When a person has suffered a significant injury and has been awarded a financial settlement following a claim, this payment is awarded as either a lump sum or continuous payment for a specified time period.
In the event of a lump sum being awarded, this payment is adjusted to account for potential changes to the value as a result of interest, investment, tax and inflation. – This adjustment is known as the discount rate.
On 15th July, following a consultation process, the Lord Chancellor revised the discount rate for England and Wales from minus 0.75% to minus 0.25%, which will come into effect on Monday 5th August 2019. Defendant’s insurers have been pushing for an increase for some time. The higher the discount rate, the less insurers need to pay overall.
It is important to remember that the purpose of a compensation award is to return the injured person back to the same financial position they would have been in, had they not been injured. – The discount rate is applied to the settlement to assist with maintaining this position and ensuring that the person is able to access the ongoing care and rehabilitation support they require.
The discount rate had been set at 2.5 % for 15 years and this caused some claimants to run out of spending power too early. They had to take risky investments to ensure their compensation went far enough for them. This high rate was reduced in March 2017 to minus 0.75%. This was a welcome change for Claimants. It has been reviewed again now and is set at minus 0.25%. This is still in the claimant’s favour.
Following the announcement of the new discount rate, there has been significant discussion and debate from both the legal and insurance sectors who hold contrasting views.
Regarding the new discount rate, Victoria Price commented:
“The new discount rate will provide claimants with confidence that as far as possible the amount of compensation they will receive is aligned to the current economic climate.
We cannot predict what will happen in relation to interest rates and inflation but the current discount rate should mean that a claimant can limit the investment risks they need to take and trust that their lump sum will cover their needs in the future.”
If you have any questions regarding making a personal injury or medical negligence claim and would like to discuss this with the Price Slater Gawne team, please contact 0161 615 5554, email firstname.lastname@example.org or drop into our Altrincham office.