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Spend & Save

Don't allow a disaster to be a cash crisis

Get what you're entitled to after an accident, say Chiara Cavaglieri and Julian Knight

Think of the worst things that can happen to you and among them will probably be a debilitating accident or perhaps medical negligence.

They are much more common occurrences than you may think. Just ask Sandra Broadbent, 60, who suffered a brain injury and was left paralysed in both legs and one arm after being knocked over on a pedestrian crossing in 2001.

The subsequent court case took two years to conclude, but eventually Sandra was awarded a £3m lump sum based on an expected life span of 14 years.

Sandra's husband, Stuart, 62, who now handles her finances, sold their old home and used the money to buy his wife a specially adapted bungalow in Hazel Grove, Cheshire, so that she could have round-the-clock care.

"Ten years along she has very little memory, but she is able to eat with one hand, she watches TV and she loves doing word searches on the computer," says Stuart, who explains that outgoings for her care are close to £17,500 per month.

The damages are being managed by specialist advice firm Frenkel Topping, and although the pot was hit heavily by the recession which wiped out much of the income Sandra was earning by interest and investments, the firm has managed to stretch it out for another four or five years.

"Sandra will probably outlive her finances," says Stuart. "She does receive some disability benefits, but it doesn't come to much. I should have retired at 56 from the NHS but now my pension pays the mortgage and I have to work to live."

Sandra and Stuart are far from alone in their difficulty and large financial settlements made when someone suffers injury or disability have to be handled properly. Expert independent advice is crucial and ideally should be sought at the earliest possible stage, because securing compensation is not simply about how much, but how it's paid out.

Inez Brown, of law firm Medical Accident Group, says: "Many claimants and their solicitors often delay seeking this advice until a claim has settled, by which time it's too late to amend the settlement terms. The first step in the settlement process is to determine whether the client would benefit from a lump-sum payment or regular payments for the rest of the claimant's life."

In most cases, damages for personal injury and clinical negligence are settled as a lump-sum payment, but this needs to be properly managed.

Richard Fullman, head of personal injury at Investec Wealth & Investment, warns against leaving awards in the Court Funds Office's Special Account (which holds money awarded in court to children and people who are unable to look after their own affairs) as it currently pays just 0.5 per cent interest, falling way short of inflation.

"Leaving large sums of cash on deposit may seem like a risk-free option, but it can have catastrophic consequences for lifetime awards as capital is rapidly haemorrhaged and the returns needed to get the portfolio back on track become unfeasibly high," he says. "The risks of getting it wrong can be devastating and result in parents and carers responsible for managing their dependents' financial affairs facing tough decisions around cutting the costs of medical care and support."

One of the first considerations will be setting up a personal injury trust so that the damages will be disregarded when it comes to assessment for current or future entitlement to means-tested state benefits.

There are different forms of trust and picking the right type will depend on your personal and family circumstances. For example, bare trusts allow you to pass on damages to children, while discretionary trusts offer greater flexibility in terms of inheritance tax.

On average, residential care costs start from £532 a week, while a nursing home is closer to £750 a week. Spending just four years in care could therefore equate to a colossal bill of £156,000.

The Government has promised a complete overhaul of the current care system, introducing deferred payments so that councils cover care bills initially before recouping the money from an individual's estate after their death. There will also be an overall cap on elderly care costs of £72,000 from 2016 (based on the standard fee, which the local authority in the area would pay for the care), but critics say these proposals will only help a few people.

The London School of Economics has warned this offers no protection to the estimated 340,000 elderly people who pay for help in their own home. Furthermore, the cap will not include the "hotel costs" of a care home such as food, energy bills and the accommodation (set at £12,000 a year under the reforms). And people will only be able to defer the care costs if they have assets of less than £23,250 (excluding the value of their home). While the poorest will continue to get free social care, anyone with assets of over £118,000 – this time including the value of property – will have to cover their care home costs until they either reach the £72,000 cap or their assets fall below £118,000.

The welfare system is so complicated that it is easy to see why navigating it without any help leaves many people missing out on entitlements. A specialist lawyer or your adviser should be able to point you in the right direction for any financial support, including attendance allowance, disability living allowance or personal independence payment, carer's allowance and NHS continuing care funding.