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Drawing down cash - care home

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rollo19
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Drawing down cash - care home

#449404

Postby rollo19 » October 11th, 2021, 9:09 pm

Hi all, been a while since I've been here... I used to frequent the HYP board when it was the Motley Fool. That was quite a while ago - glad to see that the community is still going strong albeit in a different format.

I'd like to get some advice. My grandmother is currently in a nursing home (dementia unit) and this is funded by the sale of her house. There's about £0.5million in cash which is being used at the rate of £50k per year.

There must be no risk to capital so it simply restricted to cash. In the unlikely (happy) event that she does get to another ten years or more, her place can and will be funded by family.

My initial thoughts are to basically keep £85k in the top instant access (to keep £50k for this year plus a float to deal with any emergencies), £50k in the top 12 month deposit, with the balance in the top 24 month deposit accounts. Max £85k in each institute to protect in the event of failure,

Using the best buys on moneysavingexpert and moneyexpert - sorry, I would have posted links, but I'm not allowed as a newbie.

I get something like:

£85k in Marcus instant access
£50k in Zopa (1 year fixed)
£35k in Zopa (2 year fixed)
£85k in Isbank (2 year fixed)
£85k in Masthaven (2 year fixed)
£85k in Al Rayan Bank (2 year fixed)
£85k in Kent Reliance (2 year fixed)

I'm not inclined to go above 2 years as the risk to inflation seems to the upside, and I suspect deposit rates would follow inflation if that started to go up.

I'd like any thoughts as to:

a) Whether this broadly seems a sensible approach (apart from solely keeping it in cash - that's been decided against my better judgement!)
b) Any other bright (risk-free) ideas to maximise the return. I did wonder about an annuity (she's 93), but I suspect the numbers wouldn't work
c) Investment profile - do you agree that a max two year time frame for cash deposits seems sensible? The slightly higher rates on > 2 years don't really seem to reflect the risk of inflation
d) I'm also not sure how the proposed changes to care home costs will work. I think it unlikely her local authority will suddenly stump up the cash for her to stay in a lovely care home that looks after her very well, even if she will paid a lot more than £86k in care home costs. (the £50k net cash cost is after her pension and other benefits that she is entitled to). So she will stay there irrespective of whether she could move to another local authority funded, cheaper option. Unless there is a funding amount paid by the local authority that could be "topped up"?
e) any other comments very welcome.

Thank you in advance.

mc2fool
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Re: Drawing down cash - care home

#449407

Postby mc2fool » October 11th, 2021, 9:24 pm

rollo19 wrote:b) Any other bright (risk-free) ideas to maximise the return.

Premium Bonds. Get the max of £50K of them and the return will average 0.8-1.0%pa, pretty much all made up of £25 prizes. There's a (very) long thread here of real life experience that supports that. Of course, YMMV, and there's always the possibility of less or of a big win...

Instant access, tax free, and as safe as you can get.

https://www.moneysavingexpert.com/savings/premium-bonds-calculator/

Alaric
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Re: Drawing down cash - care home

#449411

Postby Alaric » October 11th, 2021, 9:39 pm

rollo19 wrote: I did wonder about an annuity (she's 93), but I suspect the numbers wouldn't work


Have you checked? Annuities can give a higher return than their underlying investments because the losses of capital amongst those who don't live a long time are in effect shared out amongst the survivors. Underlying investments for an annuity fund would be Gilts, Loans and Corporate Bonds.

I believe there's a type of annuity called "immediate needs" which had some favourable tax treatment.

mutantpoodle
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Re: Drawing down cash - care home

#449456

Postby mutantpoodle » October 12th, 2021, 8:33 am

I would agree premium bonds would be a safe place
BUT BUT

be very very careful and read the small print...are you able with NSand I to buy for your mum?
I mean I am not able to buy for my daughter (age 30) she must buy for herself with money from her card/account...so NSand I tell me

also remember that dealing with NSand I is a nightmare...contact on phone is almost impossible and every 'agent' you talk with will tell you different info.

when you eventually make formal complaint they will send you £50 apology!

but...it is a safe place....and you might win!!

DrFfybes
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Re: Drawing down cash - care home

#449526

Postby DrFfybes » October 12th, 2021, 1:41 pm

You say there MUST be no risk to capital - is this her request?

You don't give the interest rates but I expect they average about 1%?

Have you considered bond funds that have rather low volatility than equities, but with better yield than cash?

A quick search on HL shows FTF WA Retirement Income Bond with a monhtly income of 3.25% and fairly staid price performance, but there are lots out there that other fools will be familiar with.

Paul

rollo19
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Re: Drawing down cash - care home

#449631

Postby rollo19 » October 12th, 2021, 7:37 pm

Alaric wrote:
rollo19 wrote: I did wonder about an annuity (she's 93), but I suspect the numbers wouldn't work


Have you checked? Annuities can give a higher return than their underlying investments because the losses of capital amongst those who don't live a long time are in effect shared out amongst the survivors. Underlying investments for an annuity fund would be Gilts, Loans and Corporate Bonds.

I believe there's a type of annuity called "immediate needs" which had some favourable tax treatment.


Thanks - that's a good call. I will investigate further.

rollo19
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Re: Drawing down cash - care home

#449640

Postby rollo19 » October 12th, 2021, 8:03 pm

DrFfybes wrote:You say there MUST be no risk to capital - is this her request?

You don't give the interest rates but I expect they average about 1%?

Have you considered bond funds that have rather low volatility than equities, but with better yield than cash?

A quick search on HL shows FTF WA Retirement Income Bond with a monhtly income of 3.25% and fairly staid price performance, but there are lots out there that other fools will be familiar with.

Paul


Hi - many thanks. Some of them are a bit higher, around 1.5% for the 2 years, but basically yes, it would generate around or just over 1%.

She's unfortunately no longer able to make those kind of decisions and with a decent pot that realistically should be more than sufficient, there is no need (or desire amongst those dealing with her affairs) to put any capital at risk. If it was down to me alone, I would be thinking along the lines of conservative bond investments that you mention - but it's not, so I'm not!

rollo19
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Re: Drawing down cash - care home

#449645

Postby rollo19 » October 12th, 2021, 8:09 pm

mc2fool wrote:
rollo19 wrote:b) Any other bright (risk-free) ideas to maximise the return.

Premium Bonds. Get the max of £50K of them and the return will average 0.8-1.0%pa, pretty much all made up of £25 prizes. There's a (very) long thread here of real life experience that supports that. Of course, YMMV, and there's always the possibility of less or of a big win...

Instant access, tax free, and as safe as you can get.

[still can't post links, even if I'm quoting someone else's post so have had to edit posts out!


Thank you - that makes a lot of sense.

(and thanks mutantpoodle, that's useful to know. She has a financial Power of Attorney in place so we should be ok).

1nvest
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Re: Drawing down cash - care home

#449791

Postby 1nvest » October 13th, 2021, 11:54 am

rollo19 wrote:There must be no risk to capital so it simply restricted to cash.
.
.
I'm not inclined to go above 2 years as the risk to inflation seems to the upside, and I suspect deposit rates would follow inflation if that started to go up.

Inflation is just another form of taxation. States can print money that devalues all other notes in circulation. Historically there have been cases where cash deposits haven't offset inflation and been eroded down by half or more, more so after taxation of interest.

A relatively safe alternative was to hold a third each stocks/gold/gilts.

Gilts are fully protected no matter how much is 'deposited' i.e. the state can print money or increases taxes rather than being seen to default. Roll relatively short dated gilts, a 3 or 5 year ladder for instance, and maturing bonds will roll into higher yields when interest rates rise, but that may still lag inflation, stocks/gold in addition to that will tend to narrow down/reverse the otherwise decline of gilts/cash-deposits alone. If stocks have a bad decade, so gold tends to do well and vice versa.

If inflation does rage, and interest rates remain low (as historically the state have directed at times such as presently evident) care home fees would also likely soar. 8% inflation, 10% care home fees inflation, 3% cash interest rate type situation maybe for a handful of years. Broader diversity such as a third each in gilts, gold, stocks ... is more inclined to sustain longer/better IMO.

eventide
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Re: Drawing down cash - care home

#449837

Postby eventide » October 13th, 2021, 2:49 pm

DrFfybes wrote:
Have you considered bond funds that have rather low volatility than equities, but with better yield than cash?

A quick search on HL shows FTF WA Retirement Income Bond with a monhtly income of 3.25% and fairly staid price performance, but there are lots out there that other fools will be familiar with.

Paul


Just looking at this fund for 30 seconds I see that while it may have a 3+% running yield, it is 4 duration with a yield to worst of 1.75%. So capital is being depleted at 1.5-2% per annum to create the illusion of yield.

The pickup to a ladder of cash deposits, NS&I etc proposed by OP and others is still measurable, maybe .5-1% pickup, but headline rate is somewhat misleading

1nvest
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Re: Drawing down cash - care home

#450911

Postby 1nvest » October 18th, 2021, 1:18 am

1nvest wrote:
rollo19 wrote:There must be no risk to capital so it simply restricted to cash.
.
.
I'm not inclined to go above 2 years as the risk to inflation seems to the upside, and I suspect deposit rates would follow inflation if that started to go up.

Inflation is just another form of taxation. States can print money that devalues all other notes in circulation. Historically there have been cases where cash deposits haven't offset inflation and been eroded down by half or more, more so after taxation of interest.

A relatively safe alternative was to hold a third each stocks/gold/gilts.

Gilts are fully protected no matter how much is 'deposited' i.e. the state can print money or increases taxes rather than being seen to default. Roll relatively short dated gilts, a 3 or 5 year ladder for instance, and maturing bonds will roll into higher yields when interest rates rise, but that may still lag inflation, stocks/gold in addition to that will tend to narrow down/reverse the otherwise decline of gilts/cash-deposits alone. If stocks have a bad decade, so gold tends to do well and vice versa.

If inflation does rage, and interest rates remain low (as historically the state have directed at times such as presently evident) care home fees would also likely soar. 8% inflation, 10% care home fees inflation, 3% cash interest rate type situation maybe for a handful of years. Broader diversity such as a third each in gilts, gold, stocks ... is more inclined to sustain longer/better IMO.

You can use the likes of this that whilst US based might be used to model different start dates to see how long drawing £4200/month, around £50K/year of inflation uplifted withdrawals from £500,000 initial lasted/progressed historically. Or alternatively this that has data going back further (to 1972).

Might help provide a feel for a reasonable prospect of the money outliving your grandmother, assuming care home costs don't outpace inflation too heavily.

The Conservative promise to 'fix social care' was just a whitewash IMO. No real new money is headed that way anytime soon, likely will fall far short even in a couple of years when some does, and excludes accommodation/food costs, so likely IMO to just see Councils and Care Homes jig the figures such that many will still in effect be fully self funding their care.

My own mother is near 90. Was in a dementia care home for a while following a fall and hip op back in January (and contracting Covid whilst in hospital), but Covid restrictions prevented me from taking her out (required 14 days of pretty much bedroom isolation upon return and no visits, whereas I wanted to be taking her out daily and returning her in the evening). So she's back in her own home with me (only child/son, fortunately recently retired and widowed) being her carer. Her symptoms are relatively mild so far, vascular dementia so likely to worsen over time, but where she still is pretty much normal other than short term memory issues. We've earmarked a similar amount as you for if/when no other option than a care placement might become required. Her home is north of £1M in addition to the ear marked amount, so overall pretty safe on the financial front. She's been prescribed a drug called Memantine that potentially might slow down deterioration.

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Re: Drawing down cash - care home

#450923

Postby Dod101 » October 18th, 2021, 7:46 am

Returning to the Op's case. The mother is 93 so her life expectancy is not that great, 4/5 years? She could of course live to be a centenarian. Keep it simple as far as investments go. Do not put capital at risk. I think the very first plan is as good as any but nothing wrong with £50,000 in premium bonds. This is not a time to be looking at bond funds of any sort especially given the outlook for inflation.

Dod

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Re: Drawing down cash - care home

#450989

Postby 1nvest » October 18th, 2021, 12:46 pm

This is some analysis trawled using portfoliovisualizer (US). Here I've considered three cases applied to £500,000 initial capital i.e. from the sale of a home, to fund £50,000/year inflation uplifted expenditure (i.e. care home fees after pensions of perhaps £20K/year and £70,000 care home costs).

The first is for the £500K deposited into straight cash deposits, TBills.

Another is for constant 75/25 stocks and 10 year Treasury. Broadly stocks are leveraged, of the order $30T stock market cap and $9T corporate bonds cap. Leverage broadly achieves the same reward but scales up volatility along the way, so many opt to de-leverage. Invest £30 in stocks, £9 in bonds in effect applies that deleveraging, so 77/23 proportions, that is more commonly rounded to 75/25 stock/bonds.

Bonds however can be less tax efficient than gold, so others might prefer to hold that instead of bonds. Relative valuations also can have a bearing on subsequent actual gains, so applying a stochastic based method to determine the initial start date % stock and % gold is reasonable. The formula is the standard ( current - low ) / ( high - low ) stochastic approach, applied using the Dow/Gold ratio at the time. Where high and low were set to 50 and 1 respectively. For instance at the start of 1972 the Dow/Gold ratio was 20.4, so ( 20.4 - 1 ) / ( 50 - 1 ) = 0.4 or 40% gold (and hence 60% stock) being indicated as being appropriate.

The third (titled 'stochastic') uses that relative valuation method applied at the start date.

In each case no rebalancing was applied, one started just left as-is thereafter, where each years the inflation adjusted £50K was drawn.



The results show the year end of where the money was exhausted for each start year, or a square brackets figure for how much inflation adjusted capital remained (in K thousands) of the original £500K start date amount as at the end date of end of September 2021.

Yes that's US data, US inflation ...etc. but IMO in the absence of a UK equivalent it provides a reasonable feel for the similarities/differences. Again the figures are gross so taxation factors should also be considered.

The conclusion I draw is that the stochastic based stock/gold choice was a reasonable choice. Bettered cash in every case. However equally given multiple choices you might 50/50 both rather than plumb for one or the other alone, maybe some each of cash/stock/gold.

Take January 2017 as a start date for instance. With cash you'd be down to £275K of the £500K remaining as of the end of September 2021, whilst both stock/bond and stock/gold had more inflation adjusted capital available than at the 2017 start date. For someone with no heirs that might not matter, for others where its grandmother and caring heirs are present then the individual might prefer that their heirs were likely being left better placed. "No worries Jan 2017 care home grandma, as of recent your care home costs have cost us nothing, in fact after factoring in inflation the £500K from the sale of your home has £70K more in the account ... Oh bless you my dear, I was rather concerned about how much it was costing you and just wanted to die so as not to burden you, but at that rate I'm setting my eyes on getting to 100+".


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