Investment of house proceeds

Biggles · 8 April 2007 at 6:58PM

My mother is now in a care home and the sale of her house should be complete in the next week or two.

I hold EPA and aim to take out an immediate care fees plan, which should meet the shortfall between her income and the care home fees. That will increase payments at 5% pa so, all things being well, she should hardly need to touch the remaining £240,000.

The same adviser would invest her capital, but I'm tempted to go the DIY route to avoid their fees, which would be 5% upfront, or on a commission basis.

At his suggestion, I have already paid up mini ISAs for her for last year and this year. I am considering NS&I's index-linked certs, also a high yield portfolio similar to my own, but am sure equities would not be recommended for the majority of her capital.

Any advice would be appreciated.

dunstonh · 8 April 2007 at 10:22PM

The same adviser would invest her capital, but I'm tempted to go the DIY route to avoid their fees, which would be 5% upfront, or on a commission basis.

You dont pay 5% up front commission. The provider pays the commission not you.

Any advice would be appreciated.

Surely the adviser is the best one to give the advice as he knows the facts. We dont.

Is investment bond best? annuity? unit trusts? shares? What is the income requirement? What guarantees are required? What is the taxation position? What is the attitude to risk?

Is the HYP going to provide enough income and is it the best option from a tax point of view?

jamesd · 9 April 2007 at 7:11AM

The use of ISA and care fees plan suggests that the adviser is likely to be providing good advice. You can probably find an adviser who will charge 0-2% initial commission and 0.5-1% ongoing commission for investment advice. I suggest that you investigate NMA IFA advisers if the difference is significant in your case.

If doing it yourself you might consider UK other bonds, UK corporate bonds, UK commercial property and UK equity income funds as the core of the holding.

NS&I index-linked certificates are not really a great choice compared to investment options. More of an option for those who don't want to think about it and don't want risk.

Since it is her money, if you are committed to DIY, you might consider a split of 150k adviser, 90k you and adjust based on performance after some years. At the least this will provide some useful diversification.

Biggles · 9 April 2007 at 9:43AM

dunstonh wrote: »

You dont pay 5% up front commission. The provider pays the commission not you.

Their 'key facts' statement says under 'Paying by fee', "we will agree what we will charge you before beginning work. Our typical charges are a fee of 5% as a % of all capital invested + VAT". But elsewhere in the document they hedge this by saying, "If we receive commission.....we will pass that on to you in one or more ways...". Under 'paying by commission', it gives examples of 3% of the investment plus 0.5% pa for collective investments, or 6.8% for investment bonds.

So it seems a bit grey at the moment, presumably depending on the product(s) chosen, but I assume she will pay one way or the other, either in initial fees, or in reduced performance if we go for the annual commission option?

Provided a reasonable float is kept in cash, the investments should be an emergency-only cushion, hopefully only to be dipped into if she lives well into her 90s (she's 90 now) and the care home fees have begun to outstrip the care fees plan.

As regards taxation, her taxable income will be just inside the 07/08 allowance of £7,690, so I have to assume any investment income may be liable for tax.

Cook_County · 9 April 2007 at 10:02AM

Biggles - what is her health like? I have to ask this because the average life expectancy once anyone is in care is relatively short.

Consequently, from an income tax perspective, unless inheritance tax will be an issue you'd probably want investments that do not mature until death so as to avoid tax on the investment income.

I do not know what long-term is at this stage, it could be anywhere from 12 months to three years - but bearing in mind she is in a care home it may be more than 10 years, but is unlikely to be longer. So to my mind the question is how to you grow the savings in a period of no more than - say - five years while keeping them secure.

dunstonh asks some of these questions - but of course as with all investments you should take your time to decide and to invest...

jem16 · 9 April 2007 at 10:11AM

Biggles wrote: »

Their 'key facts' statement says under 'Paying by fee', "we will agree what we will charge you before beginning work. Our typical charges are a fee of 5% as a % of all capital invested + VAT". But elsewhere in the document they hedge this by saying, "If we receive commission.....we will pass that on to you in one or more ways...". Under 'paying by commission', it gives examples of 3% of the investment plus 0.5% pa for collective investments, or 6.8% for investment bonds.

They are offering two options;

1. You pay a fee of 5% of the investment plus VAT. So on an investment of £240,000 you would pay £14,100. If you choose the fees option any commission they receive from the product would be rebated back to you ,often by being invested into whatever you are choosing. So if they receive 3% commission for the product that 3% is rebated back to you.

2. You pay no fee and they take the commission from the provider.

Jamesd suggests finding an NMA IFA which I would agree with. It sounds like it could make a considerable difference for you. Typical commission is around 1% with the rest being rebated back to you. So that 3% for collective investments and 6.8% for investment bonds which they quote would become 1% with 2% or 5.8% being rebated back to the investment.

So it seems a bit grey at the moment, presumably depending on the product(s) chosen, but I assume she will pay one way or the other, either in initial fees, or in reduced performance if we go for the annual commission option?

I think it all depends on how good a job you can do DIY and how much time you can spend on it. An IFA doing a good job can more than make up for any commission charges with increased performance against DIY.

As regards taxation, her taxable income will be just inside the 07/08 allowance of £7,690, so I have to assume any investment income may be liable for tax.

That's where the specialised knowledge of the IFA may be very useful to keep down the tax bill, both for income tax purposes and IHT.

dunstonh · 9 April 2007 at 12:24PM

Their 'key facts' statement says under 'Paying by fee', "we will agree what we will charge you before beginning work. Our typical charges are a fee of 5% as a % of all capital invested + VAT". But elsewhere in the document they hedge this by saying, "If we receive commission.....we will pass that on to you in one or more ways...". Under 'paying by commission', it gives examples of 3% of the investment plus 0.5% pa for collective investments, or 6.8% for investment bonds.

That sounds like the Menu defaults and a bit of free text. 5% commission is above average. If you look at the Menu (key facts) and check the Collective Investments and you will see the Market Average is 1.8%. That is what you should be aiming for. Average of course means some charge more and some charge less.

FSA guidance is that fees should not be structured in the same way as commission. So, a 5% fee would fail under FSA TCF rules.

NMA IFA terms would be better as they tend to be closer or cheaper than the FSA averages.

Remember though, you do not pay the commission on all investments (some are explicit, some are not). With some, the provider will pay a commission but it is paid out of the charges on the investment taken over a number of years and not up front. This is more typical of investment bonds and pensions. If commission is rebated, the annual charges either get lower or you get an increased allocation at the start. For example, if maximum commission was 5% plus 0.5%p.a. but 4% of that initial commission was rebated, the investment would be increased by 4% overnight.

There is nothing to suggest here that the advice so far is wrong but it does appear that it may be at the more expensive end of the scale and the IDD/Menu does appear to contain a TCF breach. Firms had up until end of March to put in place their action plans for implementation for TCF. They didnt have to be 100% compliant at this point. Just to have identified where they are not and what, how and when they would become compliant. So, it may be something that may already have changed. Or it could be that they don't realise they have a breach (I spoke with a number of IFA firms over the last few weeks as we shared ideas and knowledge on this and a couple didnt even know they had to do it).

VAT is not chargeable on fees where a product purchase takes place. Where advice is sought but no product purchase takes place, VAT is chargeable.

Biggles · 9 April 2007 at 6:22PM

Biggles - what is her health like? I have to ask this because the average life expectancy once anyone is in care is relatively short

Her health isn't bad physically, though she was weakened by a series of TIAs last year which have left her rather confused mentally. She seems to be stable now, however, and she does come from long-lived stock. Even so, five, possibly ten years at best, is the maximum realistic timeframe for investing, which makes me wonder about the merits of deposit accounts and selected high-yielding equities.

The IFA does compare their fees with the market average and this does show they are higher. On the other hand, they are specialists in meeting long-term care costs, so it probably makes sense to continue down the route of the care fees plan with them at least.

Where do I find out more about NMAs? I've heard the term previously, but Google isn't very forthcoming on the matter, nor are the websites of a few local IFAs I've checked so far. And exactly why is it that NMAs are cheaper?

IHT is unlikely to be an issue.

jem16 · 9 April 2007 at 6:34PM

Biggles wrote: »

Where do I find out more about NMAs? I've heard the term previously, but Google isn't very forthcoming on the matter, nor are the websites of a few local IFAs I've checked so far. And exactly why is it that NMAs are cheaper?

I don't think there is a database of NMA IFAs at present although I'm sure Dunstonh will clarify that point. It seems to be a case of asking the IFA their terms. A typical NMA IFA would take around 1% commission and 0.5% trail commission. The 1% commission is the same regradless of the type of investment so there would be no bias towards a particular product.

The NMA IFA relies more on the 0.5% trail commission to sustain business with a client. The more the investment realises, the more the NMA IFA earns so it's in their best interests to make the investment perform well.

The older model IFA relied on initial commission rather than ongoing commission.

I think the chances of finding a NMA IFA are increased by finding the smaller partnership rather than the larger salesforce. However that's only my opinion.

dunstonh · 9 April 2007 at 8:30PM

NMA is a type of IFA business model. It isnt a regulatory term. It stands for new model adviser. We are a minority type of adviser at this time but more and more are moving over to this business model. Citywire also have a publication dedicated to new model advisers so there must be enough of us around to support that.

The charges will vary. I work on 1% plus 0.5% but that is at the typically lowest end of the charges scale. I was an early mover to NMA so I have the advantage over later adopters as its generally not something you can do overnight. Ideally, you should look at the FSA market averages and be aiming for that. Anything lower than that is a bonus. The market average figures are set by the FSA, not the advisers.

The NMA business model suits smaller firms. It would be very hard for salesforces to adopt it. Mainly as they couldnt afford to. That said, there have been some attempts by some firms to call themselves NMA but take larger initial commissions and 1% a year instead of the natural 0.5%.

So in summary, 0.5% trail is the natural commission which is paid regardless. Anything more than that and you are paying above the odds. Initial comission should be no more than 3% as a maximum but you should be aiming for around 1.8% with anything less than that a bonus.

Biggles · 12 April 2007 at 12:39PM

So, is the consensus that I should be looking to use the/an IFA (but to try and negotiate the charges down) rather than to go the DIY route?

For, say, four or five years, I wasn't sure whether the fees would be recouped over and above utilising deposit accounts, for example?

Investment of house proceeds

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