Page 21 - PIC Magazine-Issue-27-Autumn-Winter

Maximising the Value
of Compensation
As compensation awards come
under increasing pressure, attention
is also turning to how funds are
structured once they are received.
For claimants with substantial
settlements that may need to support
expenditure over several decades,
investment performance is only part
of the equation. Tax effi ciency can be
equally important in determining the
long-term sustainability of an award.
Diff erent tax wrappers, including
pensions, ISAs, investment bonds,
trusts and general investment
accounts, are all subject to
diff erent tax treatments. The way
compensation is held across these
structures can infl uence investment
growth, income fl exibility, and the
overall value that can ultimately be
derived from an award.
The impact of tax drag should not
be underestimated. Over a long
investment horizon, even relatively
small diff erences in net returns
can produce signifi cantly diff erent
outcomes because of compounding.
For example, a £3 million portfolio
achieving a net annual return
of 5% could potentially grow to
approximately £13 million over 30
years, whereas the same portfolio
achieving 4% after tax could grow
to approximately £9.7 million.
A diff erence of just 1% per annum
could therefore result in more than
£3 million of lost value over the
same period. It is important to note
that this example is for illustrative
purposes and returns are not
guaranteed.
This highlights the importance
of considering not only what
investments are held, but where they
are held. Eff ective use of available tax
wrappers may help reduce ongoing
tax liabilities, improve withdrawal
fl exibility, and create greater
resilience against future changes
in tax legislation.
As a result, we are increasingly
seeing legal representatives engage
with independent fi nancial advisers
and specialist fi nancial planners
earlier in the litigation process.
Early collaboration can help
claimants better understand how
compensation may be structured
post-settlement and ensure that
fi nancial planning considerations are
aligned with long-term needs from
the outset.
Important: This guide is for information
purposes only and does not constitute
personal fi nancial advice. The value of
investments can go down as well as up, and
is not guaranteed. You may get back less
than you originally invested. Tax treatment
depends on individual circumstances and
may be subject to change in the future.
Part of FTG Advisory Balancing Risk and Security
One of the more nuanced
consequences of the PIDR change is
the renewed discussion around risk.
The discount rate itself is founded
upon assumptions about investment
returns. However, every claimant's
circumstances and attitude towards
risk are diff erent.
Some individuals place an
overwhelming emphasis on capital
preservation. Others may require a
degree of long-term investment growth
to ensure their future requirements
can be met. Many will sit somewhere
between the two.
This is an area where specialist fi nancial
planners continue to play an important
role, helping claimants navigate the
often complex transition from receiving
compensation to relying upon it for
long-term fi nancial security.
A More Connected Approach
Another noticeable trend is the
increasing integration between
legal teams, experts and fi nancial
professionals throughout the
lifecycle of a case.
Historically, these disciplines could
sometimes operate in relatively distinct
phases. At Frenkel Topping we strongly
believe in greater collaboration and
information sharing from an earlier
stage.
In practical terms, this often means
fi nancial considerations being
explored while future losses are
still being quantifi ed, allowing for
a more informed understanding of
how compensation may ultimately
be utilised.
The result is not necessarily a diff erent
settlement fi gure, but often a clearer
understanding of what that settlement
needs to achieve for the individual
concerned.
As pressures on award values continue,
this joined-up approach is likely to
become increasingly important.
Looking Ahead
It is still relatively early to draw
defi nitive conclusions on the long-
term impact of the latest discount rate
review. However, certain themes are
already becoming apparent.
First, future loss calculations are
attracting even greater scrutiny,
particularly in relation to employment
benefi ts, pensions and wider
economic losses.
Second, there is an increasing
appreciation of the importance of
ensuring compensation accurately
refl ects an individual's complete
circumstances rather than relying
on broad assumptions.
Third, and perhaps most signifi cantly,
the conversation is increasingly
extending beyond settlement itself to
consider how compensation can be
structured and managed over the
long term.
The legal framework may not have
changed, but the environment in which
compensation operates certainly has.
For professionals working across the
serious injury and clinical negligence
sectors, the emerging challenge is not
simply the calculation of damages. It
is understanding how claimants can
continue to achieve long-term fi nancial
security in a world where, for many,
compensation awards must now do
more with less.
That is perhaps the most signifi cant
market observation since the discount
rate change. Not that claimant needs
have altered, but that the importance
of getting both the calculation and the
long-term planning right has never
been greater.
The implications of the discount rate
extend beyond damages calculations
alone. In a world where compensation
awards may be lower, but claimant
needs remain unchanged, every
aspect of fi nancial planning becomes
increasingly important. From accurately
quantifying future losses to ensuring
compensation is invested and
structured tax-effi ciently, the focus
is increasingly on helping claimants
achieve long-term fi nancial security.
In many cases, that process begins
long before settlement, through
early collaboration between legal
representatives, expert witnesses and
independent fi nancial advisers.
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