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How to make a compensation payout last a lifetime

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How to make a compensation payout last a lifetime

One of the most challenging issues when dealing with clients who have received personal injury awards is making sure the money lasts without taking huge risks when it comes to investment.

‘Investment management for any client is about getting the balance right between preserving capital and perhaps achieving a secure income,’ said Mark Holloway, investment director, and court of protection and personal injury specialist at Rathbones.

‘However, this is even more important for court of protection or personal injury clients where, often, significant healthcare costs, amongst other things, have to be met and the income and capital will be called upon to provide essential care and support for the rest of the person’s life. In the vast majority of cases, there will never be anything added to a portfolio, but by its very nature, it is designed to be exhausted during a client’s lifetime.’

That is why wealth managers can help in two stages, says Toby Alcock, co-founder of Lockhart Capital Management.

The first part is pre-settlement when the financial planner can help determine what the right level of compensation will be. During this time the client will also have the opportunity to consider whether they would like a lump sum or settle some of the compensation claim on an income basis.

The post-settlement area is one that is more familiar to majority of planners, Alcock points out.

‘At that point the emphasis is on the financial planning. Getting a real grip of what the cost will be, the property, the suitable adaptations that will need to happen and if there are additional devices needed so that a degree of normality can be lived,’ he explained.

In addition, the cost of care needs to be taken into account, as well as the cost of living.

‘Once I have got to the bottom of the costs I have a figure of what it will cost to run that individual’s life,’ Alcock said.

He says it is important for the family to be involved and for them to understand the fragility of what may seem a large sum of money.

‘If, unfortunately, a lottery win mentality falls around the family, you need to dispel that. We need to manage the costs, you can’t just have overspending and patterns of overbudgeting. Then in five to 10 years’ time they could be facing a deterioration of the capital and problems [associated with that].’

Lower risk clients                                              

Holloway says that typically a court of protection or personal injury client will have a cautious risk profile due to their low capacity for capital loss.

‘The focus will be on developing and managing an agreed investment strategy that will meet very specific needs, while encompassing a flexibility that allows for changes in circumstances,’ he adds.

However, the continual changes to the benefits system and the risk of care funding being removed can have ‘devastating consequences on a portfolio’.

‘There is an absolute glass ceiling and it is not appropriate to go above a certain level of risk. The financial plan allows you to show the sort of level of return needed to deliver for the expenditure. That can be used as a helpful tool to sharpen the budget a bit,’ Alcock said.

‘You wouldn’t want to be going anything above a medium risk and, of course, medium risk is something you would want to tread very carefully. Sometimes there can be an element of contributory negligence. If it’s a car crash and they weren’t wearing a seat belt, they might not receive all the compensation. That pot of money needs to work even harder because it is the same injury, but they didn’t get all the money.’

Richard Fullman, head of the personal injury and court of protection team at Investec Wealth & Investment, also agrees, saying that it is understandable for victims to be reluctant to take large investment risks to grow their portfolios faster.

However, low interest rates and rising inflation have meant that even lower risk portfolios need to produce an annual return of at least 4%, meaning ‘investing a portion of their money in higher rewarding, but more volatile assets such as equities’.

‘Too many compensation portfolios are retained in notionally risk-free assets such as cash, but the returns are so small that they are effectively losing money and their lump sum won’t last the distance. In many cases, it’s already too late as the lump sum has become too small and the returns needed to get back on track are too high and require too much risk-taking.’

He added: ‘That can lead to parents and carers facing difficult decisions around cutting the costs of medical care and support. If the compensation runs out, the state will end up responsible for the cost of their bill until the end of their life or top up care.’  

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