Inflation affects many areas of our lives. This includes personal injury and damages. Due to the rising cost of living as well as inflation increasing and increase, the buying power of our dollars decreases. This article explains the impact this could have on Personal Settlements for injuries.
The annual percentage growth for the Retail Prices Index (RPI) is an established method of measuring inflation. In this table below the rate of inflation varied between 0.9 percent to 3.50 percent from 2012 to 2021. In April 2022, it is 11.10 percent. It is the highest rate recorded since January 1982.
Inflation has an impact on many aspects of our lives. This includes, personal injury claims. Costs for the future in an injury settlement for personal injuries are determined with the help of the personal Injury Discount Rate (PIDR). The PIDR is based on a percentage of inflation. It is also crucial the money invested in settlements can be kept up with the rate of inflation.
The basis for the PIDR is called the Consumer Price Index (CPI)*. In simple terms, it is assumed that every lump sum of money invested can earn an income equal to inflationary increase.
A PIDR of -0.25 percent, what that signifies in reality is that an investor must earn a return on their investment of 0.25 percent less than CPI. If inflation is 11 percent, then the investor must earn an annual yield of 10.75 percent in order to cover their expenses.
In order to safeguard investments from the increasing rate of inflation, it is important to think about:
- Lump sum settlement. It is essential to make sure you have a sound investing in the lump sum settlement
- The periodic payment order (PPO) The PPO is a good option for any ongoing losses that may occur in the future. PPOs are a form of insurance that protects against future losses. PPO safeguards against price hikes because future losses are tied to an index, either the RPI or to a wage index.
Future Heads of Loss appropriate for PPO
Nearly all future head of loss that have ongoing expenses may qualify for payment by way of the PPO. Some of the most frequent types of future losses that are appropriate for a PPO comprise:
- Case management and future care expenses can be tied to ASHE 6115
- Loss of earnings in the future and pension benefits can be linked to a wage index
- The future Court of Protection costs can be tied to a wage index
- Costs for future miscellaneous items could be tied to RPI.
Short Life Expectancy
It’s crucially important to seek information regarding the appropriateness of an PPO for someone who has a low life time. Life expectancy forecasting isn’t an exact scientific procedure. If a person who has the expected 5-year lifespan and live only 1 year later than predicted time, it could create a huge deficit in funds, if the settlement were made in the form of a lump-sum. Also, it’s highly unlikely that an investment in the lump sum amount for an indefinite period of time will be enough to cover the extra costs.
With the rising rate of inflation, an individual with a limited life span who settles their claims by in a lump sum is likely to be unable to place their funds into an investment and earn a yield that is above the rate of inflation. Also, it would be challenging to make a profit that would meet any increase in inflation for ongoing costs for example, care and care management. Payment of the elements of expenses, such as an PPO could help safeguard against inflation because the flow of money in the future could be tied to RPI or wages index. It would result in of increasing income in the future and helping offset the rising cost of services and goods.
Our team of financial planners is an expert in providing advice to individuals who have suffered personal injuries. If you would like to know more about the ways we can assist you in preparing an assessment report that provides guidance on the design of settlements taking consideration of the effects of inflation, investments as well as life expectancy risks, you can contact Ed Tomlinson.
For more information, check out the Asset Management page.
*Consumer Price Index is a measure of inflation that is published every month from the Office for National Statistics. It measures changes in prices of a sample representative of the retail items and services bought by the majority of households in the UK. It is different from RPI by the households it covers and also the types of items as well as services.
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