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Meeting the cost of care

Jane&#39s mother Pat, who is 79, has been diagnosed with Alzheimer&#39s disease and is going to have to go into a special-care residential home. This is going to cost £800 a week and Jane is looking for a straightforward way of paying for it. She has been advised that the nature of the illness is such that her mother could live for only another year but it could be a lot longer. What is the best course of action for Jane to take?

Initially, we have agreed to work on a five-year term, with the flexibility to review the situation after that.

Jane and her brother have power of attorney over Pat&#39s assets and the family want to consider how best to allocate them towards covering the fees. They understand that there would not be a problem with the Court of Protection as long as the money is used entirely for Pat&#39s welfare.

In principle, there is a target net expenditure of nearly £42,000 a year just to cover the home fees. Pat has liquid assets worth about £110,000 and a flat valued at £300,000. She also has index-linked annuities that currently amount to £1,200 a month net of tax.

This means she needs another £28,000 of net income from her assets. This would require a net yield approaching 7 per cent on the gross assets if one were looking for income, creating something of a tax problem as well.

This is asking a lot when the net yield on deposits and equities is about 3 per cent at the moment. There is a higher yield on bonds but it is clear that some capital depreciation is going to come into the equation at some stage unless quite high levels of risk are taken to invest for capital growth to protect the total fund.

Jane and I have considered a number of options such as sinking funds and portfolios geared to generating the high level of income necessary but she feels that she would like to keep it reasonably simple at this stage as the family do not want to sell the flat. They are hoping to be able to let it out but do not expect to be able to generate a net income of more than £10,000 a year With all this taken into account, the income shortfall is £18,000 net and it has been decided that the most practical approach, involving the least administration, is an annuity which will provide the income for a given period or for life.

I have given Jane a number of options, with and without guarantees, and she and her family feel that a five-year temporary annuity is the most attractive one.

The basic cost will be £70,000, which will guarantee the £18,000 net income for five years. Evidently, Pat&#39s condition does not warrant an impaired life annuity.

If Pat lives that long, the annuity will have represented an attractive rate of return. The drawback, of course, is that it will not present much in the way of value if Pat dies within the five years.

The additional cost of a capital guarantee would be another £10,000. Jane and her family understand that there is something of a gamble here but feel the cost of £70,000 for five years&#39 peace of mind is acceptable. They would rather hold back the extra £10,000 in case they have to repeat the exercise in five years time.

Keeping that extra cash also means there will be about £40,000 left over that will offer flexibility to cover increases in the cost of the care home as well as any other sundry expenses. If they do have to find further funding in five years, the flat can be sold. However, they feel that five years is probably a realistic term.

They are also aware of the mitigating factor that, were Pat to die within the five years, 40 per cent of the money would have gone in inheritance tax anyway. The cost of the annuity is an expense so it will immediately reduce the value of her estate, on which some inheritance tax is bound to arise. They will have to consider whether or not any additional inheritance tax planning can be done with the flat, bearing in mind that the income generated from rent is being used to fund the cost of the home (and subject to the Court of Protection).

Jane is happy, though, in the knowledge that the next five years are provided for quite simply and efficiently.


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