Periodical Payments
What are Periodical Payments?
When a case succeeds, the claimant is entitled to recover compensation to ‘put them back into the position they were ‘but for’ the negligence.
Compensation is awarded as either a lump sum or periodical payments, or both. In serious injury cases, like birth injury there is usually both. Usually, the lump sum will pay for the house, past care and the claimants pain and suffering. Lump sums are affected by the Discount Rate (see blog).
Periodical payments are made annually, either to the COP Deputy or the Trust Fund set up for a child with capacity. The amount of the PPO itself isn’t calculated using the lump-sum Discount Rate in the same way. Unlike a lump-sum award, periodical payments are not calculated on the basis that the claimant must invest a capital sum to meet future costs. They are therefore much less exposed to the investment assumptions underlying the Discount Rate.
https://www.gov.uk/hmrc-internal-manuals/insurance-policyholder-taxation-manual/iptm5020
What do Periodical Payments meet the cost of?
- Nursing Care
- Rehabilitation, Physiotherapy, hydrotherapy etc to improve the injured persons functional abilities.
- Equipment for aids to facilitate daily living and mobility.
- Medical expenses: medication, treatments, and specialist consultations
- Education and training.
- Living expenses
- Case management and Deputy’s costs
Other costs may be related to the individual child, so the above is general in nature.
Are Periodical Payments cost effective?
Periodical payments are funded by the Defendant or its insurer under the terms agreed at settlement or ordered by the Court. They provide a regular payment for the claimant for life. The ‘for life’ aspect is very important, as life expectancy can form a part of the award for compensation. Life expectancy is an important factor when calculating a lump-sum award for future losses. With periodical payments, the claimant receives the agreed payments for the period specified in the order, which can reduce the risk of the claimant outliving a lump sum.
Periodical payments are tax exempt in the case of the Claimant. The person who receives a periodical payment on behalf of the Claimant is a COP appointed Deputy acting for the Birth Injured child, rather than parents and guardians or a trustee of a trust fund for the Claimant. Periodical payments usually require a consent order from the court.
Periodical payments can be index-linked so that they increase over time. The index used will depend on what the Court orders or the parties agree. Different parts of an award may be linked to different measures, depending on the costs they are intended to cover. This should give parents reassurance that their child receives care for life.
Advantages of Periodical Payments
- There is no fear of money running out for the claimant or the family as periodical payments are designed to last a lifetime and are protected by the governments Financial Services Compensation Scheme.
- Periodical payments are not taxable whereas an invested lump sum is
- Some means-tested benefits are not affected by periodical payments, which can be an important consideration for families. However, the interaction between compensation, benefits and other support depends on the individual’s circumstances. Specialist advice is important before settlement.
- Investment and longevity risk are reduced because the claimant does not have to rely on investing a lump sum to generate enough income to meet future care costs.
- Lump sum payments require an estimated guess at life expectancy and how it could have been had an accident or injury not occurred
- The structure of the payments can be tailored to anticipated changes in the claimant’s needs. For example, payments may be structured to increase at a later stage when greater professional care is expected to be required.
Disadvantages of Periodical Payments
- There is a loss of control to some degree regarding the management of the investment in that achieving better growth cannot be controlled by the claimant
- With a lump sum, there is a clear amount of compensation that will be paid; with periodical payments, the exact, overall amount is not certain
For many people with serious, lifelong care needs, the advantages of periodical payments can outweigh the disadvantages
Sources: GOV.UK, HMRC, NHS Resolution, Ministry of Justice
