My parents are not in the best of health and may require full-time care in the future. How can I prepare myself financially should both require care at the same time?
Barry Summers, wealth planner at Kingswood, says many things need to be taken into consideration when planning for a parent or parents requiring long-term care.
There are many variables that affect how much the care is going to cost over the long term. Some of the factors to consider would be: where in the UK do your parents live; what level of care will they require; and what level of assistance the local authority will provide.
It is important to consider planning for the eventuality as early as possible, in view of the significant costs of long-term care. Having care provided at your own home can cost £15,000 a year in England. Residential care can cost £44,000 a year and nursing care £52,000. Once admitted, the average length of stay is predicted to be about two and a half years, though this time is influenced by a number of factors.
You and your parents have a number of options if you wish to start investing to prepare for the cost of long-term care. However, you need to ensure that the investments you select are in line with your attitude to investment risk.
Unit trusts, investment bonds, equities may all feature in a portfolio designed to provide for future long term care. Ensure that the investments are held in a tax-efficient manner, such as in an individual savings account (Isa). Your money will go further when the time comes to access it.
It is also worth considering that most people going into care are likely to be receiving their pensions — income and any associated capital which can be a key source of funding.
As part of a long-term care planning strategy, they should update their wills while they still have capacity, make sure they have their lasting power of attorney in place.
For such a complex situation it is essential to get advice that is designed to meet your and your parents’ individual needs and circumstances.
Should I reinvest my buy-to-let cash?
I have a buy-to-let apartment in central London that I bought from the developer a few years ago with my sisters using an interest-only mortgage. The property has been occupied since it was purchased in 2018 and has generated £20,000 in cash, which I planned to use to repay part of the capital loan.
However, with inflation and interest rates rising, a friend in the City just suggested that I could reinvest this cash elsewhere and pay off the capital at a later date. Can you explain how inflation affects property investments, what are the alternative investment options, and how risky is a strategy based on the UK economy?
Justin Modray, director at Candid Financial Advice, says inflation is certainly a topic of the moment, having soared in recent months. Given it reflects rises in the cost of living, high inflation is bad news when sitting on cash, since it buys less in future years. However, high inflation is better news if you owe money as the debt effectively shrinks in real terms.
Low to modest inflation is generally seen as optimal. Some inflation is good for growth, but too much tends to harm economies and make planning ahead very difficult. A key role of the Bank of England is to keep inflation in check, commonly doing so by adjusting interest rates. When inflation rises above desired levels it often raises interest rates to try and reduce spending, as those with mortgages and other debts will have less to spend.
When it comes to property investments, they have mostly outpaced inflation for some time thanks to cheap borrowing and a strong demand for housing. However, as the Bank of England raises interest rates to try and combat the current bout of inflation, this will push up borrowing costs, which may start to slow the housing market unless wages keep pace with the higher cost of living and borrowing.
So, what to do with your £20,000? If your mortgage is a variable rate loan, expect it to become a more expensive and budget for that. And it would be prudent to retain a buffer to cover potential unoccupied periods and repairs. Beyond that, you could consider investing the balance, depending on how comfortable you are with risk.
Stock markets offer a straightforward way to invest and tend to have a good longer term record of beating inflation, unlike cash. However, they are volatile, and you could end up losing money, especially in the shorter term. I would suggest investing for a minimum of five years, ideally longer, allowing plenty of time to ride out volatility along the way.
Whether investing is right for you depends on when the mortgage is due for repayment, being comfortable with the prospect of potential losses and having the resilience to sit tight through the inevitable turbulence and possible crashes along the way. If in doubt, perhaps part-repay the loan, or dip your toes in the water by investing a smaller amount initially.
If you do decide to invest, I’d start with mainstream low-cost index-tracking funds as offered by the likes of Vanguard and Fidelity. These invest in a wide range of companies and can reduce the chances of making a costly mistake. Tracker funds also make investing overseas easy, for example the Vanguard FTSE Developed World ex UK Equity Index fund covers areas including the US, Europe and Asia while excluding the UK, which can be accessed via a number of UK specific trackers.
Trying to second guess markets is notoriously haphazard, so rather than try and pick winners I’d opt for a sensible spread and sit tight.
The opinions in this column are intended for general information purposes only and should not be used as a substitute for professional advice. The Financial Times Ltd and the authors are not responsible for any direct or indirect result arising from any reliance placed on replies, including any loss, and exclude liability to the full extent.
Our next question
I purchased a penthouse apartment four years ago in London’s West End. It was the outside space that really sold it to us, being on the top floor of this wonderful old building and with views. We do not own the freehold of the building and the freeholder has decided to explore extending the building upwards, using the government’s relaxation of planning laws. Not only will I no longer have a penthouse apartment, for which a premium was paid, I will have to live with disruption for years to come. The property’s value will also be affected. Is there anything we can do to stop the landlord’s plans to develop upwards?
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