Investment advice for Residential Home Fees.

Bess09

I hold Power of Attorney regarding my mother's affairs. She is suffering from dementia and is living in a lovely small residential home near me where she is very well cared for. She moved in a year ago and we have been using her savings to pay for her care along with her state pension, attendance allowance, some pension credit and a small payment each month from some pension bonds.

I have just sold her house and so she has £ 170,000 in a savings account in her bank. She will now lose the pension credit and so we will have a shortfall of around £ 16,000 each year which I have to find to pay the fees.

Last year I spoke to three IFA's; one independent, one from Age Concern and one from Help the Aged. I didn't feel very happy with the last two, because they weren't as independent as I would have liked and the first one invested £ 40,000 of a friends money and has lost half this year, perhaps because of the recession? I don't know, but it doesn't look good. They all recommended Care Home annuities in varying amounts and investing the rest. The independent chap, promising the moon. Her bank (HSBC) are keen to offer advice too........

I am a complete novice in investing money and obviously need to provide an income for my mother. Could anyone offer any advice on the best thing to do? I even wondered about putting the maximum in premium bonds, on 'a just in case basis.' Many thanks. Bess.

jem16

Bess09 wrote: »

They all recommended Care Home annuities in varying amounts and investing the rest. The independent chap, promising the moon.

An Immediate Needs Annuity may well be the answer as it can be paid direct to the care home gross so no tax deducted.

http://www.sharingpensions.co.uk/annuity_immediate_needs.htm#text2

Her bank (HSBC) are keen to offer advice too........

They would be and will probably offer an investment bond with a nice 7% commission payout to the adviser.

Stay away from the bank for investments.

I am a complete novice in investing money and obviously need to provide an income for my mother. Could anyone offer any advice on the best thing to do? I even wondered about putting the maximum in premium bonds, on 'a just in case basis.' Many thanks. Bess.

You do really need to see an IFA - try and see a few more now that you have the house proceeds to invest. As you have PofA it's important that you are seen to be doing the right thing for your mother.

Biggles

The main specialists for Immediate Care Needs Annuities are NHFA, www.nhfa.co.uk (now owned by HSBC). But you will deal with an IFA and will get quotes from all the insurance companies that provide these annuities (there are presently only three, I believe). The big advantage of these annuities is that they pay the money direct to the care home so are free of tax.

dunstonh

If they are all recommending immediate care annuities, then what is the problem? That is what you would expect.

The choice is effectively between investing or using an immediate care annuity. Both have pros and cons and at the end of the day you will only know which one of the two was best after she has died.

the first one invested £ 40,000 of a friends money and has lost half this year, perhaps because of the recession?

Stockmarket dropped 45% from peak to trough. Very little has lost 50% at this time unless it was very high risk/specialist It is probable that your friends information is out of date (statements are often a fair bit behind) and doesnt include the subsequent recovery in values that occurred. Typically, if you did go down the investment route, you wouldnt use investments like that anyway.

Also, investments go down as well as up. Always have, always will. The IFA is not responsible for that. Its what happens in short term periods. Especially in a recession.

I even wondered about putting the maximum in premium bonds, on 'a just in case basis.'

You have a power of attorney to act in your mother's best interests. That is certainly not acting in her best interests.

jamesd

You might usefully ask an IFA about a mixture of corporate bond funds and share-based funds that pay income. A combination of this sort should be reasonably suitable and would be expected to generate in the range ot £9,000 to £13,000 a year in income with the remainder of the required funding coming from gradual sale of the investments.

Invesco Perpetual High Income - income at perhaps 3% of capital plus likely equity growth.

Invesco Perpetual Monthly Income Plus - income at perhaps 5% with lower equity component still providing some likely equity growth.

Corporate bond fund, lower risk type, many available, likely to provide around 5% income.

Enhanced income corporate bond fund, a few available paying up to 8% or so by sacrificing growth on the investments.

Income here is the natural income from the investment and the percentage is the percentage of the invested capital that might reasonably be expected to be paid as that income.

Other than the gradual use of capital to top up the income all of this capital would form part of her estate and be inheritable, unlike the annuity option. The mixture of funds would be chosen to match the desired income and risk level, risk being in the range of 15-30% for likely mixtures of these funds. That's 30% down in a really bad year, if they were sold at that time, but likely to recover over time if there's no forced sale. This is a pretty much routine selection of investments to use for this purpose and any IFA should be able to handle it.

You may also be able to use a mixture of an immediate needs annuity for some of the income and investments for the rest.

Bess09

dunstonh wrote: »

If they are all recommending immediate care annuities, then what is the problem? That is what you would expect.


You have a power of attorney to act in your mother's best interests. That is certainly not acting in her best interests.

Is it? Not one of the other 14 other residents in the care home are funded this way and most of them are self funding too.

I understand what my duties are as an attorney. How is investing some money ( a small part of the total sum available ) in premium bonds not acting in my mother's best interests?

Bess09

Thank you all for your replies, I really appreciate them. There's plenty for me to think about. I'll find an IFA or two and see what they recommend. It's difficult to know who to trust as I'm so new to all this. I've been looking after my mother's finances for years, since the dementia developed and she stopped bothering, but apart from investing in high rate deposit accounts and ISA's, I've never had to deal with really large sums before.
As I see it my duties are firstly; to provide a comfortable home and the best care I can for my mother for the rest of her life. And secondly, to maximise the rest so that when the time comes, I can fulfill the terms of her Will and her wishes. I'm really surprised that no other resident in the home where she lives is using a care home annuity to fund their costs and it made me wonder, being such a novice, if there was something not good about them that I am unaware of?

jem16

Bess09 wrote: »

Is it? Not one of the other 14 other residents in the care home are funded this way and most of them are self funding too.

Reading the literature that I linked to an immediate needs annuity does look very good as the income is paid gross with no loss for tax. Just because the other residents are not aware of this option does not make it bad.It really just highlights how few people have taken advice on the best way to proceed.

I understand what my duties are as an attorney. How is investing some money ( a small part of the total sum available ) in premium bonds not acting in my mother's best interests?

Basically because you are in effect gambling with your mother's money. It is making no interest and due to inflation losing value.

Bess09 wrote: »

I'm really surprised that no other resident in the home where she lives is using a care home annuity to fund their costs and it made me wonder, being such a novice, if there was something not good about them that I am unaware of?

There are advantages and disadvantages - main advantage is peace of mind and the knowledge that once it's set up it's guaranteed for life. main disadvantage is the cost and if the person were to die fairly soon afterwards.

http://www.timesonline.co.uk/tol/money/pensions/article3375740.ece

Biggles

Bess09 wrote: »

As I see it my duties are firstly; to provide a comfortable home and the best care I can for my mother for the rest of her life. And secondly, to maximise the rest so that when the time comes, I can fulfill the terms of her Will and her wishes.

No. Wrong. Just the first one. Your duties as an attorney are to act in your mother's interests. Not to maximise your inheritance. Sorry, that's just how it is.

To be honest, I had a job initially to convince my siblings that an immediate care needs annuity was the way to go. But after they realised that it was the only way to ensure that she wouldn't run out of money and potentially have to change to a less desirable care home if she became funded by the LA, they agreed. I suspect the fact that this was the best way to protect their inheritance had some bearing on it too. But I couldn't possibly comment.

In your case, though we all know the stats about care home residents, some will defy those stats and live for years. And you have probably less than ten years' funds in the bank, even if your remaining funds kept up with inflation, which they almost certainly won't.

And please forget about premium bonds. They are not a sensible investment (I was going to add 'in these circumstances', but really they're just not a sensible investment).

I'm really surprised that no other resident in the home where she lives is using a care home annuity to fund their costs and it made me wonder, being such a novice, if there was something not good about them that I am unaware of?

First: how would you know? Even if you had asked each of the self-funding ones in great detail, they probably wouldn't all have been able to tell you, for various reasons, demetia not the least of them. Second: I'm not surprised about the lack of knowledge, in fact you would probably have found that many of the other residents had their money in bank accounts paying 0.1%, ie not properly invested at all. Or even in premium bonds ;-)

What's the worst-case scenario with such an annuity? For the beneficiaries, it would be if she died very soon afterwards, as it would mean that she had paid out the premium and not gained full benefit. But, in my experience and from seeing case studies, I would reckon she would only have to live in care about three years before being 'ahead'. Any years she survived after that would mean that the premium had saved her money or, to look at it another way, that your inheritance would continue to increase.

But, as attorney, the peace of mind I achieved by buying the annuity was worth an absolute fortune!

jamesd

Perhaps worth looking at three possible approaches. For all I'll assume age 75 female with a 5% escalation annuity (to cover inflation) and ignore the dementia and any other health conditions, which will reduce the cost of the annuity significantly. That may cost £80,318 to deliver £12,000 income according to the sharingpensions web site. Start with £170,000 and a need to provide £16,000 a year of income.

1. Immediate care needs annuity only. Spend £107,000 to get £16,000 of income, leaving £63,000 to invest for other income needs or future use.

2. Mixed immediate care annuity and investments, the annuity sized so that the investments can expect never to run out of money, however long she lives. Spend £67,000 to buy 5% escalation annuity paying £10,000 now. That leaves £103,000 and at 6% income that can be expected to produce £6,100 a year in income. That's the £16,000 income target met and any growth can cover inflation, without any need to expect to reduce the capital further.

3. Investment only, using investment income and reducing the capital as required. Assume 6% investment income and that capital growth covers inflation. The £16,000 income could be delivered for 19 years, after which there would be no money left.

3 works best for a short life. It leaves more capital available than 2 for the first 11 years, then falls behind. It leaves more capital available than 1 for the first 15 years. It's hard to consider this a prudent choice for an attorney to make. While it's not likely it does happen that people with dementia live longer than 19 years.

Either 1 or 2 works for a long life. 2 is more flexible because it leaves more capital unused, allowing greater room for provision for possible higher income needs in the future. You adjust the annuity portion in case 2 to a higher proportion of the total if you want to be more cautious about possible investment performance.

Given the dementia reducing annuity cost, it's very likely that a mixture like case 2 will be the choice that provides the best mixture of assured income provision for any life length while leaving capital available for future needs.

If you and other family members are willing and able to commit to topping up the income starting immediately it's possible to use a lower annuity amount. Say there are three family members each providing £1,000 a year. That reduces the income target to £13,000. That means that investment-only option 3 could last for 28 years. The mixed option 2 would need only a £4,700 annuity income, leaving £138,500 in capital while still expecting to last forever. That's £35,000 more capital so each of the three would in effect be speculating on a life shorter than 12 years, being better off from inheritance during that time, assuming the inheritance is split to cover it and that other needs don't subsequently require you as her attorney to spend the money - not an insignificant risk! I'm assuming that she has expressed some interest in maximising the value of her estate.

Premium bonds aren't very suitable because of the low income they provide. A substantial portion of their investment return comes from the hope of a life-changing win, something that isn't really deliverable to a person with advanced dementia.

opinions4u

Bess09 wrote: »

I'm really surprised that no other resident in the home where she lives is using a care home annuity to fund their costs and it made me wonder, being such a novice, if there was something not good about them that I am unaware of?

The main reasons will be that a lot of families don't put a POA in place early enough and even if they do most attorneys aren't sensible enough to seek advice from an IFA.

How is investing some money ( a small part of the total sum available ) in premium bonds not acting in my mother's best interests?

1. The average return on PBs is 1.5% after tax. Even if she was a higher rate tax payer it would be difficult to justify actively pursuing such a low return.

2. If she won a £1m prize, how on earth would she enjoy the benefits of this? All you'd have done is create an IHT bill for her estate when she does eventually die. This is of no benefit to her - possibly of benefit to those who stand to inherit (but you are effectively gambling a small part of any inheritance that they could expect to receive for a tiny chance of winning an obscenely large sum, when you could actually obtain a higher net rate in a typical savings account).

3. Look at it another way - if you saved your own money in a high interest account, would you rush out and buy lottery tickets with the interest when it has been paid and claim that it's the right thing to do with your money?