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Treated child in a hospital
Cash deposited with the Court Funds Office fell in real-term value by £140m last year. For children who have suffered as a result of a serious injury the money can make all the difference. Photograph: Alamy
Cash deposited with the Court Funds Office fell in real-term value by £140m last year. For children who have suffered as a result of a serious injury the money can make all the difference. Photograph: Alamy

Court Funds claimants losing out to effects of tax and inflation

This article is more than 12 years old
Compensation claimants – including children and the elderly – saw their awards eroded by £140m last year

Compensation claimants who deposited their awards with the Court Funds Office suffered a £140m erosion in value last year as inflation ate into their money.

The CFO provides banking and administration services for about 140,000 people, the majority of whom have received personal injury awards and rely on income from their award to fund medical care and specialist support. The clients include children who suffered from medical negligence at birth, people who have become mentally incapacitated through a road traffic accident, and elderly people suffering from dementia. Money may also be deposited in the funds while waiting for the settlement of a civil court action.

There are two cash interest rates paid: the basic rate of 0.3% applies to county court and high court awards involving adults, while the "special" rate of 0.5% is paid on court of protection awards, leaving those who the money is intended for almost completely exposed to the ravaging effects of inflation and tax. The CFO also offers an equity index tracker fund, run by Legal & General.

The office holds a total of £3.3bn in cash; and wealth management service Investec Wealth & Investment has calculated that inflation has diminished the value of this money by £140m last year alone.

Richard Fullman, divisional director of the personal injury and court of protection team at Investec Wealth & Investment, said: "The Special Account used to pay 6% as recently as two years ago, but it dropped to 0.5% in July 2009. Sadly many parents and carers charged with the responsibility of managing their dependants' financial affairs have kept the money where it is despite the impact this is having.

"In our experience many people don't realise that the ongoing interest they receive plus any capital gain over their allowances, is taxable. Add to this a widespread tendency to underestimate the impact of inflation over the lifetime of an award and you have a situation where many vulnerable people are in danger of running out of money too soon. It's tempting to leave a large sum of cash on deposit, particularly in the current investment climate. But it's not necessarily the lowest risk approach and almost certainly isn't the most tax efficient."

A Ministry of Justice spokesman said: "This is not a commercial banking service, these accounts are designed to protect funds awarded by the courts with a 100% government-backed guarantee and at zero risk to the individual.

"These are not supposed to be an investment fund, and they were not established to use the market to increase the value of the sum being held."

Justice minister Jonathan Djanogly announced in May that the CFO would work in partnership with National Savings & Investments (NS&I) to modernise the services it provides to clients. But NS&I says it will purely be working on administration with the CFO: it will not be involved with running the accounts.

Anthony Fairweather, a partner with Bristol law firm Clarke Willmott, acts as a deputy – a person appointed by the court of protection to manage the affairs of someone who lacks the mental capacity to manage them. Such deputies may be professional, such as a solicitor, or a lay person – usually a family member of the person concerned. In the case of very large awards the deputy is usually professional. "In both cases, the deputies may not review arrangements often enough, or feel confident about moving money away from the CFO," he says.

There may be legitimate reasons for leaving the money deposited with the Court Funds, such as the person benefiting from the money being a minor but nearing their majority. On its website the CFO says: "Each case is different, but as a rule, where the award is for £10,000 or less, or has less than five years until the child reaches 18, or the court has directed maximum income, all the money will be deposited in the Special Account."

Fairweather says: "You need to look at the personal circumstances of the recipient and how far they are from reaching the age of 18. If it's only a short time, then the CFO special fund is fine; if longer, the CFO's equity index tracker fund may be better. But it's open to the minor [or their representatives] to say 'we want to take the money out and put it in a personal injury trust'. That request [to court] is often successful."

Putting the award in a personal injury trust has two main advantages: the value of the trust is ignored for the assessment of eligibility to most means tested benefits and local authority support; and it allows the money to be invested in a way that best suits the needs of the beneficiary.

So how should a deputy approach this? "First I would seek advice from a chartered or certified financial planner – the highest levels of financial advisers – to consider the individual's requirements and to prepare a cashflow forecast. You need to know how long the money needs to last, what level of risk you need to take and consider the appropriate asset allocation.

"For this you need someone who has an understanding of personal injury claims and personal injuries. Once this is done a decision can be made on how much needs to be readily accessible for a rainy day and the extent to which you can invest with a discretionary portfolio manager to generate an income or capital growth for the future."

Investec's Fullman adds: "Any portfolio will need 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 they will incur over the course of their lifetimes, such as housing, day-to-day expenses and care costs."

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