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The case for long-term investment to provide a lifetime of care
07 Oct 2020
As NS&I cuts rates, is cash really risk-free?
In late September, NS&I (National Savings & Investments, the UK’s state-owned savings bank) announced it is slashing the rates of return it offers on many products from 24 November 2020. The new rates are well below the consumer price index (CPI), a measure of inflation which is currently 1%. As a result, many investors could find themselves in a situation where they cannot keep up with the rising cost of living and even eventually run out of money.
The risk of inflation in Court of Protection and Personal Injury cases
NS&I products are a popular choice for individuals in receipt of a compensation payment following a personal injury or clinical negligence, as they have historically offered a low-risk solution to storing large amounts of cash for the longer term.
However, with the announcement of the upcoming cut in rates, cash may not be as risk-free as investors had thought.
Jonathan Taylor, Head of the Specialist Court of Protection & Personal Injury team at Investec comments:
The significant cuts in NS&I rates may be the final straw for many investors seeking cash-only returns. With this in mind, we are currently working with our clients to assess excess cash balances and consider whether investing cash previously held with NS&I is now in their best long-term interests.
Managing inflation risk to protect a compensation award
A typical compensation award can run into millions of pounds and unlike inherited or earned money, this is awarded to provide for a lifetime of income and care. As such, the calculations can be more difficult and the decisions over which long-term strategy to adopt can be more important, as there may be no room for recovery.
While there may, therefore, be some reluctance to take on investment risk, in many cases, the risk of investing is lower than the risk presented by inflation. Jonathan explains: “Investing over the long term does not automatically involve high risk. Our low-to-medium risk portfolios can often provide clients with a risk-controlled, long-term return that stays ahead of inflation and meets current or anticipated care costs, without taking too much risk.”
At Investec, we specialise in helping our clients understand risk and we work together to formulate an investment strategy that meets the goal of providing for a lifetime of care. Taking the right amount of risk early in the investment process can prevent individuals from having to take higher risk later in the investment cycle to make up for lost ground.
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