,664 which works out at £73.05 per day, so over 77 days an employee would receive £5,625. An employee on SSP would receive £4,671 less during the time they were on unpaid sick leave. All other calculations and statistics based on the research conducted by OnePoll on behalf of LV= in September 2013.

Critical Illness Protection


Something critical

You really need to find the right peace of mind when faced with the difficulty of dealing with a critical illness. Critical illness assurance pays a tax-free lump sum on diagnosis of any one of a list of specified serious illnesses, including cancer and heart attacks. The good news is that medical advances mean more people than ever are surviving life-threatening conditions that might have killed earlier generations. Critical illness cover can provide cash to allow you to pursue a less stressful lifestyle while you recover from illness, or use it for any other purpose.

It’s almost impossible to predict certain events that may occur within our lives, so taking out critical illness cover for you and your family, or if you run a business or company, offers protection when you may need it more than anything else.

Whichever happens first

The illnesses covered are specified in the policy along with any exclusions and limitations, which may differ between insurers. Critical illness policies usually only pay out once, so are not a replacement for income. Some policies offer combined life and critical illness cover. These pay out if you are diagnosed with a critical illness, or you die, whichever happens first.

If you already have an existing critical illness policy, you might find that by replacing a policy you would lose some of the benefits if you have developed any illnesses since you took out the first policy. It is important to seek professional advice before considering replacing or switching your policy, as pre-existing conditions may not be covered under a new policy.

Core specified conditions

All policies should cover seven core specified conditions. These are cancer, coronary artery
bypass, heart attack, kidney failure, major organ transplant, multiple sclerosis and stroke. They will also pay out if a policyholder becomes permanently disabled as a result of injury or illness.

But not all conditions are necessarily covered. The Association of British Insurers (ABI) introduced a set of best practice guidelines. In May 2003, the ABI introduced other measures. These included conditions such as non-invasive skin cancers and less advanced cases of prostate cancer. Tumours that have not yet invaded the organ or tissue, and lymphoma or Kaposi’s sarcoma in the presence of HIV, are excluded.

There are also more restrictive conditions for heart attacks. There has to be evidence of typical chest pain, or changes in the electrocardiogram (ECG), for example, if a claim is to be successful. Cardiac conditions, such as angina, will not be covered.

Lifestyle changes

Some policies allow you to increase your cover, particularly after lifestyle changes such as marriage, moving home or having children. If you cannot increase the cover under your existing policy, you could consider taking out a new policy just to ‘top up’ your existing cover.

A policy will provide cover only for conditions defined in the policy document. For a condition to be covered, your condition must meet the policy definition exactly. This can mean that some conditions, such as some forms of cancer, won’t be covered if deemed insufficiently severe.

Similarly, some conditions may not be covered if you suffer from them after reaching a certain age, for example, many policies will not cover Alzheimer’s disease if diagnosed after the age of 60.

Survival period

Very few policies will pay out as soon as you receive diagnosis of any of the conditions listed in the policy and most pay out only after a ‘survival period’. This means that if you die within the specified number of days of meeting the definition of the critical illness given in the policy, the cover would not pay out.

How much you pay for critical illness cover will depend on a range of factors including what sort of policy you have chosen, your age, the amount you want the policy to pay out and whether or not you smoke.

Permanent total disability is usually included in the policy. Some insurers define ‘permanent total disability’ as being unable to work as you normally would as a result of sickness, while others see it as being unable to independently perform three or more ‘Activities of Daily Living’ as a result of sickness or accident.

Getting it covered

If you are single with no dependants, critical illness cover can be used to pay off your mortgage, which means that you would have fewer bills or a lump sum to use if you became very unwell. And if you are part of a couple, it can provide much-needed financial support at a time of emotional stress.

While life assurance is often the priority of those with dependant family members, critical illness cover can be vital if you are the sole breadwinner, rely heavily on your income or are single. It provides a welcome financial boost at a time of emotional stress and financial hardship.

Before you take out critical illness cover, you need to obtain professional financial advice to make sure that it is right for you and offers sufficient cover.

Why it pays to be smart when planning your legacy

Inheritance tax (IHT) is becoming an issue for an increasing number of people in the UK. None of us likes to entertain the thought of our own death and what would happen to our family after such an event. However, a financial plan for your death is vital, especially if you have dependants.

IHT is a tax on money or possessions you leave behind when you die and on some gifts you make during your lifetime. However, a certain amount can be passed on tax-free, utilising your ‘tax-free allowance’. This is also known as the ‘nil rate band’.

Everyone in the current 2013/14 tax year has a tax-free IHT allowance of £325,000. The allowance has remained the same since 2010/11 and will stay frozen until at least 2018.
Failing to think about how to tackle a potential IHT liability could have serious consequences for your loved ones. No one wants to leave people they care about with an IHT bill that could have been substantially reduced, or even eliminated altogether.

We have provided five steps to consider if appropriate to your particular situation:

1. Write a will
In the UK, if you don’t have a will your estate will be distributed according to rules set out by law. These are known as the ‘Rules of Intestacy’ (some areas of the law and legal procedures are different in Scotland).

For example, in England and Wales, if you’re married with children, the first £250,000 of your estate (plus any personal possessions) would pass to your spouse. The remainder would be split equally, half going to your children when they reach the age of 18 and the other half used to generate an income for your spouse, passing to the children on your spouse’s death.
If you’re not married your estate will go to your blood relatives, even if you’ve been living with someone for several decades. This could be far from what you wish. Think about where you want your money to go and why. A will makes your wishes concrete and clarifies who should get what, but can also be reviewed over time.

2. Making use of life assurance
Life assurance can play a big part in your IHT planning. Rather than reduce the liability, by taking out a plan to cover your estate’s potential IHT liability and writing it in an appropriate trust, the proceeds can be used to meet the IHT amount payable. More importantly, by putting it in an appropriate trust it will fall outside your estate so it won’t form part of your estate and will not be liable for IHT currently at 40 per cent.

3. Give it away
Giving your wealth away to another individual while you are still alive will also save on IHT. Some gifts are immediately outside your estate. You can give as many people as you like up to £250 each in any tax year. If you want to give larger gifts, either to one person or several, the first £3,000 of the total amount you give will be exempt from IHT with the balance after 7 years.

You can also make a regular gift as long as it is out of your income and doesn’t affect your standard of living. For example, if you don’t spend all your salary or pension each month, you could redirect any funds that are left over to another person. The gift does need to be regular, which could perhaps be a birthday or Christmas present, or a monthly payment.
A wedding can also be a good excuse for an IHT-exempt gift. A parent can give up to £5,000, a grandparent £2,500 and anyone else £1,000.

Legislation stops the tax saving if you continue to benefit from whatever is given away.

4. Make an investment 
and use a trust
This could be useful if you wanted to give some money to, for example, your children or grandchildren but fear they might not spend it wisely during their teenage years. Or, if you wanted to give away capital while keeping control over how it is managed and, in some instances, still being able to receive an income from it.

Tax charges can also come into play on the money placed in trust, but generally if this remains below the nil-rate band you won’t need to pay any tax. And in many cases the level of tax suffered will be less than the 40 per cent headline IHT rate. Most IHT planning uses a trust arrangement of some sort.

5. Make IHT-exempt investments
Where planning to reduce the liability is not possible, then life assurance is an option. More importantly, by putting it in an appropriate trust it will fall outside your estate so it won’t form part of your estate and will not be liable for IHT, currently chargeable at 40 per cent. Be aware that premiums must be maintained throughout your remaining lifetime and if they lapse, so will the cover. It’s therefore essential that you ensure the continued affordability of the premiums, which may be payable for the rest of your life.

Investments in unquoted companies usually carry higher risks and may not be suitable for all investors. Accordingly, professional advice should be obtained before making an investment. Levels and bases of, and reliefs from, taxation are subject to change and their value depends on the individual circumstances of the investor. The value of your investments can go down as well as up and you may get back less than you invested.

The Financial Conduct Authority does not regulate Taxation & Trust advice or Will Writing.