Investment Plan

Brock_and_Roll

Dear Fools,

I am looking to invest my mother's money for her retirement. We are talking circa £500k+.

I am a fairly experienced investor and so most of the money will go into fixed term deposits, stocks and perhaps corporate bonds. Will look to have a balanced portfolio with a lowish risk profile.

However the question to the forum is are their any tricks I might be missing to maximise my mother's after-tax rate of return (without increasing risk too much). If there anything else worth look at in addition to maximising the ISA allowance?

Thanks

RickyC_IFSWP

Hi Brock_and_Roll

I assume the £500k+ is not in any tax wrappers at present? It would be good to know your mother's income tax position now and in future.

Brock_and_Roll

Thanks for that - no the money is not in any tax wrappers. It is primarily coming from the sale of her business which she has run for 25+ years with my late father.

Your_Hero

Hello,

It may be worthwhile clarifying a few points. When you say you are looking to invest the money for your mother's retirement, do you mean she requires income now or in the future? If so how much does she need? Any other sources of income?

Also is there any CGT due on the sale of the business?

The answers to these questions would help determine how much should be invested for income purposes and how much for growth to maintain an increasing capital base for the future.

In addition to this, with this sum of money she may even need to be thinking about IHT planning and could kill two birds with one stone, ie. she could satisfy her income needs whilst protecting her estate from IHT.

Brock_and_Roll

Your_Hero wrote: »

Hello,

It may be worthwhile clarifying a few points. When you say you are looking to invest the money for your mother's retirement, do you mean she requires income now or in the future? If so how much does she need? Any other sources of income?

Also is there any CGT due on the sale of the business?

The answers to these questions would help determine how much should be invested for income purposes and how much for growth to maintain an increasing capital base for the future.

In addition to this, with this sum of money she may even need to be thinking about IHT planning and could kill two birds with one stone, ie. she could satisfy her income needs whilst protecting her estate from IHT.

Thanks - some good points to think of.

Firstly, I do not believe there will be any CGT due on the sale of the business due to indexation and there not being much of a capital gain in itself!

She does have a state pension circa £140pw but other than that no other sources of income. She will use a lump of her savings to buy a small house for herself at some point in the next year. After that point she will live on the income from her pension and savings.

Inheritance is very much on my mother's mind and she has specifically told me that she does not want an annuity. She lives pretty frugally despite my encouragement to enjoy herself a bit. Obviously who knows what might play out in terms of long term care etc, but she is keen to pass on as much as she can.

Many Thanks

RickyC_IFSWP

Your Hero asked some great questions.

Since there is no CGT on the sale of the business, then this means that you can focus on what Your Hero was eluding to in his last paragraph, i.e. IHT planning using trust arrangements which as you mention, is something important for your mother. The benefits include: investing the money, your mother could have access to capital and/or income for her retirement (depending on the trust arrangements), mitigating future IHT liabilities (more money for the family), and also pass on wealth to the right people in a timely manner as it would not be part of her estate therefore bypasses probate.

Saying that, ISAs can now be IHT-free too but must be invested in AIM, so ensure that it fits your mother's attitude to risk. (google for more info as I can't post links yet)

Your_Hero

Brock_and_Roll wrote: »

Thanks - some good points to think of.

Firstly, I do not believe there will be any CGT due on the sale of the business due to indexation and there not being much of a capital gain in itself!

She does have a state pension circa £140pw but other than that no other sources of income. She will use a lump of her savings to buy a small house for herself at some point in the next year. After that point she will live on the income from her pension and savings.

Inheritance is very much on my mother's mind and she has specifically told me that she does not want an annuity. She lives pretty frugally despite my encouragement to enjoy herself a bit. Obviously who knows what might play out in terms of long term care etc, but she is keen to pass on as much as she can.

Many Thanks

Ricky has summed up a few options there for you.

She does not need to buy an annuity. There are lots of plans to help produce income and an annuity is one of them, albeit a guaranteed income for life.

First, you need to establish if there is indeed any IHT due on the estate upon your mother's unfortunate death. You mentioned that your father had passed away, did he leave absolutely everything to your mother (assuming married) or was anything gifted to someone else (such as you or other children/3rd parties)? Did he make any large gifts (over £3k) 14 years (yes 14, not just 7) before his death?

If it's a simple (or simpler) case like most couples and everything was passed to your mother, then add up everything she owns; property, car, cash savings, any life insurance plans not in trust, outright gifts in the last 7 years, etc. and if it is more than £650k then the excess (revalued at the point of death) will be taxed at 40%.

If there is a large IHT bill, of course you would be the ones paying it. You could solve the IHT issue and also provide your mother with an income via the use of Trusts. Alternatively, she could even simply look at a whole of life insurance plan to insure against the IHT liability.

There are many types of trusts/solutions and it is a complex area that you should not do on your own. Without knowing the full details on your situation and your mother's objectives it is impossible to suggest which routes would be most suitable.

I would urge you to seek financial advice from someone who is qualified and independent. Best to go onto the 'unbiased' website and look for a local one (speak to at least 2).

If you have any other queries, just ask here or pm. Hope this gives you some food for thought

grey_gym_sock

lots of useful points made ... just to pick up on 2 small things:

Your_Hero wrote: »

Did he make any large gifts (over £3k) 14 years (yes 14, not just 7) before his death?

why 14 years?

Alternatively, she could even simply look at a whole of life insurance plan to insure against the IHT liability.

i'd suggest skipping that specific idea. it doesn't actually avoid paying IHT. it just means that you pay the insurer premiums, which could come to more or less than the IHT bill, and then they pay out an amount which covers the IHT.

if your mother is sure that she has more capital than she will need, then a very simple approach is to give some away now, and then live for at least 7 years.

RickyC_IFSWP

grey_gym_sock wrote: »

lots of useful points made ... just to pick up on 2 small things:



why 14 years?



i'd suggest skipping that specific idea. it doesn't actually avoid paying IHT. it just means that you pay the insurer premiums, which could come to more or less than the IHT bill, and then they pay out an amount which covers the IHT.

if your mother is sure that she has more capital than she will need, then a very simple approach is to give some away now, and then live for at least 7 years.

There is a little known "14 year rule" which could impact on failed Potentially Exempt Transfers (PETs) and result in further IHT liabilities.

Commonly if you add up the insurance premiums paid vs the sum assured, it would take 40 or 50 years' worth of premiums until it exceeds the sum assured - granted that it does depend on how old the life assured is. However, I would not dismiss whole of life policies for IHT planning, particularly if assets cannot be gifted in time or cannot leave an estate.

grey_gym_sock

RickyC_IFSWP wrote: »

There is a little known "14 year rule" which could impact on failed Potentially Exempt Transfers (PETs) and result in further IHT liabilities.

hmm, you mean like this: http://www.wealthprotectionreport.co.uk/public/123.cfm

i didn't know about that ... however, it only seems to come into play if you make lifetime gifts to trusts.

Commonly if you add up the insurance premiums paid vs the sum assured, it would take 40 or 50 years' worth of premiums until it exceeds the sum assured - granted that it does depend on how old the life assured is. However, I would not dismiss whole of life policies for IHT planning, particularly if assets cannot be gifted in time or cannot leave an estate.

well, you pay the premiums before you get the payout. if you pay the premiums for decades, it's effectively a regular investment scheme. and for that to be accounted a success, you would need to get back substantially more than you paid in.

why not instead pay into a real regular investment scheme for your beneficiaries? they would then both get the returns available from proper investing, and have a choice about when to cash it in, instead of waiting for you to die.

it is not as if you even prevent the IHT from being paid. all you do is (pay to) generate a payout that matches the IHT liability. but why pay to generate a cash at that precise time? your beneficiaries are getting richer at that point anyway, since IHT is less than 100%.

or better, if you can permanently do without the part of your income that will be used to pay the premiums/contributions, then give away the part of your capital which generates that income. and then live for at least another 7 years. which is likely to work if you are in early retirement, with a decent life expectancy.

also, the latter approach does actually avoid paying the IHT, if that is the aim.

RickyC_IFSWP

grey_gym_sock wrote: »

hmm, you mean like this: http://www.wealthprotectionreport.co.uk/public/123.cfm

i didn't know about that ... however, it only seems to come into play if you make lifetime gifts to trusts.

well, you pay the premiums before you get the payout. if you pay the premiums for decades, it's effectively a regular investment scheme. and for that to be accounted a success, you would need to get back substantially more than you paid in.

why not instead pay into a real regular investment scheme for your beneficiaries? they would then both get the returns available from proper investing, and have a choice about when to cash it in, instead of waiting for you to die.

it is not as if you even prevent the IHT from being paid. all you do is (pay to) generate a payout that matches the IHT liability. but why pay to generate a cash at that precise time? your beneficiaries are getting richer at that point anyway, since IHT is less than 100%.

or better, if you can permanently do without the part of your income that will be used to pay the premiums/contributions, then give away the part of your capital which generates that income. and then live for at least another 7 years. which is likely to work if you are in early retirement, with a decent life expectancy.

also, the latter approach does actually avoid paying the IHT, if that is the aim.

Yes true. The advantage life insurance will have over regular savings is that it takes time for regular savings to effectively break even with it, and no one can predict when one will die. Second, once the money is gifted to beneficiaries, it is theirs to do with as they please (and can also be lost through bankruptcy or divorce), whereas life insurance policy in trust requires trustees to come to a unanimous decision and is outside all estates.

Obviously not everyone is a fan of insurance, but it works and is generally my preferred approach vs regular savings.

As mentioned, typically life insurance will be used if the person does not wish to or cannot give away capital.. hence it's almost a last effort to mitigate the IHT liability for beneficiaries. It's certainly rarely the first option.