Investment Options For Your Payout

Your biggest fear as a recipient of a personal injury or medical negligence claim is likely the possibility of losing your payout due to bad decisions. One of the most important decisions you’ll need to make is how you invest your compensation. A careful balance must be struck between achieving the best possible return and preserving your capital.

The stories of people losing their settlements to scams or poor advice are common—and understandably rightening.

As a result, many recipients choose to keep their money with the bank because, as the saying goes, “at least my money is safe there.” But is that really the best decision? Below, we explore a few of the most common investment options available to settlement recipients. Each one is assessed for its advantages, disadvantages, and suitability for providing long-term income and capital security.

Option 1: Keeping Your Money with the Bank

Banks offer savings products such as cheque accounts, savings accounts, and fixed deposits. These are low-risk options that prioritize the safety of your capital. Depending on your needs, you can keep funds fully liquid (for instant access) or lock them into a fixed deposit to earn higher interest.

Advantages:

• Perceived safety: South Africa’s large banks are generally seen as stable.
• Government protection: The SARB’s Corporation for Deposit Insurance (CODI) now insures qualifying deposits up to R100,000 per depositor per bank.
• Predictable income: Fixed deposits pay a locked-in rate, protecting income if interest rates fall.
• Flexibility: Immediate-access (e.g., savings) accounts benefit when rates rise.

Disadvantages:

• Limited income: Interest rates on savings accounts are often too low to cover monthly needs.
• Liquidity constraints: Capital is locked in fixed deposits until maturity, with penalties for early
  withdrawal.
• Inflation risk: Returns may not keep pace with rising living costs.

Bank accounts provide peace of mind but are often inefficient income generators. For larger settlements, CODI’s R100,000 cap means most of the payout is not insured.

Option 2: Money Market Fund Unit Trusts

Money-market funds are collective investments that buy short-term, interest-bearing instruments from banks and the government. They are designed to preserve capital and provide regular income.

Advantages:

• Higher yield: Often outperform savings accounts.
• Liquidity: Withdraw anytime.
• Capital stability: Aim to maintain a stable unit price.
• Benefit from rate hikes: Returns rise with interest rates.

Disadvantages:

• No guarantees: These funds target stability but are not insured.
• Rate sensitivity: Income falls when interest rates decline.
• Limited growth: Not designed for long-term capital appreciation.
• Money-market funds strike a balance between safety and flexibility. Many South African funds have delivered positive rolling 12-month returns in recent years, but investors must remember there is no guarantee.

Option 3: RSA Retail Savings Bonds

Offered directly by the South African government, these bonds come in 2-, 3-, and 5-year fixed-rate versions, and an inflation-linked option. Minimum investment is low, costs are zero, and interest can be paid monthly in certain series.

Advantages:

• Government guarantee: Backed by the SA
  government.
• Fixed income: Rate locked for the term.
• Low cost: No fees or commissions.

Disadvantages:

• No upside from rising rates: You’re stuck at the
  agreed rate.
• Reduced flexibility: Withdrawals before maturity are
  limited and penalised.

Provides a level of capital security, but your investment has to remain locked in for a specified period.

Option 4: Income Fund Unit Trusts

These invest in bonds, credit instruments, and money-market assets. They take slightly more risk than money-market funds to achieve higher interest returns.

Advantages:

• Higher potential income.
• Diversification across issuers and instruments.
• Monthly income options.

Disadvantages:

• Moderate volatility: Values can dip during
  interest-rate changes.
• Market sensitivity: Bond values fall if rates rise

Income funds provide regular income over a medium- to long-term horizon. This is achieved by investing in assets that are subject to market fluctuations.

Option 5: Annuities

Insurance companies offer annuities funded by a lump sum.

• Life annuity: Pays guaranteed income for life.
• Living annuity: Lets you control investments and withdrawals, but your capital can run out if badly
  invested or due to extreme market events. If the withdrawal rate is too high, this will also negatively impact your capital.

Advantages:

• Predictable income: Life annuities guarantee payments.
• Longevity protection: Cannot outlive income (life annuities).
• Inflation-linked options available (life annuities).
• The ability to invest in financial markets enables the investor to potentially earn returns higher over time
  (living annuities)
• Living annuities can be passed on to beneficiaries in the event of death.

Disadvantages:

• Irreversible commitment (life annuities).
• Inheritance potential conditional (life annuities)
• Market risk: Returns are not guaranteed. Gains or losses depend on the performance of the underlying investments (living annuities).

Annuities provide stability but must be chosen carefully with professional advice.

Option 6: Balanced Investment Portfolios

Balanced portfolios typically combine shares (equities), bonds, property, and cash to achieve both growth and
stability.

The goal is to spread risk while still delivering growth that keeps ahead of inflation. Unlike single-asset investments, they are designed to provide a smoother ride by blending both income-generating and growth assets.

Advantages:

• Diversification: Risk is spread across different asset classes. Your payout is not tied to one type of
  investment, reducing the impact of any single market shock.
• Inflation protection: Equity exposure helps returns keep pace with or exceed inflation.
• Flexibility: Portfolios can be adjusted to your risk profile. You can choose a conservative, moderate, or more growth-focused mix depending on how comfortable you are with taking on risk.
• Growth potential: Offers higher long-term returns than cash or bonds alone.

Disadvantages:

• Market volatility: The value of your investment fluctuates with markets, which may feel unsettling. It can be stressful if you need to withdraw at a time when markets are in a downcycle, for example, during the global financial crisis, the COVID-19 pandemic, the Tech bubble, etc.
• Time commitment: Best suited for investors who can leave funds invested for at least 3–5 years.
• Complexity: Requires professional advice and active management to set the right balance for your situation and match your personal risk tolerance.

Who should consider this option?

Those with a mix of medium- to long-term goals and who do not need to access their full payout immediately, and who can tolerate some ups and downs in the markets. For example, a conservative balanced fund might hold 40% shares, 50% bonds, and 10% cash — aiming to provide steady income while still growing your
investment over time.

Balanced portfolios are a strong choice if you want your investment to grow and keep up with inflation, but they are not ideal for short-term needs. They require patience and a willingness to tolerate some ups and downs.

There is no one-size-fits-all investment solution. The right solution depends on your individual circumstances, needs, and comfort with risk. The key is to evaluate your options carefully and choose a strategy that aligns with your personal circumstances, risk tolerance, and long-term goals. Because settlement funds often come with unique challenges, it is essential to work with a qualified and registered financial advisor who has experience in this area. The right advisor will not only guide you in structuring your investments but also help you understand the tax implications of each option—ensuring your payout is preserved and works for you over the long term.

It is always a good idea to consult with a financial advisor to help you develop a personalised investment strategy that aligns with your specific needs and circumstances.