In the context of personal injury and medical negligence claims, the discount rate refers to the rate at which future losses are adjusted to present-day values. When an individual is awarded compensation for long-term financial losses (such as loss of earnings, care costs, or pain and suffering), the amount awarded is often based on the assumption that the individual will invest the compensation and generate returns over time.
The discount rate essentially reduces the overall compensation to reflect the fact that future losses or expenses can be “earned” from investing a lump sum now.
Why is the discount rate important in personal injury and medical negligence claims?
In cases involving serious injuries that result in long-term care or lost earnings, the compensation amount may be substantial. The discount rate affects the final value of the award, as it determines how much the claimant needs today to cover their future financial needs.
For example, if the discount rate is set at a higher value, the present-day compensation needed would be lower, because the injured individual is expected to generate more returns from investments. Conversely, a lower discount rate would lead to a higher compensation sum to ensure the individual is adequately supported in the future.
How is the discount rate determined?
The discount rate is reviewed periodically and is set by the Lord Chancellor, based on advice from the Government Actuary’s Department (GAD). It is influenced by factors such as the return on investments, inflation rates, and other economic conditions. As of the last review in January 2025 the discount rate in the UK was set at 0.50%. This is an increase from the previous rate of -0.25% which means that claimants will receive lower compensation for future financial losses.
These changes are typically based on an assessment of the financial environment, including returns from low-risk investments like government bonds, and the need to balance fairness for claimants with the interests of defendants (such as insurance companies).
Impact of the discount rate on an individual’s compensation
The discount rate directly affects the calculation of future losses. A lower discount rate increases the compensation awarded to the individual, as it assumes less return from investments, whereas a higher rate will decrease the compensation because it assumes a higher return.
In personal injury and medical negligence claims, this can significantly alter the amount an individual receives to cover long-term care costs, future medical treatment, and loss of earnings.
Key points to consider
- The discount rate is applied to compensate for future losses and long-term care needs in medical negligence claims;
- It is reviewed regularly by the government based on economic factors and the return on safe investments;
- A lower discount rate results in a higher compensation award, while a higher discount rate results in a lower award;
- The discount rate influences the amount of compensation the individual will receive to meet their future financial needs;
- With a higher, positive discount rate, it becomes more pressing to consider the need for a periodical payment order.
Changes to the discount rate is only one of the many reasons as to why it is important for those injured to ensure that the lawyers that represent them are true specialists in the field that will ensure the maximum level of compensation is secured. This will ensure that all future rehabilitation, care and accommodation needs are met.
