Future care costs plan - sanity check?

[Gilgongo]

My father recently died. The income she is left with (state pension + widows increase, some rent) may amount to perhaps a third to a half of her current (pretty low) expenditure. But I will be doing a proper estimate of that in due course.

She is in relatively good health - she may be around for another 10 years or so. And she has some fairly substantial liquid assets. But the wild card is of course care costs over time.

There are some reasons to re-jig her current finances (she's paying almost 3% in fees for her investments with the dreaded St James Place, for one thing). I also haven't thought much about her rental property income and whether she should sell up and use that instead in some way (being a land lady at 83 is not a good idea). But there would be tax issue with that, I assume. Another potentially "interesting" thing is that my father has a NRBDT in his will, which may or may not be a consideration (I need to talk to his solicitors about that anyway).

But my question is that in order to have, as it were, a maximal war chest for future costs, might she re-jig her share portfolio (most of which are accumulation funds in an ISA) so that it starts producing income to make up her current shortfall? A couple of investment trusts, for example.

Her residual assets can then go into growth investments (eg a broad-based ETF of some kind) in the hope that it will grow over time. With some cash set aside for the odd discretionary expense, she can then start eating into the accumulation part when the care costs hit, and those might see her out.

Or is that all too over-complicated?

[Gilgongo]

Sorry - "she" refers to my mother who survives my father. That got lost in an edit.

[Gerry557]

I'm not too sure what the question is.

I think it's how best help mum arrange her finances assuming that she is likely to need care cost in the near future.

I suspect some IHT planning might also be a consideration.

[Gilgongo]

Yes. Funny how the act of trying to ask a question helps to show that the thinking isn't clear! Part of this question is also one for a professional, since as you say there's also IHT considerations in there too.

I think my main question was about whether over about a 10-year period, she should use dividends to make up the shortfall between her non-care costs and her current income. I'm leaning towards dividends, simply because that removes the need to do periodic selling.

Since I'll suggest simplifying her finances down from about 15 providers to more like four, this is something to decide before we start that process. But for now at least I'll assume the dividend income route.

G

[Dod101]

Has she a house paid for? What sort of yield is she getting on her rental property? I think it would be best to liquidate that anyway. Just too much hassle, and although you say she may be around for another 10 years, it could be that you (have you got a P of A in place?) have to find the funds to start paying for care next week (or may never need to)

If she needs to supplement her current income then clearly assets/investments need to be switched to provide that income and that ought at her age to come through reliable dividend income (at least as reliable as it can ever be) probably using the cash from the rental property. Keep it all as simple as you can.

Once her current income needs are sorted out, as simply as possible, you can then think about planning for where care costs might come. Switching her current income of course will be a help but it will probably need to supplemented.

Then think about IHT but you do not want to overwhelm yourself and just take it one step at a time.

O and get rid of St James Place!

What is the NRBDT for? These used to be widely used but now and for a long while they are not much use. I would look to wind it up if possible. Too much hassle and expense for little benefit. Solicitors love them of course.

Dod

[Gerry557]

I would also look into power of attorney for medical and financial affairs.

Mum might be fine now but things can change. The PoA need to be done while she can make that decision. It can take a while too.

So it sounds like she need more income from her assets so swapping into income producing versions sounds sensible.

The house might be the biggest problem. Assets count against you for care costs. I can't remember the figures but something like £16k+.

The house might have to be sold anyway at some point and if you can plan it best for your circumstances it better than being forced.

Sounds like you need some low cost providers and income paid out.

[DrFfybes]

Yes. Funny how the act of trying to ask a question helps to show that the thinking isn't clear! Part of this question is also one for a professional, since as you say there's also IHT considerations in there too.

I think my main question was about whether over about a 10-year period, she should use dividends to make up the shortfall between her non-care costs and her current income. I'm leaning towards dividends, simply because that removes the need to do periodic selling.

The first thing I'm hearing is you have IHT concerns, which suggests a total estate of circa £1m. In which case care costs are incredibly unlikely to be an issue. With the residential allowance she can have £500k IHT exemptions, and very few people ever get anywhere close to spending that in care costs. And it really doesn't matter if the costs come from income or asset sales, but best to use unsheltered assets first.

Personally I would start with your father's NRBDT, what are the chances the will was written before the transferrable NRB came into effect? If so then her asset base would increase, as would her IHT allowances, if the beneficiaries agree to a Deed of Variation on the will.

Secondly, as you say, rationalise her portfolio and get PoA. MrsF's parents had 50+ accounts with about 20 different providers when she took over under PoA, took us months of Saturday mornings in various banks and BS, but made things a lot easier in the long run. You don't need PoA to start the rationalisation, your mum can do quite a lot of that anyway.

As for the BTL - this is where things can become complicated. Any action you might eventually take under PoA must be in the best interests of your mother. This does not necessarily mean that they comply with what she would have wanted! eg iusing PoA to invest her money in Octopus IHT exempt funds might give a lower return, so whilst she might want to avoid IHT, the action is in your interest, not hers. Similarly hanging on to a BTL to avoid CGT on death is in your interest. So I suggest you address the BTL whilst she can still make that decision.

Vanguard do (or did) an automatic periodic sellling account - you chuck in (say) £200k, choose your investments, choose your income level, and they do the rest. It just pops into the bank every month. There are other providers that do this, but not as cheaply. I find it great as mentally that cash has gone, I just have another couple of lines on my tax spreadsheet. This could be an alternative to the BTL using the same capital.

But my question is that in order to have, as it were, a maximal war chest for future costs, might she re-jig her share portfolio (most of which are accumulation funds in an ISA) so that it starts producing income to make up her current shortfall? A couple of investment trusts, for example.

Her residual assets can then go into growth investments (eg a broad-based ETF of some kind) in the hope that it will grow over time. With some cash set aside for the odd discretionary expense, she can then start eating into the accumulation part when the care costs hit, and those might see her out.

Or is that all too over-complicated?

First rule - keep it simple Actually, first rule is "It is her money", but you know what I mean. Minimise the number of providers, keep an eye on fees and balances, and keep good records.

Paul

[Dod101]

I would also look into power of attorney for medical and financial affairs.

Mum might be fine now but things can change. The PoA need to be done while she can make that decision. It can take a while too.

So it sounds like she need more income from her assets so swapping into income producing versions sounds sensible.

The house might be the biggest problem. Assets count against you for care costs. I can't remember the figures but something like £16k+.

The house might have to be sold anyway at some point and if you can plan it best for your circumstances it better than being forced.

Sounds like you need some low cost providers and income paid out.

Yes I mentioned Power of Attorney in m post.

Houses have become an interesting problem because on the one hand you may need to raise cash from a sale but on the other they can provide a good protection against IHT if the plan is to pass on the house to a direct descendant on death (as Dr F has said in his recent post)

Dod

[Gilgongo]

Thanks! Some good points and clarifications from all.

The estate is over £1M, so perhaps my concerns about care costs arn't in fact an issue. I was spooked by possible annual costs that would maybe treble her current outgoings. But ever then there's headroom I think.

I have POA for both her property & finance, as well as health & welfare (the LPAs for those were registered last year). And as DrFfybes points out, I do need to make sure I'm acting in her interests and not just putting my IHT concerns first! Her goal is to live a good life while she can

I get the impression that it's sensible to make up current (and some future?) income shortfall from dividends (athough thanks DrFfybes for the tip about that Vanguard auto-selling account - will look into that). Psycologically, dividends may be easier for her to accept than selling.

As per Dod's thoughts though, it seems sensible to sell the BTL on the gounds of management overhead. I'll ask her what she wants to do about it. But I think she may not actually need the proceeds to generate the required income - so yes, houses are complicated!

The NRBDT is I think a legacy measure (will was drawn up in 2004). But I'm going to take some legal advice on that to make sure we both undertand it before taking any decision on it. My sister and my mother are also trustees.

O and get rid of St James Place!

A quick calculation shows she's paying a weighted average of 2.8% on the funds with them. Oof! And they are just one provider out of about 17 I've found accross various funds, ISAs, and cash accounts.

[Gilgongo]

Just a footnote to this. I asked Vanguard whether I might be able to manage a LifeStrategy account on my mother's behalf, and they said:

"Provided your Mum has the capacity to open and manage the account via our online platform herself, then she is more than welcome to apply for an account herself. Then, should you wish to manage the account in the future as a Lasting Power of Attorney, then you would also need to open an account with us yourself and then provide us with the relevant Lasting Power of Attorney documentation which we will review and once verified, we would grant you access to manage her account accordingly."

(I like that they dropped to the familiar "Mum" from my use of "Mother" used in my message to them.)

I think I may therefore do that, perhaps with a LifeStrategy 40 account, if that allows automated drawdown and transfer to her account.

[hiriskpaul]

In case it has not occurred to you, the capital gain on your father's share of the BTL will have been wiped out, so the CGT bill will consequently be smaller.

[Hariseldon58]

Personally I’d focus on financing your mothers lifetime expenses.

Then select investments that meet that requirement, the IHT is not really her problem but that of her beneficiaries….

You don’t need an equity portfolio that churns out sufficient dividends, though that might work but a bond portfolio that provides say 5 years income, of appropriate durations (A bond ladder perhaps )

With a five year plus outlook on the rest of the investments then an equity portfolio may well be ideal, there is no need to focus on dividends as the income is provided for, as opportunities arise buy more bonds to maintain the bond portfolio to cover the five years income. The residual portfolio then becomes available for the beneficiaries at the culmination…