My 96 year-old mother is in a care home, with the costs covered by a combination of a care annuity and her pension income. We’ve sold her home and she now has more than £500,000 sitting in her bank account.
I hold a Lasting Power of Attorney and would like to protect her money from inflation and even aim for some low-risk growth. I am considering purchasing an investment bond on her behalf, or opening an account with an investment platform to invest in funds. What are the benefits and drawbacks to this? And how can I ensure she continues to pay tax at the basic rate?
Name supplied, Stafford
This is a really interesting question and one, I suspect, more and more of us will have to deal with as life expectancies increase. One of the most prudent things you can do is arrange Power of Attorney, so that your loved ones have the authority to act on your behalf and manage your affairs should you become unable to do so.
For those who aren’t familiar with the concept, Power of Attorney is a legal document where one person (the donor) gives another person the right to make decisions on their behalf. You can only set up a Power of Attorney while you still have the ability to weigh up information and make decisions for yourself, known as ‘mental capacity’ – so it’s worth putting one in place early on
The type that you have – Lasting Power of Attorney (LPA) – is the most common form. It is an ongoing arrangement with no expiry date that will allow another person to make decisions on your behalf. There are two types of LPA; property and financial affairs gives your attorney the power to make decisions about your money and property, while health and welfare LPA gives your attorney the power to make decisions about your health.
You’ve told me you have powers of attorney over your mother’s property and financial affairs. In order to find out what that enables you to do, I spoke to the Office of the Public Guardian (OPG), the government body that oversees the rules for power of attorney.
It firstly strongly recommended that your LPA has been registered with it – otherwise you will not be able to act on your mother’s behalf. The OPG also stated that, before you act, you should consider whether your mother has the mental capacity to be involved or make the decision to invest herself. If she does, decision-making can only be made with her permission, even if the LPA has taken effect. This is defined by following the Mental Capacity Act code of practice on decision making.
In terms of the investment decisions you can make, there are a few things to consider. If your mother has put in some specific restrictions on the actions you can take, these must be respected. Even if she hasn’t, you’re still required to act in her best interests. The OPG told me that with investments, for example, past wishes and feelings of your mother – for example, if she had taken financial advice in the past – should be considered and followed by you as her attorney.
For the reasons both above, and below, I would suggest taking some professional advice with such a large sum of money. Investing means putting your mother’s capital at risk of loss, and you need to consider whether that is something that she would have been comfortable with when she was managing her own affairs, and also the potential views of her heirs (if she has any).
Forgive the pragmatism, but you should also take into consideration your mother’s life expectancy and investment timeframe. It’s sensible to view investing with a minimum of a five-year timeframe, which enables you to ride out the highs and inevitable lows of the stock market. Consider your mother’s health and the need to liquidate those investments in the event of her death – if you had to do so after a short period of poor investment performance, you’d be potentially making a loss.
With such a significant sum, tax will be a factor to consider. Making use of Isas is the first step, but that would only allow you to shelter £20,000 a year from income, dividend or capital gains tax. Your mother, as a basic-rate taxpayer, can earn £1,000 in savings interest, as well as £2,000 in dividends or £12,000 in capital gains before paying tax.
Assuming you were to use an Isa for £20,000 of her £500,000, you could bust these tax-free limits. Putting £480,000 into the best instant-access savings account, paying around 1.5 per cent, would result in more than £7,000 in interest, on which 20 per cent tax would be paid on £6,000 – a bill of £1,200. Would this additional income push her into a higher tax bracket?
These are the kinds of decisions a good professional adviser would be able to support you on. You can find one using the Money Advice Service’s Find an Adviser portal at https://directory.moneyadviceservice.org.uk.
Gareth Shaw is Head of Money at Which?.