At Juniper Wealth Management we work with Trustees of Personal Injury Trusts and individual beneficiaries to help them invest compensation awards to meet their needs.
Following a lot of speculation, there’s been a significant change to the ‘discount rate’ used to calculate compensation payments following personal injury claims.
The discount rate is a slightly technical concept, but mainly involves a calculation designed to reflect the interest a claimant can expect to earn when investing a lump sum compensation payment.
It also factors in tax, expenses and price inflation on these investment returns, to arrive at a fair figure, designed to put the claimant in the same financial position as they would have been had they not been injured.
In calculating this figure, the loss of future earnings and the cost of care is also taken into account. Until recently, the discount rate was set at minus 0.75%. It was last changed in March 2017, when it was plus 2.5%, a level it had remained at for several years. At the level of minus 0.75%, there were widespread concerns that claimants were substantially over-compensated.
Paying victims of personal injury claims too much was placing financial pressure on public services who bear sizeable personal injury liabilities, including the NHS.
Following an extensive review of the discount rate, which led to reforms set out in the government’s Civil Liability Bill 2018, an increased discount rate of minus 0.25% was introduced.
By increasing the discount rate by 0.5%, the government aims to deliver a more balanced approach, while still giving victims of personal injuries full and fair compensation.
The new discount rate comes into force on 5th August 2019. It’s worth noting that this discount rate only applies in England and Wales, with Scotland enjoying devolved powers to set its discount rate.
It will then be reviewed within five years, as part of the Civil Liability Act 2018. An expert panel will advise future reviews of the discount rate.
David Gauke, who was Lord Chancellor and Justice Secretary at the time of the change, said:
“It is vital victims of life-changing injuries receive the correct compensation I am certain this is the most balanced and fair approach following an extensive consultation. It is also right that the rate is informed by experts and reviewed on a regular basis to make sure this important calculation is accurate every time. In practical terms, changing the discount rate from minus 0.75% to minus 0.25% means that a 30-year-old male with annual financial costs of £50,000 would see his award reduced from £2,935,500 to £2,565,250, a reduction of £370,250.”David Gauke, Then Lord Chancellor and Justice Secretary
Responding to news of the increased discount rate, the Association of British Insurers expressed its disappointment in the change, saying:
“The new Discount Rate is a bad outcome for insurance customers and taxpayers that will add costs rather than save customers’ money. It will put further pressure on premiums.”
“We are deeply frustrated. It matters that this system works properly so accident victims get the right compensation and insurance premiums are affordable.”
“The industry has spent two and a half years working with the Government, helping design and legislate for a more predictable and modern formula, only to have the Lord Chancellor override the recommendation of The Government Actuary’s Department without any prior warning. This sets a worrying precedent.”
“This will remain the lowest Discount Rate in the Western world, leaving England and Wales an international outlier at a time when we need to boost our attraction to international capital.”
Individual insurance companies appear to be disappointed with the change too, with Stephen Hester, Group Chief Executive at RSA, saying:
“Frustratingly, this outcome fails to solve many of the problems that theStephen Hester, Group Chief Executive at RSA
review set out to address. RSA is fully committed to fairly compensating and supporting claimants who have suffered serious injuries, but movement from -0.75 to -0.25 still reflects an unduly pessimistic view of investment outcomes, and risks continuing to drive premium increases and costs to the taxpayer.”
What remains essential following this discount rate increase is seeking professional independent financial advice to ensure compensation payments are suitably invested.
By working with an experienced Financial Planner, claimants can manage the tax implications of a compensation award, take appropriate levels of investment risk, and ensure the sustainability of income.
Jon Doyle is Founder and Financial Planner at Juniper Wealth Management. Advising clients since 2008 he has guided clients through good time, bad times and the ugly. With a clear vision on how advice should be delivered and strong opinions on how we should be investing money in order to live the life we want to live free from money worry.