Reinvesting But With Severe Penalties

Fazzer

I have an interesting problem and wonder if anyone in these forums has managed to either overcome or avoid similar matters?

I am an attorney for some relatives (married) who are too elderly to deal with their own affairs.

They have substantial savings mostly in sole names.

We are setting up a Trust mechanism to mitigate against an IHT liability and also provide an income for them to be cared for using their capital

In order to place their funds into a trust their existing investments (ISAs and NS&I certificates) will need to be cashed attracting some pretty severe early redemption fees.

Does anyone know ways to avoid this or will it be a necessary sacrifice?

Also we need at least 4-5% net income. The best return I can find is 2.5% and that would involve all eggs in the same basket.

I am VERY worried we have not seen all the blood let from the banks yet and seek a 'safe haven' if such a thing exists anymore

quotememiserable

Why not keep those investments out of the trust until the early redemption fees are past?
You can't do better than 2.5% if you want a risk-free cash vehicle. There are alternatives though. The top 50 dividend yield shares in the footsie average at 4%. The capital value will fluctuate but that doesn't have to worry you if you hold for the long term to get the dividends. You could also use funding circle or other peer to peer lending, I'm getting 6.5% after charges and debt there at the moment. Can you consider property? The right buy to lets can yield 10% although of course you're on the hook for repairs etc. I use a lettings agent so there's very little hassle to this, though I realise its not for everyone.

Fazzer

Thanks for your reply. I would like to wait for the bonds etc to mature but regrettably we need to rearrange the investments to produce monthly income and double quick time due to the age and care needed for both parties. I was hoping for some loophole that may exist as it is a necessity not a whim. I suppose bottom line the Building societies don't care what the motivation is and the penalties were fixed in stone.

I am keen about the B2L schemes and have spoken to a local agent. Although I accept there is no guarantee and a certain amount of effort required I have estimated a 4-5% return. I blow hot and cold on the subject depending who I speak to. I would also use a lettings agent but may be do some of the maintenance (between tenants).

It is good to hear it works for you.

So long as the income is monthly and the capital is safe in this rather strange world we now live in I am open to any ideas.

Thank you for your reply

bowlhead99

As far as I know, NS&I certs and ISAs can't be held by someone as nominee for another party (ie another individual, trust or company) as they are restricted products with limits on max investment etc. So a person who wants to give them away for IHT planning purposes cannot simultaneously still maintain legal ownership of them and have the relationship with NSI or the isa provider continue uninterrupted.

It's a trade-off between holding them longer to get more return (i.e. to maturity or at least to some useful income receipt hurdle or penalty date), or getting the clock running sooner to take them outside the scope of IHT partially or altogether. The potential IHT is on the interest and principal so presumably rather larger than the interest forgone.

What, if anything, did the solicitor or financial planner drawing up your trust documentation suggest? If you're paying someone for professional advice, make then earn their keep.

When you say 4-5% income is required, hopefully you just mean 4-5% cash withdrawn to pay care fees/ living costs is required? Given bond and cash interest rates these days you can't possibly take an income that size and completely preserve capital without investment risk. And if the capital were to need to be maintained in real terms so that the 4% buys as much care fees next year as it does this year, it's an even bigger ask.

Realistically the trust has a choice of:

i)attempting to preserve the real value of the capital over the long long term as best it can, using traditional investment fund products or structured products which may ultimately have a negative result for the surviving beneficiaries, or

ii) simply going cash with a weak return and eroding some of the capital by taking it out as spending money while eroding the rest of the capital through reduced purchasing power from ongoing inflation.

Whichever method selected, the trustees would seem not be carrying out their fiduciary duties if they just dump the cash in one uninsured bank deposit scheme to try and eke out another few basis points of interest. Maybe you could consider having an investment strategy or permitted limits written in the trust deed so nobody can complain later. But presumably the settlors are unable to express their wishes properly on their own, and if you invest in something so "safe" that insufficient income is generated and the money all gets used up ,it will still be your fault ...

gadgetmind

bowlhead99 wrote: »

As far as I know, NS&I certs and ISAs can't be held by someone as nominee for another party (ie another individual, trust or company) as they are restricted products with limits on max investment etc

With NS&I you can hold in trust for someone else. My wife and myself each own bonds in our own names, and hold others in trust to each other, which we did to get around the investment limits.

Fazzer

Thanks gadgetmind

Your comments are much appreciated.

I have estimated a return of 4-5% on the capital will allow us to pretty much preserve the original sum invested but is a really big ask.

The care of both parties will be at their own home even if 24/7 which is dramatically cheaper (or can be) than sticking them in separate care homes to fester and pay them £120k per year for the privilege, which would be the case given their individual circumstances. It would be wrong to split them up anyway.

It is a difficult situation but I guess a sacrifice will have to be made with the early withdrawal penalties.

Glen_Clark

Fazzer wrote: »

We are setting up a Trust mechanism to mitigate against an IHT liability

quotememiserable wrote: »

Why not keep those investments out of the trust until the early redemption fees are past?

Did you read the question before replying quotememiserable?

Glen_Clark

gadgetmind wrote: »

With NS&I you can hold in trust for someone else. My wife and myself each own bonds in our own names, and hold others in trust to each other, which we did to get around the investment limits.

I don't follow
If the limits are say £15k for an index linked bond, can you have say £15k each, and £15k for each other making £60k total instead of £30k total?

Glen_Clark

Fazzer wrote: »

I guess a sacrifice will have to be made with the early withdrawal penalties.

I think so too.
If you went to the building society. National Savings and said you needed the money early to pay for essentials you would have to pay early redemption charges. I can't see them being more sympathetic if you said you needed the money early to avoid Inheritance Tax

gadgetmind

Glen_Clark wrote: »

If the limits are say £15k for an index linked bond, can you have say £15k each, and £15k for each other making £60k total instead of £30k total?

Yes, that's exactly what we did. The forms are even on the NS&I web site or were when the bonds were available.

Glen_Clark

gadgetmind wrote: »

Yes, that's exactly what we did. The forms are even on the NS&I web site or were when the bonds were available.

:eek:aaaarrrrrrrrrrrrrgggggggghhhhhhhhh :mad:
How did I miss that one