The Gazette 1984

GAZETTE

JANUARY/FEBRUARY 1984

Investment of

Court Awards

Des Peelo, F.C.A.*

HE scale of court awards has now become very large.

In the particular case of road accident victims,

awards of several hundred thousand pounds are now

relatively commonplace. The receipt of such large sums

by individuals not perhaps previously accustomed to

handling money can present considerable problems, not

least of which is the dilemma of investing it to best

advantage. There have been a number of sad cases where

the money has been unwisely invested or frittered away

through foolish spending. Before reviewing how such

money might best be invested, however, there are three

overall features to be considered, namely, the needs of the

individual, inflation and taxation.

Needs of the Individual

This is of paramount concern and requires very careful

consideration. The victim may be the father or mother of

a large and young family or, indeed, may have a

dependent parent. Their financial needs, as well as those

of the victim, have to be taken into account. The future

medical requirements, if any, must be considered very

carefully. In some cases continuous medical care will be

necessary and in others the medical assessment may be

that progressive disablement will occur so that at some

future date heavy expenditure will become necessary,

perhaps even involving something close to permanent

hospitalisation. In other cases, there may be no necessity

for future medical treatment. The extent to which future

medical costs will be met by an outside party such as the

State or the VHI will be a matter of fact in each case. If at

all possible, it is best to plan to meet such future costs out

of income rather than capital.

There may be immediate capital costs to be met in

terms of house alterations, special medical equipment for

use in the home or specialised transport. Again this will be

a matter of fact in each case. A housekeeper or nurse may

have to be employed in some cases and the cost of this will

also have to be met from income. As explained later, there

is a considerable tax snag involved here, as the cost of

such assistance has to be met from after-tax income.

Finally, under this heading, day-to-day living expenses

have to be considered. In some cases, the individual may

have other income through employment or have the

advantage of reduced living costs through residing at

home or with a relative. A point not to be overlooked here

is that although the person concerned may at present have

secure living accommodation and care, this may not

always be the case as parents or relatives may die and

family circumstances alter. Too high a reliance on

generating an immediate large income, which may be

heavily taxed, could sharply reduce the prospects of long-

term investment appreciation to meet just such an

eventuality. From looking closely at the above points, a

picture can be assembled of the actual financial needs of

the person, both short and long term, as a first stage in

devising an investment programme.

Inflation

Everybody knows that inflation reduces the purchasing

power of money but, curiously, in relation to investment,

the effect of inflation is not perhaps well understood. To

illustrate this point, supposing you had £1,000 to invest

now and inflation over the coming year was expected to

be 15%; to maintain the purchasing power of the capital

in one year's time would require the investment to have

grown to £ 1,150. Now this is where the effect of inflation

is misunderstood. If the investment had in fact generated

a growth of 15% whether as interest earned or dividends

received, and this income was then spent, effectively you

are spending your capital. In other words, the income

should be

reinvested

to keep the purchasing power of the

capital intact. It is only income in excess of the inflation

rate that is

real

income. The high rate of tax on most

forms of investment income exacerbates the difficulty of

achieving any kind of after-tax return to match the

depreciation of the capital through inflation, yet alone

generate a

real

income.

As a chilly reminder of the effect of inflation, consider

that £1 in today's values will only have purchasing power

of 62p in five year's time, if inflation runs at 10% p.a.

during that period. Inflation in Ireland for the three years

to 31 December 1982 has run at almost 18% p.a., though

the expectation for the current year is 11%, a downward

trend that, hopefully, may continue. When investing

money in circumstances in which individuals with a life

expectancy of perhaps thirty or forty years will be

dependent on investment income for the duration of their

lives, combatting inflation is clearly of paramount

importance.

The effect of inflation on those dependent on

investment income should therefore never, under any

circumstances, be underestimated.

Taxation

Nobody has to be told that personal taxes are very high

in Ireland. A single person, living on taxable investment

income, currently reaches the top rate of Income Tax of

65% on income in excess of £11,450, a married person at

£22,900. Capital gains are taxed on a sliding scale of 60%

for short-term gains, 50% for gains within three years and

40% for gains realised after three years. Unlike the

personal tax allowances and rate bands, however, it is

only gains in excess of the inflation rate that are taxable.

This underlines the necessity of generating only enough

after-tax income to meet the financial needs outlined

earlier, with a pronounced emphasis towards longer term

and lower taxed, capital appreciation. Tax-free income is