Understanding the discount rate in personal injury claims in Scotland

When individuals suffer personal injuries due to accidents, they may be entitled to compensation. In Scotland, one of the most important elements influencing the amount of compensation awarded in personal injury claims is the discount rate. While it may seem like an abstract financial concept, the discount rate has a direct impact on the compensation a pursuer can receive. Here we explore what the discount rate is, how it affects personal injury claims in Scotland, and recent changes to consider.

What is the discount rate?
The discount rate in personal injury claims is used to adjust the amount of compensation awarded to a pursuer to account for future losses, including lost earnings or medical expenses. The rate is set to reflect the potential return on investments that the pursuer could achieve if they invested their compensation award, ideally allowing them to be fairly compensated for their injuries without being under- or over-compensated over time.

Essentially, it’s a rate applied to ensure that the pursuer receives the correct amount to cover their anticipated future losses, taking into account the possibility of earning returns on the lump sum they receive. A lower discount rate results in a higher lump sum compensation, as it assumes less return on investment, while a higher rate would lead to a smaller compensation award due to assumed greater investment returns.

Why is the discount rate important?
In personal injury cases, particularly those involving catastrophic injuries with long-term impacts, compensation awards are often meant to cover future losses for many years or even a lifetime. The discount rate adjusts for inflation and investment returns over time, aiming to ensure that the awarded sum will not fall short over the years.

For example:
• Pursuers with serious, long-term injuries may require lifetime care and support, as well as compensation for lost earnings.
• If the discount rate is too high, it may lead to under-compensation, leaving the injured person without adequate resources in the future.
• A lower discount rate ensures that pursuers are awarded more, with the idea that they won’t need to rely heavily on investment returns to make their settlement last.

How is the discount rate determined?
In Scotland, the discount rate is set by the Scottish Government. The rate is now reviewed regularly, based on expected returns on low-risk investments to which a pursuer would be expected to turn. This ensures that the rate better reflects realistic financial conditions, providing fair compensation while acknowledging market realities.

The Damages (Investment Returns and Periodical Payments) (Scotland) Act 2019 sets out the methodology for calculating the discount rate. It uses a variety of financial assumptions, including investment yields on low-risk assets and inflation rates, to reach a fair rate.

Recent changes to the discount rate in Scotland
The discount rate is periodically reviewed, and significant changes can have a noticeable impact on personal injury awards. In September 2024, the Scottish Government announced an increase in the discount rate from -0.75% to +0.5%.

How the discount rate affects compensation calculations
To understand the impact of the discount rate, consider a pursuer who requires £1 million to cover future losses over their lifetime. With a negative discount rate, this award will be adjusted upward, resulting in a higher final sum, as it assumes less investment return potential over time. Conversely, when the rate is positive, there is an assumption that higher investment returns will allow a pursuer to make good returns on their investment and therefore the initial award is reduced.

Considerations for personal injury pursuers and lawyers
Understanding how the discount rate will impact a potential settlement is crucial for both pursuers and their legal representatives:
• Pursuers should be aware that changes in the rate could significantly influence the final compensation they receive.
• Personal injury lawyers must keep up to date with any changes to ensure they secure fair settlements for clients.

Conclusion
The discount rate is a critical factor in personal injury claims in Scotland.  Its purpose is to ensure that individuals receive full and fair compensation for their injury and losses, while taking account of the economy.  Therefore the balance will always bring debate and dispute.

Northern Ireland has also changed its discount rate from -1.5% to +0.5%.

England and Wales have also announced that with effect from 11 January 2025 the discount rate for England and Wales will change from – 0.25 to + 0.5%.

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If you require any advice in relation to any of the topics discussed above then contact our Personal Injury Team.