My father is aged 89 and approaching 90 this month. Can you please tell me if he is too old to invest in shares?
Tanya Jefferies, of This is Money, replies: He is not too old, but there is more to it than that.
We asked stockbroker Killik & Co to explain what to consider when investing at that age, and the contingency plans your father should put in place if he becomes unable to handle his own affairs.
Rachel Winter, associate investment director at Killik, looks at the practical aspects of maintaining a stock portfolio when you are older, and how you might approach investing decisions for yourself and your heirs.
Svenja Keller, head of wealth planning, then explains the importance of having power of attorney in place and how best to set it up, and the inheritance issues to bear in mind.
What should you consider when investing at 90?
Although there are no upper age limits when it comes to having an investment account, the Financial Conduct Authority has recently issued guidance to help financial services companies treat vulnerable clients fairly.
There are countless determinants of vulnerability, but age is certainly one of them.
Good investment managers should have several safeguards in place to protect elderly clients.
They should be aware if a client has a power of attorney, and they should have a copy of this as well as the contact details for any attorneys.
It is also a good idea for them to have contact details for other family members should they need to raise any concerns about the client, particularly if the account in question is an ‘advisory’ one.
This is where the client is responsible for all decisions, as opposed to a ‘discretionary’ account where they delegate decision-making to a professional investment manager.
Investment managers should also be mindful of how they should communicate effectively with elderly clients, for example if they are hard of hearing or if they are uncomfortable with email.
The approach to investing at this age depends on the purpose of the portfolio, but also on the individual in question. Some nonagenarians may be in poor health, but others could thrive for another decade.
If the portfolio is intended to cover potential medical or care home costs, then it would not be advisable to take a high level of risk.
On the other hand, if the client wishes to draw the natural income – dividends only – from the portfolio but does not require the capital, then volatility may not be a concern.
In this case a client could invest in a portfolio of equities and withdraw the dividends on an ongoing basis.
If the client does not expect to draw on the portfolio and instead hopes to leave it to the next generation, then the risk profile of the beneficiary should be considered when selecting the investments.
How do you set up power of attorney?
Lasting powers of attorney are vital legal documents that most UK individuals should have.
Your father would be able to appoint one or more attorneys to act on his behalf – either if he becomes too frail or even if he loses mental capacity to make decisions himself.
If your father lost mental capacity without having LPAs in place, the Court of Protection would have to step in, and this could become a costly and lengthy process – not something you need when your family is already going through a difficult time.
There are two different types of LPAs – health and welfare, and property and financial affairs.
For your father and his share portfolio, the property and financial affairs LPA is most relevant although he may also want to think about the health and welfare LPA to ensure that the right person makes medical decisions for him if that ever becomes necessary.
There are a few things to bear in mind when drafting LPAs.
1. Your father needs to have mental capacity when he signs the document.
2. The main thing for him to consider is who his attorneys should be – he can have more than one – and whether they can only make decisions unanimously or whether they can each act separately.
He can also appoint replacement attorneys, in case his original attorneys can no longer act.
Although many people prefer to choose trusted relatives and friends, it is possible to appoint a professional to act as property and financial affairs attorney if your father would like to have an objective person with expertise involved.
Lasting power of attorney helps families keep control if illness or accident strikes
Why you need this and how it works: Read more here.
What happens if you or a family member fall ill without an LPA in place? Read more here.
Professional attorneys would charge ongoing fees for their services after he lost capacity to carry out his own affairs, which your father should ask about and ensure he fully understands in advance.
If he appoints non-professional attorneys, they could decide to hire help from professionals – lawyers, or financial advisers for example – and pay their fees out of his funds if necessary in the future.
3. Finally, it is important to ensure that LPA documents are well drafted, and your father may therefore want to ask a professional adviser to assist him with this.
One example is the necessity to have a special clause in the property and financial affairs LPA to ensure that attorneys are allowed to delegate the investment management to a discretionary manager if they want, as otherwise only advisory investment mandates are possible where the attorney has to make the final decision on each investment.
The requirement for this clause was introduced by new guidance in 2015 and is therefore missing in a lot of older documents.
What inheritance issues should be considered if you invest at age 90?
From an inheritance tax perspective, provided your father is UK domiciled for tax purposes, all his worldwide assets will be subject to this tax.
This would include his share portfolio, so its value when he passes away would count towards his taxable estate. That would be taxed at 40 per cent over and above his available ‘nil rate band’, which is the assets threshold at which inheritance tax starts to be applied.
Should you buy AIM shares to cut your loved ones’ inheritance tax bill, or is this too risky?
An estate planning expert explain how this works and the potential pitfalls to a reader here,
One positive thing to note is that, based on current legislation, capital gains tax does not become due when he dies. The beneficiaries of the estate inherit the shares at the base value on the date your father passes away.
A less comfortable thing to consider is your father’s age and life expectancy. Investing in shares is typically only appropriate for longer time horizons.
If one of your father’s objectives is to pass the investments on to the next generations, he could take a longer term view on how much investment risk he takes.
Mitigating inheritance tax when the investments pass from one generation to the next is more difficult as most planning has a time requirement of being in place for two or seven years.
The latter is in relation to gifts, whereas the former relates to investments in business relief qualifying assets.
Your father could consider investing in specific shares on the AIM market that qualify for the inheritance tax exemption under business relief as long as he has held them for at least two years.
There is of course still a risk that the two years are too long, and this will depend on his health too.
In addition, he would have to bear in mind that these types of shares can be less liquid and more volatile which means he is taking more investment risk with them.