Stephen Farnfield on the importance of detailed loss calculations after injury, illness or clinical negligence.
It is often the case that Loss of Earnings and Loss of Pension are treated separately when calculating the financial impact of personal injury, illness or clinical negligence cases. Moreover, it’s common for Loss of Earnings calculations to be overly basic, failing to fully factor in the tax, National Insurance and pension contributions elements that can make a significant difference to achieving the right outcome for clients whose cases are subject to litigation.
A big, and welcome, change I’ve recognised is that increasingly I am being asked to bring the Loss of Earnings claim and the Pension Loss claim into one single report. This makes perfect sense – the two are, after all, inextricably linked. The calculation of one inevitably impacts the calculation of the other, so dealing with them and other employment benefits simultaneously is logical and efficient. It also makes life easier for all parties involved with the case when dealing with a single, unified joint statement.
Let’s be clear about one more thing too – Loss of Earnings is not limited to simple salary and pension. Other employment benefits are all too frequently missed altogether, or not treated correctly for tax purposes. Consideration of areas such as critical illness cover, company cars, fuel cards, gym membership, share schemes, discount vouchers, travel allowances, and many more, all need to be factored in with an understanding of how they impact on the individual’s tax position. A thorough understanding of all these
factors, and the relationship between them, is crucial to presenting the losses correctly.
A good example here is private medical insurance. Many policies, through employers, don’t only cover the named policy holder, but extend to covering spouses, children and other dependants. These policies are set up on a group basis for the firm covering all employees and so come at a significant discount.
To go to BUPA or another insurer as an individual and replicate this family coverage would be extremely expensive. A typical policy for a family of four would probably cost somewhere in the region of £2,500 per year. If we imagine the Claimant was out of work for 20 years as a result of their injuries then, it’s reasonable to arrive at a loss in the region of £50,000. As we can see, simply accurately reflecting the reality of a lost medical insurance policy can add tens of thousands of pounds to a claim, but frequently we encounter cases where this is overlooked.
There are tax considerations to take into account for these kind of benefits too. Although the Claimant may not have been personally paying for the medical insurance or other benefits themselves, they are still considered benefits in kind, and as such have an impact on their tax code. Ultimately, and in its simplest terms, the key to a successful Loss of Earnings calculation lies in fully understanding your client, fully understanding their payslip, and reflecting that understanding in the final calculation. Make sure you have the full picture of their employment package.
Another area where it’s crucial Claimants are accurately served is that of formulating a career path. As a financial expert witness, I can help to understand and build a logical career path for your client if one has not been already formulated. This could be private sector or public sector work such as the NHS, where transitions up the banded earnings need to be accounted for. I am not an employment expert perse, but I do have a lot of experience in discussions with claimants and their legal teams on putting together realistic career paths – it’s not just Loss of Earnings and Pension Loss where I can assist your clients.
Similarly, a lack of detailed calculations can lead to an outcome that’s lacking in Loss of Dependency and Lost Years claims. There are a number of areas associated with these types of claims where things can be overlooked. To accurately assess your Claimants’ financial losses, it is critical to understand fully the tax position of all forms of income and benefits from the deceased’s employment, and also from the surviving dependant in order to make an accurate assessment of the dependency. Often in loss of dependency cases I see other benefits of employment ignored with no consideration for the benefit that the surviving spouse may have received. The private medical insurance example is, again, a good one to consider.
With financial dependency losses there is, in my view, the need to look at the whole dependency period from death through to normal life expectancy in one go, and in one set of calculations. With differing ages of partners and differing retirement ages, it is very challenging to accurately look at Dependency on Earnings and Dependency on Pension as two separate positions.
It should be a Loss of Dependency on income as a whole. I can assist you with this and provide simple-to-follow calculations for the whole period. With pension dependency, it is an “at retirement” approach that is needed for pension loss. We must model forwards pensions, whether defined benefit or defined contribution, through to the point of retirement; this is then converted into a lump sum and pension income. You simply cannot consider a loss-of-contributions-only approach to get to a Loss of Dependency claim – in my view it just does not work.
The same can be said for a Lost Years claim. These claims often span income and pension and again are reliant on understanding the tax position of all earnings and assessing as accurately as possible the net position of the Claimant for the rest of their “but for injury” life expectancy. Much like with pension dependency you simply cannot consider a Lost Years claim by following the contributions-only approach to
A skilfully-prepared Lost Years claim can add a huge amount to the value of an award and will combat some of the losses from those arguing for a reduced life expectancy. As always, it is vital that all of these factors are fully explored in order to achieve the best outcome for your client. By engaging a qualified financial expert you can be sure that your client is getting an accurate view on their losses. We fully understand the minefield of benefits of employment, before and after injury; the implications of tax rates on these benefits and opension contributions and the different methods of deducting pension contributions – net pay, relief at source and salary sacrifice; the need for a realistic and supported career path for the Claimant, and the importance of making sure past earnings are inflated with average wage inflation data, or data specific to that job if it’s available.
By covering all these fields in a single report from Frenkel Topping, you can be sure of the right financial outcome and the assurances that brings for you and, most importantly, for your client.