When a person claims means tested benefits from the Department for Work and Pensions (“DWP”) or needs care provided by the Local Authority, that person has to show that they:
- have no income, or income below the relevant levels;
- have no savings, or no savings above the relevant levels.
If you receive compensation as a result of your claim, that compensation will be a lump sum that will be treated as capital by the DWP or Local Authority.
In most cases where someone receives a lump sum (this could be from any source) there is usually nothing that can be done to avoid that money being taken into account for benefits purposes.
However, if your lump sum comes from a personal injury claim, it can be dealt with in such a way that the DWP will ignore it for benefits purposes (treat you as if you do not have it at all)
Which benefits are relevant?
Any of the means tested benefits are relevant:
- Personal Independent Payments
- Income Support
- Universal Credit
- Income Based Job Seekers Allowance
- Income Based Employment and Support Allowance
- Pension Credit
- Housing Benefit
- Tax Credits (because income from savings are taken into account)
- Council Tax Support
- Social Fund (Sure start maternity grant, final payment, cold weather payment).
Benefits that do not depend on income but on disability are not relevant.
Capital limits for means tested benefits
The current rules are that if you have savings of more than £10,000 your benefits are affected.
It will be assumed that for every £500 over £10,000, you have £1 a week income which will be treated as “notional income” and deducted from your benefits.
If you have over £16,000, then you are no longer entitled to benefits at all.
Everyone in receipt of any such benefit must report a relevant change in circumstances to the DWP and failing to do so can lead to prosecution and being asked to repay benefits that should not have been paid.
So if, as an example, a person has, say, £4,000 savings, is on Income Support and then receives £20,000 compensation so they now have £24,000 they are no longer entitled to means tested benefits and will not be until their savings go below £16,000. Even then that person will be treated as having income.
The law also says that if you intentionally deprive yourself of capital for the purpose of receiving benefits, you will be treated as still having the capital. Accordingly if you receive a large lump sum and “blow it”, the DWP will treat you as still having it.
These rules, therefore, can lead to your compensation having a significant effect on your benefits position – particularly if you are actually receiving any of those benefits, whether as a result of your claim or not.
Income limits for means tested benefits
There are also income limits for means tested benefits and income that derives from capital (such as interest on a building society account) can be counted as income by the DWP when considering your entitlement to any such benefits.
How can this be avoided?
Social Security legislation provides that if you receive compensation for Personal Injuries and you put that compensation into a Personal Injury Trust, the DWP will not count that compensation as capital. The law also allows you to pay off debts that must be paid (although this can be more difficult because you also have to show that you have not deprived yourself of capital for the purpose of receiving benefits).
Therefore if you put your compensation into a trust, you will always have the benefit of it and will still receive your benefits.
Is it worth setting up a trust?
Whether a trust should be set up in any particular case depends on various factors:
- How much your compensation will be and what it was made up of (particularly if there is a large sum for past and future loss of earning, and past and future care needs).
- What your financial needs are as a result of the injury.
- Whether those needs can be met without using the compensation money or not.
- What your current benefits position is.
- What your current overall financial position is (particularly whether you have debts you wish to pay off).
- What your current employment position is – trying to forecast whether you might lose your job and have to claim benefits.
- How much it costs to set up a trust.
You will also need to think about the future. You may at some point find you need “social care” from the Local Authority, whether by way of carers coming to your home or you might need residential care. Most of us think that it will not happen but it is important to consider because social care provided by Local Authorities is means tested.
Each individual case needs to be looked at on its own facts, but generally speaking if you are going to be taken over the capital limits and there is even the slightest chance that you might have to claim benefits even if you are not doing so now, you should certainly consider a trust.
What is a trust?
A “trust” is any situation where a person gives money or property to another, but only on the basis that the money or property is to be looked after on behalf of the giver and only dealt with in the way the giver says.
There are some common examples that most of us are familiar with, for instance:
Everyone who owns their own home jointly with their spouse/partner has a trust set out in the title documents. This will explain the basis upon which the property is held and may spell out what each person’s share of the house is. If someone leaves a Will there will be a form of trust as the executors have to deal with the property as set out by the person who makes the Will.
Trusts can be oral but are difficult to prove, therefore when dealing with significant sums of money, or the DWP, it is always better to have a written trust deed or a court order.
Setting up a PI Trust
A PI Trust can take various forms.
The simplest is a trust deed which is a formal legal document which sets out the terms of the trust, who the trustee is and who has power to deal with the money. In many cases you yourself can be the trustee.
In a complex case particularly in a high value case where the injured person has no capacity and needs someone else to manage their money, the Court of Protection will be involved and will appoint a professional Deputy to look after the money. Money being dealt with by the Court of Protection is automatically in a PI Trust.
Other cases can fall between those two extremes. For example where the person receiving the compensation has no capacity but the actual amount of compensation is not particularly large. Here, it is likely that an ordinary trust deed can be used but the trustee may be a family member who has Power of Attorney (or is a “lay” Court of Protection Deputy).
All of them will need formal documents to be drawn up and a charge will be made for doing so. However, we are of the view that it is financially better to pay to set up a trust than to find your benefits stopped if you do not do so.
When should a PI Trust be set up?
Serious consideration should be given to setting up a trust either (1) on receipt of the first interim payment in the case, (2) on final settlement.
Whichever comes first.
This is because compensation is received from the date of the first interim payment not from final settlement and there is only a period of 52 weeks in which to set up the trust once the first interim payment is received.
If therefore your case is one where interim payments will be applied for/obtained, and one where it is in your interests that a trust be set up, we advise the trust be set up in time to receive the interim payment.
That is so even if, for example, an interim payment is to pay for required treatment or otherwise to be paid out to someone else.
If the interim payment point applies in your case we will discuss this with you at that time. Otherwise we will discuss the question with you as the matter approaches settlement.
Where a case will clearly require Court of Protection involvement that will be discussed with you at a very early stage.
If you would like to discuss a personal injury trust please contact a member of our Litigation Team on 01905 721600