Funding the twilight years
My parents are in their eighties and now need 24-hour care. Fees for the residential home are about Pounds 2,500 a month. They have pensions of Pounds 650 a month plus state pensions and attendance benefit. They have savings of Pounds 70,000 and a house worth about Pounds 75,000. Where can I obtain advice about the best way to invest their money to help pay for the residential home?
Before considering investment you need to calculate accurately the amount of income you need to make up the shortfall between your parents' existing income and the residential home fees.Based on the information you have provided I estimate that your parents' position in the current tax year is as shown in the box below.
In addition, your parents are entitled to the attendance allowance which is payable at a higher and lower rate of Pounds 45.70 per week and Pounds 30.55 per week, respectively. I am not sure how much your parents receive so I have assumed, for illustration, that they receive the lower rate. The attendance allowance is not taxable.
Taking this into account, your parents' total monthly income is about Pounds 1,077, leaving a monthly shortfall for the residential home of Pounds 1, 423.
It is now important to ask what yield this shortfall represents on the capital available for investment. Your parents' savings are Pounds 70,000, so this capital would have to yield an investment return of over 24 per cent per annum net tax to meet the shortfall. If the house is sold and the proceeds, Pounds 75,000, are added to the savings, then the yield falls to just under 12 per cent per annum net.
Under current investment conditions, neither of these required yields is achievable without spending part of the capital as well as the income. To achieve this, you could simply invest the capital available and by a combination of spending the income and selling investments, meet the monthly shortfall. But this is a risky strategy, because the capital might run out before your parents die and there is no means of increasing the income, to meet higher residential home fees, without spending the capital faster.
If one is resigned to spending capital, which I think you must be, one way of investing in a manner which permits you to spend capital and income without any risk that the income will run out before your parents die, would be to purchase an annuity for them. Annuities are issued by insurance companies and are payable for the lives of the annuitants, ie you pass the risk that the capital will run out on to the insurance company.
The disadvantage of annuities is that you lose the capital but you can mitigate this loss by having the annuity guaranteed for a period of years, normally between 5 and 10 years, in which case, if the annuitant dies within the guarantee period, the annuity will be paid for the remainder of the guaranteed period.
At current rates, a joint life annuity (one payable for the life of the survivor of your mother and father) with a purchase price of Pounds 70, 000 and without a guarantee, would produce an additional gross income of about Pounds 14,935 per annum. After tax, this would amount to around Pounds 1,139 per month.
There are two tax points to note about this approach. First, of the Pounds 14,935 only Pounds 5,058 is subject to income tax because the Inland Revenue regard the bulk of the "income" received from this type of annuity as a return of capital and therefore non-taxable.
Second, your parents are currently entitled to a special personal income tax allowance called the age allowance. However, the age allowance is reduced by Pounds 1 for every Pounds 2 by which your parents' total income exceeds Pounds 14,200.
Thus, because your parents' total income, including the taxable element of the annuity, will be Pounds 17,647 the age allowance will be reduced to Pounds 5,352 and their annual net income, including the non-taxable element of the annuity, will be about Pounds 24,575 per annum, or Pounds 2,048 per month. Once the attendance allowance is added, the monthly income will be about Pounds 2,180.
I suggest that you consider making up the balance of the monthly income, Pounds 320, by trying to let your parents' house, in the first instance, but if this is not possible, you may need to consider selling it and buying another annuity.
There are other options to the ones set out above and I would urge you to seek independent advice from a local firm of advisers before you proceed.
Readers wishing to put questions to Andrew Warwick-Thompson (no names will be published) should write to the Personal Finance desk, The TES, Admiral House, 66-68 East Smithfield, London E1 9XY.
No correspondence will be entered into and no legal liability accepted for the advice offered.
Pensions, per annum 7,800
State pension, per annum 4,789
Total income 12,589
Age allowance (age 75+) (7,075)
Taxable income 5,514
Tax: Pounds 2,500 @ 20% (500)
Pounds 3,014 @ 25% (754)
Total tax 1,253
Net income, per annum 11,335
Readers wishing to put questions to Andrew Warwick-Thompson (no names will be published) should write to the Personal Finance desk, The TES, Admiral House, 66-68 East Smithfield, London E1 9XY. No correspondence will be entered into and no legal liability accepted for the advice offered.