Why Helen Green's £800,000 is not as much as it seems

A few weeks ago Beverley Charman suddenly found herself in possession of £48m. Then a few days later Helen Green was handed a cheque for £800,000.

Cue green-eyed columnists across the nation huffing and puffing about obscene payouts to divorces and the absurd culture of victimhood. Charman's money came courtesy of her former husband, John, an insurance magnate, while Green's came from Deutsche Bank Group Services in compensation for what the judge who ruled in her favour called "a relentless campaign of mean and spiteful behaviour" against her.

But while these settlements are high in nominal terms, both were based on the principle that they should last for the rest of their lives, which rather changes the way they should be judged. Before we can say whether it is too much or too little, we have to ask if the money can be invested to provide sufficient income and, if so, how?

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In the case of Charman and the £48m, the answers to these questions are "yes" and "it doesn't much matter". Charman's ex-husband was unimpressed with the judgment given to his wife in recognition of their long marriage and her role as mother to their two sons. What, he said, could she possibly want with all that money? He had offered her £20m, an amount that was surely "impossible for any reasonable person to spend in their lifetime". The same clearly goes for £48m, an amount he said was quite "grotesque".

I'm rather with him on £20m being enough and £48m being more than enough, although if he really thinks that it does beg the question why he is making such a fuss about losing it when he gets to keep more than £80m for himself.

It doesn't matter how Beverley invests her cash. She can put it in a savings account and be done with it, she can invest it in a variety of investment funds or she can go mad buying properties in Bermuda. Either way, unless she is phenomenally stupid with it, the money is unlikely to run out in her lifetime.

However, when it comes to the £800,000, it is a different matter. The general view has been that Green has really lucked out. She can, say her critics, just stick the money in a savings account and never work again. But can she really? The best savings accounts offer around 5% at the moment, so if she finds one of those she will make £40,000 a year in interest. Not bad you might say. She was earning £45,000 when in work, so getting to sit around at home all day on £40,000 is something of a result.

It isn't quite so simple, though. There's inflation to take into account, which is running at 2.5%. This means that if Green spends all the interest she gets, the real value of her cash pot will halve every 18 years (or faster if inflation keeps rising, as I think it will). So in 2024 she'll be living on the equivalent of only £19,000 and in 2042 on only £9,500.

If Green was old this wouldn't be that much of a problem. She could just delve into the capital a little every year to keep herself going. If she was careful it would probably last until her death. But Green isn't old. She's 36. That means that not only can she not delve into her capital but she needs to preserve its real value. She can therefore only afford to spend the returns she makes above and beyond the rate of inflation around 2.5% on her £800,000, or £20,000 a year with interest rates and inflation where they are now. That doesn't sound so good does it?

She needs a longer-term solution. So what should she do? She can either find a way to get a much higher income from the cash, or invest in such a way that she gets an income to live on and makes some capital gains too. The former is tricky but the latter is the traditional reason for investing in the equity markets: the idea is that you can spend the dividends safe in the knowledge that the companies' share prices will grow at least in line with inflation.

Still Green can't afford to take much risk with her money: if she can't afford for her capital not to grow, she most certainly can't afford for it to shrink. And low-risk, high- income investments aren't that easy to come by these days. There are the big oil firms Shell yields 3.3% and BP just over 4% and the big banks, although I'd be nervous about these given the rise of bad debt and the state of the housing market. Some of the big media and pharmaceutical companies also have decent yields Pearson pays 4%, for example.

Overall, however, even if Green puts the whole lot in the equity market (which she definitely shouldn't), she wouldn't want to put all her money in high-yielding shares.

Once she has diversified across different sectors she will be getting only about 3.5% on her money, or £28,000 a year. That might sound fine to many of us, but don't forget she was earning £45,000 a year and if she really is in such a state following the bullying that she can never work again (she now has a depressive condition of some kind), I wouldn't call £28,000 a year for ever much of a result.

First published in the Sunday Times 13/8/06