Personal Injury and the impact of increasing inflation

Inflation impacts many parts of our lives including personal injury damages. With the cost of living and inflation continuing to rise, the purchasing power of our money decreases. Here we explain how this may impact Personal Injury settlements.

The annual percentage increase in the Retail Prices Index (RPI) is a common method for measuring the rate of inflation. As shown in the table below, the inflation rate fluctuated between 0.9 percent and 3.50 percent between 2012 and 2021. However, as of April 2022, the rate is currently 11.10 percent. This is the highest inflation rate since January 1982.

Inflation can impact many aspects of our lives including, personal injury damages. Future costs within a personal injury settlement are calculated using the Personal Injury Discount Rate (PIDR). The PIDR assumes a rate of inflation and crucially, that funds invested from a settlement can keep pace with inflation.

The rate used in the PIDR is the Consumer Price Index (CPI)*.  Simply put this means, it’s assumed than any lump sum invested will earn a return that equates to inflationary price increases.

With a PIDR of -0.25%, what this means in practice is that a claimant investor needs to achieve a return on investment of 0.25% below CPI. When inflation is at 11%, then the claimant investor needs to achieve a return of 10.75% to be able to meet their need.

Therefore to protect investments against the rising rate of inflation it’s important to consider:

• Lump sum settlement. It’s essential to ensure good investment of any lump sum settlement
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• Periodical payment Order (PPO): a PPO should be considered for all ongoing future losses. A PPO protects against price increases as future losses will be index linked, to either the RPI or a wages index.

Future Heads of Loss suitable for a PPO

Almost all future heads of loss which have continuing annual costs may be suitable to be paid by way of a PPO. The most common future heads of loss considered suitable for a PPO include:

• Future care and case management costs can be linked to ASHE 6115
• Future loss of earnings and pension contributions can be linked to a wages index
• Future Court of Protection costs can be linked to a wages index
• Future miscellaneous costs can be linked to RPI.

Short Life Expectancy

It’s especially important to obtain advice in regards to the suitability of a PPO for a claimant with a short life expectancy. Forecasting life expectancy is not an exact science. Should a claimant with a forecast life expectancy of 5 years, live just one year longer than the forecast, this would result in a significant shortfall of funds if settlement was made by way of a lump sum. It’s also highly unlikely that investment of a lump sum for a short period would be sufficient to meet the additional costs.

In a period of increasing inflation, a claimant with a short life expectancy who settles their claim by way of a full lump sum will find it very difficult to invest their settlement and achieve a return above inflation. It would also be difficult to earn a return to match any inflationary increase in ongoing future costs, such as care and case management. Settlement of elements of future ongoing costs by way of a PPO, would help protect against inflation as the future inflow of funds can be linked to either RPI or a wages index. This would have the effect of increasing future income thereby offsetting the increased price of goods and services.

Financial Planning

Our financial planning team are experts in advising personal injury claimants. For more information on how we can help prepare a report to provide advice on the structure of a settlement that takes account of inflation, investment and life expectancy risk then please contact Ed Tomlinson.

To learn more, please visit our Asset Management page.

*Consumer Price index is a measure of inflation published monthly by the Office for National Statistics. It measures the change in the cost of a representative sample of retail goods and services that are purchased by most households in the UK. It differs from RPI in respect of the households it represents and the range of goods and services.

All financial and wealth management services are provided by IM Asset Management Limited.