• 'Lifetime' care awards could be used up in just 16 years
• 'Buckley Ruling' highlights dangers of taking excessive risk and importance of taking financial advice
Investec Wealth & Investment (IW&I), the leading investment management firm, warns that as many as 140,000 people – many of them children – who have deposited personal injury awards in the Court Funds Office's (CFO) 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 billion of assets, yet its Special Account pays just 0.5% interest. This figure falls way short of inflation – currently 2.7% (CPI) – 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 in today's value was drawn down annually for medical care and support, the portfolio would run out of capital in just 16 years (with costs inflated).After just five years the investor would lose nearly a quarter of their award. As capital is depleted, the additional return required on the portfolio to meet the costs would need a significant increase in risk. After 12 years, the investment return would need to be 20% to cover the inflated costs.
The challenges of developing an investment strategy for individuals requiring specialist care that balances risk and return was recently highlighted by a recent Court of Protection case involving Miss Buckley, an elderly nursing home resident whose niece had been appointed as her Lasting Power of Attorney (LPA). Miss Buckley's niece had invested £90,000 of her aunt's funds in a reptile-breeding venture, with no formal security of share of the investment returns. The Court held that the investment decision was not in Miss Buckley's best interests and revoked the LPA.
However, IW&I warns that current market conditions mean that in order to generate above inflation annual returns of approximately 4 to 5% to fund lifetime specialist medical care it has become necessary to introduce a modest increase in investment risk. Where three years ago IW&I's Court of Protection team invested portfolios exclusively in gilts and bonds, it now allocates between 10% and 30% to a broad spread of equities and up to 20% to alternatives, including lower volatility hedge funds. The majority of portfolios remain invested in a combination of short dated corporate bonds and gilts.
IW&I recommends that individuals with funds in the CFO 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 individuals who have become mentally incapacitated through a road traffic accident, or elderly people suffering from dementia.
Richard Fullman, Head of the Personal Injury and Court of Protection team, Investec Wealth & Investment, comments: "Leaving large sums of cash on deposit may seem like a risk-free option but it can have catastrophic consequences for lifetime awards as capital is rapidly haemorrhaged and the returns needed to get the portfolio back on track become unfeasibly high.
"Conversely, the recent Buckley case highlighted the dangers of taking excessive risk with money earmarked for lifetime care. Sadly, no lifetime award investment portfolio can be entirely risk-free so it needs to be designed to minimise the effects of inflation, interest rate fluctuations, currency movements and volatility."
He added: "The risks of getting it wrong can be devastating and result in parents and carers responsible for managing their dependents' financial affairs facing tough decisions around cutting the costs of medical care and support."
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.
Investec Wealth & Investment has consistently achieved top quartile performance for its low risk portfolios and in the past ten years the Court of Protection team has tripled its assets under management and currently manages over £380 million on behalf of its clients.