How to invest for a disabled dependant

Providing financially for a disabled dependant presents its own unique investment challenges. If you are looking to support a dependant who has either physical or mental disabilities, your concerns may range from maximising your investments in order to meet care costs, to protecting the person you are supporting from financial exploitation.  

How a dependant will fare once you have passed away is also a concern. In last week’s Portfolio Clinic, we looked at how a reader could invest his portfolio to provide for his autistic grandson over their lifetime. While each set of individual circumstances will differ, there are general principles you can follow if you wish to provide for others, and to maximise your investments to best support them both during your life and after. 

Trusts

One aspect you may want to consider, as touched upon in last week's Clinic, is whether to put your investments into a trust to protect both the assets and your dependants.

There are three situations where setting up a trust may be beneficial. The first is where you have a vulnerable dependant who does not have the capacity to manage their finances on an ongoing basis. 

Alternatively, you may wish to put some money aside for a disabled beneficiary but want to retain control over what happens to those assets. So, for example, if the beneficiary were to marry you would still have a say over how the investments were managed. 

The third situation is when the dependant is in receipt of means-tested benefits or care. By placing the assets into an appropriate trust, those investments will not be considered when the beneficiary’s means-tested entitlements are calculated. Rhiannon Gogh, director of St James's Place partner practice PlanIt Future, has encountered situations where parents have put investments in the names of their children, only to have unwittingly compromised their care home place once the child turned 18 as they did not realise that these investments would impact their means-tested care provisions. Given the difficulty of securing care home places, this situation should be avoided where possible. 

A trust can also be beneficial from a safeguarding perspective as it protects vulnerable dependants from predatory behaviour. Having trustees manage the investments, in terms of both strategy and access, puts a stop in place against financial exploitation or poor money management. 

Gogh gives an example of a client who did not outwardly appear vulnerable but who had ADHD. His mother left her entire estate to him when she passed away but, within nine months of her death, he gave away all the money to someone who had befriended him. “If a trust had been in place it would have protected him, as he would have had to go to the trustees to access the money,” Gogh notes. 

Another advantage is that a trust can continue to act as a protective vehicle if you pass away before a disabled dependant. Claudia Button, a financial planning consultant at Quilter, outlines a situation where her client, who had a disabled daughter, died at a young age. Through his will, he created a vulnerable minors trust for his daughter. “What that then meant was his child was protected for the rest of her life in terms of accessing the money from the estate,” she explains. 

There are several types of relevant trusts here, but one that may be available for disabled dependants is a vulnerable beneficiary trust. To qualify for this style of trust, the beneficiary must either be unable to manage their own affairs due to a mental health condition or be in receipt of certain prescribed benefits such as the adult disability payment or child disability payment. 

The benefit of a vulnerable beneficiary trust is that it receives preferential tax treatment compared with a standard discretionary trust. This includes an income tax deduction for which trustees can apply to HMRC, which means the income paid will be treated as though it was given directly to the beneficiary rather than as though it was given to the trust. The income will, therefore, not be taxed at the 45 per cent trust tax rates. 

Additionally, the capital gains tax-free allowance is also increased for the beneficiaries of these trusts. For the 2024-25 tax year, vulnerable beneficiaries have a £3,000 allowance, whereas other trustees have a £1,500 allowance.

Access, risk and means-tested care  

While investing with the objective of supporting a disabled dependant may seem daunting, Gogh suggests following a checklist to simplify the process and centre the beneficiary at the heart of decision-making. She recommends investors focus on three topics: access, risk and means-tested care. 

Investors should consider how easy it will be for a disabled beneficiary to access an asset: will, for example, a court order be needed? Secondly, will this investment make the individual more vulnerable to financial exploitation? If so, the investment should probably be placed in trust. Finally, will it impact their means-tested benefits or care? Again, if the answer is yes, a trust might be the most appropriate vehicle.

Keeping these three principles in mind will ensure that the financial wellbeing of the person for whom you are caring remains the focus and will give you a platform on which to build your investment strategy.

Investment thinking

The investment strategy itself should take into account the individual's disability, their care needs and outlook, and your intentions for how the money will be used. 

Their life expectancy will be a key factor. If you are investing for a young child, then you are likely to be doing so for a long period, and will want to grow the underlying assets as well as provide an income in the future. If you are investing to support someone with Alzheimer's, for example, the investment window will clearly be much shorter. 

As well as lifespan, you also need to consider the outlook for the individual and the quality of life they may be able to enjoy. As Gogh notes, one important question is "will they need residential care, and if so, do you want to be able to provide top-up funding to allow them to do things like take day trips”. Access to council-funded care varies across the country and privately funded care can be extremely costly, so these costs will often be a major consideration when planning for the financial future of a person with disabilities. 

Alternatively, the person you are caring for may be able to live independently. If so, your investment objective could be to facilitate the purchase of a suitable house and carry out any necessary adaptations. It would be likely to require a different time horizon and strategy as a result.

It is, therefore, crucial to determine what you want your money to achieve before making any portfolio decisions. If you want your investments to finance ongoing care for a disabled dependant then there will probably need to be an element of income investing to your strategy to meet care costs. Equity income funds or dividend-paying shares, bonds and bond funds, and multi-asset funds may be appropriate. 

However, not all investors will be looking to generate income immediately. “If you’re in a situation where you’re earning well and have enough money to pay for costs of care, then you might not need income from investments right now. That means you can pursue a more growth-oriented approach, and build up assets,” Laith Khalaf, AJ Bell’s head of investment analysis, notes. 

Assessing both the financial needs of your dependant and your own financial situation will therefore be important when deciding how to position yourself and make most use of your assets. Button suggests creating a cash flow plan as a starting point so that you can determine how much income you will need from your portfolio. 

“Then you can prioritise the strategy, weighted either towards growth assets or long-term income assets, such as government gilts and annuities,” she says.  

Lucie Spencer, a financial planning director at Evelyn Partners, suggests a similar approach. “When we talk with clients about producing an income for them, we talk about the natural yield on the portfolio and whether they need more than that,” she says. 

If you are comfortable with the natural yield – living off the income produced by your investments, rather than dipping into your capital – you can leave the underlying assets alone to continue to grow. However, if this doesn't meet the needs of your dependant, you may need to take a more income-focused investment approach or sometimes use the capital as well. 

Another thing to consider is your risk appetite. While a certain level of risk will be needed to grow your assets if you are investing for the long term, many investors may feel more cautious if taking financial responsibility for a disabled dependant. 

“Diversification is important to reduce the risk and ensure stable returns,” Button says. She suggests spreading investments across different asset classes such as equities, bonds and property to ensure you have a stable portfolio. 

Getting the risk allocation right means that you should be able to peacefully leave your portfolio alone and weather market storms. “What we really want to ensure is that investors stay the course. If the health of the disabled beneficiary has changed, that could be a reason to change the portfolio and re-examine the level of risk. But the guardian or trustees feeling nervous is not a good reason to change an investment portfolio,” James Norton, head of retirement at Vanguard, says. 

Further considerations include the level of cash buffer you may need. Spencer usually suggests a two-year buffer, but for investors with disabled dependants, she recommends a cash cushion that covers any shortfalls in income for “anything they think they need to buy in the next five years”. This is due to the significant costs of care and the potential need for specialised equipment or support. 

Norton also advises investors to be mindful of costs, given the potentially long investment horizon. If investing for a dependant who is a child or young adult, it may be worth approaching the investment as you might a pension and keep in mind how costs will accumulate over the years. 

This also feeds into how investors should be thinking about risk, Norton says. “When you’re looking after a disabled dependant there is also probably a higher duty of care. That really means that the decision on risk is even more important because the dependant could be in their teens and that money needs to last them for the rest of their lives.”