Following settlement of a client’s litigation claim, consideration as to how best to invest their damages award is a priority.
The task of managing funds prior to the taking of longer term investment advice has become increasingly difficult. We are not, of course, qualified investment advisers - however, deputies do have to be proactive in the period immediately following receipt of an award.
The main aim is to try to ensure that the client’s funds are safe and earning some worthwhile interest pending longer term investment of funds.
Accessibility of funds
Only five years ago it was usually the case that the damages award of a client would be paid directly into the Court Funds Office (“CFO”), where it was held in their Special Account. Whilst funds held in the CFO are fully guaranteed, gone is the security and comfort of a 6% interest rate. The 0.5% interest now dictates that funds held on Special Account must be withdrawn immediately, unless there are very good alternative reasons for leaving some funds there.
Indeed, instead of the Defendant paying funds into the Court Funds Office on settlement, if a deputy is already in place, it is preferable that funds be transferred directly to the deputy’s account. This ensures that funds can be transferred to higher yielding interest accounts, without the inevitable delays of applying to withdraw from the Court.
Protection of funds & minimising risk
It is essential that funds are protected and deposited in a safe account, which does not expose funds to any significant level of risk. The amount of compensation recoverable under the Financial Services Compensation Scheme, in the event of a bank defaulting, is limited to only £85,000.
Rather than depositing up to £85,000 into a number of different accounts, we tend to find a temporary ‘park’ in National Savings & Investments accounts. The combined maximum investment in the Income Bond and Direct Saver accounts is £3 million and funds invested in these accounts are fully guaranteed and therefore risk free.
Inflation & interest rates
Interest rates are at their lowest for years. One of the main aims of investment is to beat inflation so that the value of the funds does not erode over time. With the interest rates of the Income Bond and Direct Saver accounts at 1.25% and 1.5% respectively, National Savings & Investments do not offer a long-term solution to the dilemma of investment. Whilst inflation has been falling in recent months it is still at a level above the interest that can be achieved.
This is even more of an issue for clients who are minors – these accounts are no longer available to clients under the age of 16.
There is no simple solution to the challenge of keeping a client’s damages award safe whilst earning some worthwhile interest, pending longer term investments. This task is a constant and demanding challenge for every deputy.
What seems clear is that the taking of proper financial advice as soon as is practicably possible is absolutely essential for any deputy.