The Gazette 1984

JANUARY/FEBRUARY 1984

GAZETTE

Investment of Court Awards

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 17

by Des Peelo, F.C.A.*

T 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