Investec Wealth & Investment (IW&I), the leading investment management firm which has an office in Leeds, warns that as many as 140,000 people1 – many of them children – who have deposited personal injury awards in the Court Funds Office’s Special Account to fund lifetime specialist medical care risk running out of money long before their original expectations.
The CFO provides banking and administration services and manages a total of £3.3 billion2 of assets, yet its Special Account pays just 0.5% interest. This figure falls way short of inflation and will not generate the level of income required for the award to last a lifetime’s medical care and support.
IW&I calculates that if a £1 million award had been invested in the Special Account today and £50,000 a year was drawn down annually for medical care and support, the portfolio would run out of capital in just 12 years. After just four years the investor would lose a quarter of their award. As capital is depleted, the additional return required on the portfolio to meet the costs peaks at a staggering 432%.
According to IW&I, many award recipients may have retained their funds with the CFO without being aware that they have the option to make alternative arrangements to improve the returns. IW&I recommend that individuals with such funds seek financial advice on how best to invest their award rather than leaving all of their capital in the Special Account by default.
Many of the deposits at the CFO are made on behalf of children who have suffered from medical negligence at birth and people who have become mentally incapacitated through a road traffic accident, and elderly people suffering from dementia.
Investec Wealth & Investment’s specialist Court of Protection team, with over 50 years of experience investing clients’ money, helps people fully utilise their award to provide them with a long-term strategy for their financial security. This can range from providing for day-to-day living expenses and care costs to the purchase of a specially adapted home.
Richard Fullman, divisional director of the Personal Injury and Court of Protection team, Investec Wealth & Investment, comments: “Low interest rates, above target inflation and a lack of financial advice have resulted in many lifetime awards haemorrhaging capital. In many cases it’s already too late – too much capital erosion has taken place and the returns needed for the portfolio to get back on track are unfeasibly high and require too much risk-taking. As a result, parents and carers responsible for managing their dependents’ financial affairs are faced with tough decisions around cutting the costs of medical care and support.
“In the current investment climate, where returns are hard to come by, it’s tempting to leave a large sum of cash on deposit. However, as our analysis shows the consequences can be catastrophic. An investment portfolio for a lifetime award needs to be designed to minimise the effects of inflation, interest rate fluctuations, currency movements and volatility. Awards need to be carefully invested in order to cover all of the different costs that an individual will incur over the course of their lifetimes.”