Wealth structuring is certainly not the preserve of the ultra-wealthy, and there are a number of strategies families should consider to ensure that their wealth has maximum benefit for generations to come.
Lengthening life expectancy and rocketing care home fees mean elder care is a real concern for even quite affluent families today. Luckily, professional wealth managers are on top of the issue and leading the way on clever investment strategies to help clients cope. Here, Tom Perks, Investment Manager at Quilter Cheviot Investment Manager offers invaluable tips for families wisely looking ahead.
Questions regarding care home fees and the provision of later life care are some of the most common I face as an investment manager when meeting older clients. The process is daunting, confusing and decisions are often being made by or on behalf of some of the most vulnerable members of our society. A recent government study into the provision and affordability of care does not read well; concluding that unless better subsidised by local or central government, care costs are going to increase markedly over the coming decades.
As of 2018, there were 410,000 residents within either residential or nursing homes in the UK, with the average cost of self-funded care coming to £846 per week or £44,000 per annum
As of 2018, there were 410,000 residents within either residential or nursing homes in the UK, with the average cost of self-funded care coming to £846 per week or £44,000 per annum. Those requiring the most sophisticated care should expect to pay well in excess of this – with weekly fees sometimes running into the thousands of pounds. Unfortunately, those that find themselves in a position where they are considering care for themselves or a family member will find little financial support from the state or local authority, except in extreme circumstances.
What is also compelling is that the treatment of persons suffering with a degenerative disease, such as Alzheimer’s, is no different from those going through the natural ageing process. Whilst ongoing medical attention and medication will be covered by NHS, the cost of care is expected to be met from the assets of the patient.
All care in the UK, in either care homes or nursing homes, is means-tested based on the person’s level of assets and income. The current thresholds are set so low that practically anyone that owns their own home will be ineligible for local authority funding. In England and Northern Ireland the threshold is £23,250. It is only marginally higher in Scotland and Wales. Therefore, it is necessary that anybody who cannot fund care fees from any pensions or other income will be required to dispose of assets in order to pay for their care on an ongoing basis. In the majority of cases this will involve the disposal of a person’s most valuable asset – their home.
As investment managers, we often meet with families and their advisers following the disposal of assets with a view to investing for an income to cover the cost of care. It is often apparent during such meetings that there is a misconception regarding how much “natural” income can truly be generated from a diversified, lower-risk portfolio. For a lower-risk portfolio, it is difficult to obtain a yield much more than 2.5%. To pay the average annual care estimate of £44,000, you would therefore need a portfolio of around £1.7m.
Enjoying one’s later years while still saving a sensible amount for living expenses is a tricky balancing act further complicated by the desire to help children and grandchildren financially. The sooner you tackle family wealth planning your long-term investment strategy with a professional, the better.
Ultimately, how much you might need for care home costs will depend on the length of stay. Sadly, the average stay in a care or nursing home is 30 months. With the average UK house price less than £250,000, many are faced with the stark reality of the erosion of both their capital and their children’s inheritance. We would expect this to be mitigated by the contribution from private and state pensions, but the overall picture still remains the same.
A sensible investment policy can help to maintain the amount left for inheritance, but any approach has to balance the ongoing need to fund care costs and the risks involved in investing. If you don’t have many assets, then the risk may not be worth taking. Those with significant assets, upwards of £500,000 may want to consider the balance of risks in conjunction with their family.
In many cases, the advice is to hold enough cash back to cover 12-18 months of fees and to then invest the remaining capital. This will allow time for the portfolio to build dividend income whilst, hopefully, generating a certain degree of capital growth. Ultimately, the longevity of the portfolio will be determined by many factors: its size, market movements and the skill and experience of the investment manager. A well-positioned portfolio should be able to provide substantial support once cash has been exhausted.
Given the potential for vast costs over a number of years, many clients are drawn to enquire about ways to mitigate these costs; to dispose of their assets and therefore place themselves outside of the threshold for contribution. Gifting assets or selling at a disproportionately low value in order to avoid costs of care is referred to as “deliberate deprivation of assets”. It is an offence and local authorities take a very dim view of the practice. Moreover, many now have specialist departments with the specific task of investigating the finances of those unable to pay for their care. They also hold powers of recovery and are able to initiate County Court proceedings.
It is not only the cost of care which people find difficult to deal with. The subject forces us to deal with the physical and mental decline of ourselves or our loved ones and to confront our own mortality. Drastic actions such as those described above may be ill-advised for many and the cost of care should be something clients weave into their long-term financial plans. Working with specialist planners, at the earliest possible point, may make the burden more bearable for all involved while discretionary investment managers, who can build a bespoke investment strategy and work with a financial adviser, can help to protect any inheritance that might want to be passed on.