Mr B has an enduring power of attorney for his elderly aunt, Mrs K, whose property has been sold, realising a capital sum of £120,000. Mrs K is 88 and she is permanently resident in a nursing home. She has no other assets and Mr B wishes to maximise the capital sum available to provide income for his aunt covering care costs that currently stand at £10,500 a year after state benefits and allowances. He also wishes, if possible, to minimise erosion of the value of the estate. To this end, he is prepared to invest with a moderate degree of risk for around 50 per cent of any investment portfolio, with the balance held in low or low/medium-risk funds. How should he go about this?
Mr B is one of two major beneficiaries of his aunt's estate and there are specific legacies of around £30,000 to other named individuals.
This dictates that there is a portion of the sum either held immediately accessible or invested without early encashment penalties so that the specific terms of the will can be met.
One of the dilemmas facing Mr B is the need to try to build in some form of protection against increases in care costs and, although the simplest way of achieving this would be the purchase of an annuity with indexation, he wants to avoid losing control of any capital at this stage.
Also, given Mrs K's age, there are a limited number of investment vehicles available that can provide good levels of return.
It was agreed that a sum of £40,000 should be retained on deposit to meet the care costs for the first three-anda-half years while the remaining capital of £80,000 should initially be invested for growth. The provision of a higher capital base from which to take income after this period is therefore a priority.
It was recommended that £33,000 should be invested in an NDF extra income & growth plan with a fixed term of three years to provide potential for 33 per cent growth, with the possibility of additional full capital return, depending on the performance of the Eurostoxx 50 over the period.
These types of plan are tax-efficient as basic-rate taxpayers or non-taxpayers will only pay 20 per cent tax on any gain in excess of their CGT allowance in the relevant tax year.
As the total maximum gain is £10,890, there should be a minimal tax liability – probably less than 2 per cent of the original sum invested. These plans can also be inherited if encashment is not advisable at the date of death.
For further tax-efficiency, the full £7,000 was invested in a Skandia MultiIsa, with the total spread between a number of equity income and corporate bond funds.
This ensured that there was as much diversity as possible in the portfolio, giving the equity-based investments a greater defensive quality. All the funds are income-prod-ucing but there is the flexibility to switch underlying funds if necessary.
As Mr B had requested that early encashment penalties should be avoided where possible, I recommended putting £25,000 into a Clerical Medical international bond written with three lives assured – Mrs K, Mr B and Miss R – the other major beneficiary of Mrs K's will (aged only 43).
The bond can therefore continue on Mrs K's death to avoid otherwise punitive pen-alties. As income on this inv-estment is paid gross, Mrs K's personal allowance can be utilised for any withdrawals which exceed the 5 per cent annual limit.
The remaining £15,000 was invested in the easy access version of a Sun Life distribution bond, with no establishment charge or early surrender penalties.
The portfolio will need to be arranged for income once the cash on deposit has been exhausted and this should coincide with the maturity of the NDF plan.
Once it is clear how much capital is available in total, appropriate income can be arranged to meet the care costs that apply at that time.
I suggested that we then reconsider the option of using all or some of the proceeds of the maturing NDF plan to buy an annuity with a guaranteed five-year period, which would minimise the loss of capital for Mrs K's estate, should she die within the early years.
If care costs have risen significantly in the intervening period, this may be the best way to ensure that income keeps pace.
The portfolio was designed to provide a constructive balance between the often conflicting requirements of the estate and Mrs K's care costs as well as having diversity and inbuilt flexibility.