Investing for the tenth decade

Source: Pixabay

I’ve recently had a family bereavement. It’s been a sad time for the family and is the end of an era. It also brings to a close my role as an attorney looking after the financial affairs of my late father. Since the end of 2012 until early in this new year of 2020 I have acted under an enduring power of attorney (EPA) to manage his property and financial affairs. This followed a deterioration in his health and his being assessed as no longer being able to make financial decisions as he entered his tenth decade. I would now like to look back on what I did in this role and what lessons I take from it.

Actions taken

I was fortunate in that I was one of two appointed attorneys but we were appointed jointly and severally meaning that we could act together or independently. If we had been appointed jointly then we would have needed to act together and always agree before doing anything. I think this would have also made dealing with banks and investment platforms more complicated. We decided, as attorneys, that I would take the lead on managing financial matters, and my brother would assist the situation in other ways. They lived close to my dad’s retirement flat and I lived in another part of the country.

The financial position was good in that current income exceeded current living expenses. These expenses included living in a warden assisted retirement flat with a small amount of daily carer visits. Income included a company pension, the state pension and an Attendance Allowance benefit. There were no debts and substantial cash was held on deposit following the sale of a larger home a few years earlier. Unfortunately, this cash had been allowed to languish in accounts paying very little interest. A “high interest” account that had once paid 4.00% was now paying only 0.10%. A relatively small portfolio of ex-privatisation shares was also held and paid some dividend income.

It was clear, however, that residential care was likely to be needed in the near future and the current income would not support the expected costs for that. It was my view that the cash deposits would need to be invested in income producing assets.

The first thing to be done was to get the banks to recognise the enduring power of attorney that had been registered in November 2012. This required a visit to a bank branch with the registered EPA document and the required identity documents. In 2013 I was still working full time and I wasn’t living near these bank branches. I had to make a trip in March 2013 in order to get this done and to get online access to the main bank accounts. I had to make a second trip in January 2014 in order to close the account at the second bank and move the cash there to the main bank.

The second thing I did was to open a new investment dealing account in October 2013 and a new investment ISA account in March 2014. I gradually transferred cash from the bank to the investment accounts and invested in equity income investment trusts. The bank interest had been as low as 0.10% and no higher than 1.60%. The dividend yield on the trusts I chose averaged 4.05%. By July 2014 equity investments in trusts and shares had been increased to 62% of total assets and cash reduced to 17%, with the balance being the retirement flat.

These steps meant that when residential care started, in August 2014, we were better placed to fund it mostly from income. We were fortunate in finding a care home close to other members of the family, where his particular care needs could be met and where he felt at home, and where costs were below the average in what is a lower cost area of the country. My father, frugal by nature, was unreceptive to the appeal of a nearby care home that sought to emulate a luxury hotel, and was 31% more expensive!

On entering the care home and after me completing a long form a higher level of Attendance Allowance was payable, although this only covered a tiny fraction of the additional costs.

The third thing I did in January 2015 was to sell all of the ex-privatisation shares and reinvest the proceeds in more equity income investment trusts. This increased the dividend income but also provided for a better diversified portfolio. This process involved selling certificated holdings via the share registrars. It also incurred payment of capital gains tax and the preparation of a tax return.

The fourth thing I did was to sell the retirement flat. This required a collective family effort to clear the flat of items dating in some cases back to the 1930’s and was quite a challenge. After also making the flat ready for sale it was put on the market in July 2016 almost two years after being vacated. but it was March 2017 before the sale was completed. The proceeds were re-invested in more equity income investment trusts. Thus, it was only in April 2017 that I was able to achieve my preferred asset allocation of 96% in equity income investment trusts, with a dividend yield of 3.86%, and 4% in cash, earning interest of only 0.31%.

I was prepared to have such a high allocation to equities because of the dividend record of my selected trusts. I expected that the share prices would suffer volatility but that the dividend payments would continue to be increased or at least not reduced. Many of the trusts are recognised as dividend heroes by the AIC, or else they aspire to that status. That means they have increased their dividend every year for many years. Investing in such equity income investment trusts was, I thought, the best way to achieve and maintain a high level of income. This would also allow the portfolio to grow as and when stock markets rose.

The dividend income from these investments ensured that there was sufficient funding with which to top up the pension and benefit income in order to pay the care home fees for over five and a half years. By investing in investment trusts that aimed for income growth, and by tilting towards higher yielding but still mainstream trusts, I was able to grow that income by 22.90% (8.03% per annum) between April 2017 and December 2019.

Lessons

It would have been better to have had the power of attorney in place earlier, and it would have been better if I had been able to move more quickly to invest in shares. The cash had been placed on deposit before 2008 when 4% interest could be earned but as the ability to make financial decisions declined it was not managed thereafter until the EPA was in place and recognised by the bank. Being insufficiently invested in the stock market in 2013 meant that most of the gains in that year were missed.

The retirement flat was a very poor investment. It provided a convenient home for over six years from 2008, but was eventually sold in 2017 for 47% less than was paid for it. Such a retirement flat with an on-site warden was a necessity but, with hindsight, it would have been better to have tried to find an opportunity to rent rather than buy.

By contrast the ex-privatisation shares were a better investment and they made a gain of 28% between December 2012 and their sale in January 2015, and had already enjoyed higher gains since their original purchase in the 1980’s and 1990’s such that CGT was payable. Selling them in 2015 meant that I was not concerned by re-nationalisation proposals at recent general elections.

We were fortunate in our choice of care home. Starting with lower costs meant that we were better placed to deal with rises in those costs. Over nearly five years the care home fees increased by 30.18% in total with annual rises of 4.08%, 2.61%, 5.00%, 7.50% and 8.00%. This compares to the retail price index (RPI) increasing by 12.12%, and the minimum wage increasing by 30.11%. The state pension, the Attendance Allowance benefit, and the company pension (net of tax) increased by only 13.46%, 7.81% and 5.43%. This income covered 77% of the care home costs in 2015, but only 65% in 2019, because of these different rates of increase.

Actively managing the available assets by investing in income producing equities has meant that some of the available income can rise, ideally to meet rising costs, whilst the assets could also grow when markets were favourable.

Results

At the end of 2019 the available income was more than sufficient to meet the current costs and to allow for above RPI increases in the care home costs. If a higher level of care, in a more expensive care setting, had been needed that could have been a challenge. As it was events took a different turn.

I will consider more fully in a follow up post how well I did in managing these property and financial affairs over these seven years.

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