Insights
Investing your compensation
What to consider in a financial plan before investing
Each year, thousands of people in the UK receive compensation awards for things like personal injury claims and negligence. In 2024, both the Infected Blood Scandal and Post Office Postmasters scandal also moved forward in paying claims to victims. After fighting hard to receive an award, it can be daunting to know what to do with the money especially after having gone through a traumatic experience.
At Path, beyond financial planning, we offer empathy. While we can never fully understand what you have been through to get your award, we will do our best. Understanding a client’s history, current situation and dreams for the future is key to making a financial plan for anyone and it’s something we do well.
The financial plan
You have just received a compensation award. Now what? Each of us is unique with our own set of life circumstances and goals. You need to establish a financial plan which is right for you.
Most people don’t understand money; it is stressful, filled with jargon and easy to make mistakes or get ripped-off. There are many dubious investment schemes and not everything is regulated. At Path, we aim to be your trusted adviser and guide.
Here are some of the key things to consider:
If you have any unsecured debt, for example a credit card or store card, then you should consider paying it off. This type of debt often comes with high levels of interest and should be avoided where possible.
Mortgages are different although you could still consider reducing them. Mortgages are secure debt and typically come with lower interest rates relative to unsecured debt. The argument for reducing your mortgage is stronger now than it has been for many years as a result of increased interest rates; however, in the long term you would typically expect a higher return from investing than reducing your mortgage. If you do decide to reduce your mortgage then you should be careful to consider and avoid early repayment charges – consult a mortgage adviser if you are unsure.
We should all have a sensible rainy-day fund which can be used in the event of an emergency like replacing the boiler or fixing the roof. How much cash you should keep is completely dependent on your personal situation. A good rule of thumb is keeping your income shortfall, outgoings less regular income, for 3-5 years plus a small emergency fund.
Beyond reducing debt and establishing a sensible cash reserve, you should be considering investing for your future. You need to establish what the money is for; does it need to last your lifetime? Do you need to start drawing on it now or, if not, when? Does it need to be held in trust for you? People receiving compensation awards can have complex needs and scenarios.
There are four investment products we would typically consider for clients; investment ISAs, pensions, General Investment Account and Investment Bond. Which of these investment products you could and should use is part of your financial plan and depends on your goals objectives and circumstances. Typically, using pensions and ISAs to the extent you can is very tax efficient for most people although all products come with their pros and cons and it is important to assess those before establishing your plan of action.
As well as which products you invest in you should consider where you would like to invest. How much risk should you take with your investments? Are you happy to invest in fossil fuel companies and weapons manufacturers or would you prefer a portfolio more aligned to your values? The investments need to be right for you. At Path, we only deliver sustainable/impact investments to clients and avoid unethical investments.
Depending on the nature of your compensation it may be a lump sum or regular monthly amount or both. If it needs to last your lifetime, you need to project forward its value including any necessary withdrawals to ensure you draw on it at a sustainable rate.
At Path, we deal with this by building a ‘cashflow plan’ where we input all your information into some computer software and project forward the value of your wealth to illustrate whether it is likely to last longer than you live or not. Although cashflow projections aren’t guaranteed, and rely on a number of assumptions, these give us a good indication of whether you are on track to meet your goals.
We have the right expertise to help, including champions for vulnerability and compensation advice. You can read about our financial advice process here. If you would like to meet with us for a no obligation free initial consultation to discuss your position then please get in touch.
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RISK WARNING
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.