No amount of money can ever really compensate for a permanent disability, but meticulous attention to detail, patience and constant vigilance can deliver priceless outcomes when the stakes are high. Mark Story reports.
When a teenager has a lifetime of earnings potential scuppered before he’s even embarked on a career, any lump-sum payout is by default a big deal. Such was the case when 23-year-old Novocastrian Tony Walker (not his real name) was awarded significant compulsory third party compensation for brain damage incurred as a teenage passenger in a car accident.
Tony’s parents, Chaz and Lil (not their real names), did all they could to provide the best care possible for Tony, at considerable personal expense. When Tony’s case finally made its way through the NSW court system, Chaz – as Tony’s legal guardian – together with their barrister, hired local professional planner Andrew Price as an expert witness to the case.
Five years later, Tony was finally awarded a lump sum of $2.5 million, plus an additional $300,000 payment to manage these funds over his lifetime. Tony’s parents were also awarded $70,000 to cover out-of-pocket expenses incurred over the previous five years.
COMPLYING WITH THE LAW
Under NSW law, funds could not be released to the Walker family until a financial manager had been appointed. Funds could only be released once the proposed financial plan for the investment of Tony’s payout had been signed off by the NSW Trustee and Guardian. Once an initial lump-sum payment had finally been awarded to Tony in January 2009, Price was formally hired by the Walker family to work out how these funds should be invested.
Owing to the magnitude of Tony’s payout, he is effectively prevented from receiving any future pension, disability and/or medical-related Centrelink entitlements for a period tantamount to three lifetimes.
“We knew that if Tony did blow all his money, there wouldn’t be any more handouts,” recounts Chaz.
“So any financial strategies proposed by Andrew had to convince the NSW Trustee and Guardian how the investments would last Tony’s entire life.”
Price, in conjunction with Chaz, is required to report to the NSW Trustee and Guardian annually. While there is room to exercise discretion in managing Tony’s funds, any significant deviation from the stated plan also requires NSW Trustee and Guardian approval.
“By the time I’d approached the NSW Trustee and Guardian, we’d already locked in what we wanted to do with the money. And once they were satisfied that Tony’s money wasn’t at risk, we were allowed to proceed,” Price says.
SUPER STRUCTURE
Adding to the attractiveness of a super fund option, says Price, was Tony’s exemption from the $150,000 annual cap on non-concessional contributions – or a $450,000 lump-sum limit, with no other contributions for the next two years.
“We took advantage of the opportunity under a personal injury provision to contribute a considerably larger amount than the standard maximum $450,000 in non-concessional contributions,” says Price.
It was subsequently agreed upon by Price and Chaz that half Tony’s funds – $1.4 million – would go into a Macquarie Pension Manager. Being deemed “unpreserved super” – and not subject to normal super rules – meant there were no aged-based conditions governing the subsequent release of these funds.
Adding to the attractiveness of super as an investment structure for Tony was its tax-free status, Price says – not only in terms of money going in and out, but also tax-free earnings along the way.
“The beauty of a Macquarie Pension Manager fund meant that we could have all the benefits of a self-managed super fund (SMSF) – with investments divided between direct shares, managed funds, cash and income – without the associated compliance or costs,” Price says.
BEYOND SUPER
The remaining half of Tony’s funds was invested across numerous asset classes to provide adequate diversification between income, growth and capital preservation. To alleviate any worry over immediate cashflow, Price also recommended that $104,000 remain in cash for the first couple of years.
A further $600,000 was divided evenly between four Macquarie term deposits of $150,000 each. Price decided to invest these funds over three, six, nine and 12 months respectively – with matured deposits being re-invested for a further 12 months. This means they never have to wait more than three months to reinvest some funds, based on prevailing market opportunities.
At face value, there’s a lot of money being invested in term deposits; but if Price learnt anything from the GFC, it was the need to protect funds from another hammering, especially given heightened market volatility.
Given Tony’s fairly modest income needs, and the investment life cycle ahead of him, Price says there’s no need to expose him to anything more than a conservatively balanced risk profile.
“We could have found a better rate, but a term deposit of 6.2 per cent is still 170 basis points over the cash rate – and is virtually risk-free,” says Price.
To increase exposure to growth and income, Price recommended that $360,000 be invested in ASX-listed blue-chips stocks, most of which pay high-yielding, fully-franked dividends. Remaining cash parcels of $105,000, $400,000 and $140,000 were invested within small-cap, international and property funds respectively, through the Macquarie Pension Manager account.
“With the global economic outlook on an upward trajectory, especially within emerging markets, we wanted to wire Tony’s portfolio to future growth within global sharemarkets,” says Price. “Given Tony’s age and future investment horizon, we deemed this level of exposure to a sustained recovery in global equities perfectly appropriate.”
