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Financial Settlement

Managing a Financial Settlement

By understanding what’s important to you, we support
you to make the right decisions for your future.

Duncan Glassey

When faced with a life-changing injury, it is a heroic task to keep moving forward with all the thoughts, feelings, and self-judgements faced. It requires courage, creativity and determination to succeed.

The pursuer will be faced with many seemingly insurmountable obstacles, all as foreign and unknown as each other.

This article summarises my book, ‘A Guide To Managing Your Financial Settlement’, providing strategies that enable individuals and family members to work effectively through the life transition of receiving and managing a financial settlement.

Technical preface

 

There are several fundamental aspects of a financial settlement to consider:

 

Settlement structure:

  • The settlement either comprises a one-off capital lump sum or a reduced lump sum plus an annual income for the rest of the pursuer’s life.

Trust options:

  • There are benefits of holding the settlement in a Personal Injury Trust. Namely, the preservation of entitlement to means-tested state benefits. Funds must be placed in Trust within 52 weeks of receipt to ensure preservation.

Investment priorities:

  • It is important to make long-term investment planning decisions to maximise the longevity of the settlement. Investment risk should be appropriately managed.

Emotional impact:

  • This can impact the management of the settlement as well as personal life. However, it is valuable to remember why the settlement has been awarded: to initiate positive change.

Working through transitional stress

 

Stress can impede the ability to think clearly and make sound financial decisions. Recognising the emergence of psychological impacts enables them to be addressed, ultimately leading to a stronger financial future.

Typical characteristics of transitional stress include:

  • Confusion stemming from shock
  • Invincibility – being unrealistic about what is possible
  • Physical/mental fatigue
  • Fear-based decisions
  • Unresponsive as still shocked
  • Victim mentality – ‘why me’
  • Combative/angry

It is vital to address psychological impacts. This can be achieved by speaking with close friends and family members, a life transitions coach, professional counselling, exercise, meditation and relaxation. Everyone will have something that works best for them.

Only when stress-related emotions do not influence decisions should priorities be determined and decisions made.

Managing Transition

For those who have experienced serious personal injury, there is often little time to prepare for this transition. The various stages of transition impact the personal and financial lives of everyone involved.

Stage 1

The funds will not yet have been received during this initial stage, but the anticipation will have an impact.
Goals and priorities must be identified. I will often ask the question, “If we were having this discussion in three years, and you were looking back, what has to have happened for you to feel happy with your progress?”

Stage 2

The anticipation has ended, and the financial settlement is paid. This can often lead to feeling overwhelmed by the volume of work required.
Taking time to absorb what has happened allows the responsibilities stemming from a financial settlement to be comprehended. Many recipients feel disoriented; hence it is important to make only essential decisions.

 

Stage 3

Post-settlement brings the opportunity to determine realistic priorities. As different scenarios are considered, it will become evident how components of financial and non-financial life interconnect. The key is to adapt and rebuild a foundation for a ‘new normal’, acknowledging this may take several years.

Stage 4

As life is repositioned post-settlement, it becomes easier to understand what is needed and how best to achieve it. The importance of a financial plan will become evident, and the peace of mind offered by it ensures the recipient feels confident in their spending.

There will undoubtedly be periods of difficulty, lack of readiness and struggles with decision-making. If we accept such difficulty as an integral part of life, we will be in a better position to cope with anything.

Making your settlement last

The longevity of the settlement is the primary priority. Many factors will affect this, including inflation, life expectancy, and investment returns. Here, we will look at steps that can be taken to improve settlement longevity:

Step 1 – Planning

  • Understand what it means to be an investor
  • Develop a financial plan focusing on the most important priorities
  • Select a team of advisers
  • Determine attitude to investment risk

Step 2 – Assessing

  • Determine monthly outgoings and ascertain how long income will be needed for
  • Adjust expenditure to ensure the settlement lasts for the recipient’s life
  • Seek advice regarding tax, inflation and investment return
  • Determine affordability of property, including modifications and maintenance costs

Step 3 – Adjusting

  • Accept that financial decision-making will always be a part of life
  • Enhance financial understanding, specifically in relation to investment risk and tax positions
  • The ‘aha’ moment during this final step is knowing exactly how long the financial settlement will last

As the financial situation becomes more transparent, it is possible to relax a little, no longer consumed by the worry the financial settlement initially brought.

Reacting to the settlement

Adjusting to the settlement can be difficult. Not all recipients respond in the same way, but in my experience, pursuers react in one of three ways:

Acceptance:

  • Some view the settlement with openness. They view the hurt separately and hold no grudge on the money. Recipients enjoy the benefits of the money, even if it does not lessen the pain endured, without the negative emotions that plague others.

Conflict:

  • Some recipients cannot disconnect the money from the injury, which creates feelings of anger, sadness or guilt. Things they have purchased with settlement monies, such as a new house, constantly remind them of the injury.
  • Time and distance from the injury can help alleviate some of the conflict. Some choose to donate money to charities connected to the injury they have experienced. Others may benefit from speaking to a life transitions coach to separate the pain from the money.

Rejection:

  • Some recipients try to separate themselves from the money. They are in so much pain that they cannot process the emotion which stems from the money. This can result in excessive gifting, reckless spending or taking excessive risk.
  • The advantages of establishing a Trust are evident here. Part of the trustees’ role is to ensure funds are appropriately spent. Many find the support of trustees a great comfort as they act as a physical and psychological barrier and help reduce the pressure of financial decision-making

Emotional clarity about the money will not come overnight – but the sooner issues are addressed, the sooner a healthy relationship with the money will be formed.

Common concerns

Awaiting a substantial sum:

  • Pursuers may begin to shift their life and finances in anticipation if a win is expected. Be prepared to either not secure a settlement or be awarded less than initially expected. Until the money is physically awarded, assume the case is far from won. This avoids dwelling on ‘what if’ scenarios.

Length of litigation process:

  • Think marathon, not sprint. Expect the case to take longer than expected. I have clients who have waited years for a successful resolution.

What is a structured settlement:

Instead of receiving the settlement as a single lump sum, a structured settlement provides a reduced lump sum with an annual income over the recipient’s lifetime.

Structured settlements have several advantages:

  • Long-term security
  • Tax-free
  • Guaranteed payment – regardless of economic conditions, unlike investment returns
  • Indexed in line with care costs

Disadvantages:

  • Only a proportion of the award is immediately accessible. This makes it more difficult to pay for large, one-off expenses.
  • An invested lump sum may produce a higher long-term return.

Conclusions

Change offers us the opportunity to discover something new about ourselves, our relationships and our choices. A rich experience comes with change, and if we embrace it and all its possibilities, wonderfully positive, transformational things can happen. Even circumstances that are unbearably painful can lead to something good. My hope is that this piece will better enable pursuers to navigate this transition, starting from a position of pain and loss but ultimately feeling comfortable in their situation.

A copy of A Guide To Managing Your Financial Settlement can be purchased from Amazon

This article was originally published in PI Focus Magazine for The Association of Personal Injury Lawyers (September 2022).

Key steps towards successfully managing a financial settlement

 

Step 1 – Take control

  • This does not require decision making. Control can be observing and planning.

Step 2 – Slow down

  • Know which decisions need to be made and which can be delayed. Take time to adjust.

Step 3 – Get help

  • Build an advisory team of experts you trust, comprising a solicitor, tax adviser and financial planner. All three are needed to address tax, legal and financial issues.

Step 4 – Upgrade money beliefs

  • Identify and let go of restrictive money beliefs which may negatively impact the management of the settlement. For example, if one views tax advisers as dishonest and does not hire one, they may pay more tax than necessary.

Step 5 – Manage relationships

  • Receiving a financial settlement when a friend’s disabled child has not, or seemingly splurging on a new home when friends are struggling, can lead to a change in relationships. A solution is not divulging too much information.

Step 6 – Stay on track

  • It is important to stick to the financial plan and adjust where necessary.
  • Equally, avoid the following:
    • Spending/gifting too much
    • Investing unwisely
    • Fraud

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Registered in Scotland No SC635011. Registered Office: 10 Charlotte Square, Edinburgh EH2 4DR.

© 2022 WealthFlow Group Limited
All Rights Reserved | Privacy | Cookies Policy

Head Office & Consulting Rooms: 10 Charlotte Square, Edinburgh EH2 4DR.

Mail correspondence to our Central Scotland Admin Hub: WealthFlow Group Limited, PO Box 14947, Grangemouth FK3 3AU.

Authorised and regulated by the Financial Conduct Authority

For your protection, unresolved complaints can be referred to the Financial Ombudsman Service.

Registered in Scotland No SC635011. Registered Office: 10 Charlotte Square, Edinburgh EH2 4DR.