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Lump sums - the good, the bad & the ugly Richard Cumpston Cumpston Sarjeant Pty Ltd.

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Presentation on theme: "Lump sums - the good, the bad & the ugly Richard Cumpston Cumpston Sarjeant Pty Ltd."— Presentation transcript:

1 Lump sums - the good, the bad & the ugly Richard Cumpston Cumpston Sarjeant Pty Ltd

2 Topics how lump sums currently operate in Australia how lump sums are spent lump sum pitfalls the structured settlement alternative

3 Cumpston Sarjeant Pty Ltd Lumps sums currently Full common law Common law with statutory restrictions Partial common law No common law entitlements Commutations of statutory incomes Impairment lump sums

4 Cumpston Sarjeant Pty Ltd Full common law A lump sum intended to restore the plaintiff to their former position Subject only to court decisions For example, the 3% discount rate of the High Court in Todorovic v Waller 1981 Only applies in the ACT, for work and road injuries?

5 Cumpston Sarjeant Pty Ltd Common law with statutory restrictions Statutory discount rates of 5%, 6% or 7% Thresholds for non-economic loss Caps on non-economic loss awards Caps on economic loss awards Restrictions on legal costs

6 Cumpston Sarjeant Pty Ltd Partial common law For work and road accidents in Victoria, severely injured persons can receive common law awards for earnings losses, but expenses of care continue to be paid by TAC or WorkCover ComCare also pays continuing expenses of care

7 Cumpston Sarjeant Pty Ltd No common law South Australian work accidents NT work and road accidents

8 Cumpston Sarjeant Pty Ltd Commutations & redemptions Some severely injured Victorian workers can commute weekly payments for 25% of their actuarial value Some SA workers have been able to commute for limited periods, at fair values, but at the expense of the Commonwealth NSW injured workers appear to get less than fair value

9 Cumpston Sarjeant Pty Ltd Impairment lump sums Statutory entitlements, regardless of fault Originally based on meat charts Now largely based on medical impairment assessments Sometimes severely biased against those less than 100% impaired

10 Cumpston Sarjeant Pty Ltd Where structures possible Annuity will be tax exempt if purchased using money paid as personal injury compensation, where that money would have been tax-free if paid as a lump sum (excluding compensation for workers compensation and death) Bill ss (1) (c ) & (d), & 54.20

11 Cumpston Sarjeant Pty Ltd Lump sums paid pa (Walsh & Davies 6/11/97)

12 Cumpston Sarjeant Pty Ltd How lump sums are spent Colin Bass, study for NSW Law Foundation, 1983 Marcia Neave & Louise Howell, Adelaide Law Review Resarch Paper No 5, 1992 UK Law Commission Personal injury compensation How much is enough, 1994

13 Cumpston Sarjeant Pty Ltd Colin Bass NSW 1983 – sums exhausted within 7 years Work redemption $20,000-$30,000 Work redemption $40,000- Motor vehicle $20,000-$35,000 Motor vehicle $100,000 Work common law $40, % 43% 65% 31% 36%

14 Cumpston Sarjeant Pty Ltd Neave & Howell – 227 SA MV awards of $25,000+ in 1980 In families below poverty line Reliant on social security for reasons related to the accident Financially insecure because of accident Compensation insufficient to cover accident-related expenses 16% 19% 22% 53%

15 Cumpston Sarjeant Pty Ltd Main reasons for inadequate compensation (SA) Wrong predictions Lawyer Inflation Need to settle early What happened in court Contributory negligence Investment mistake 52% 34% 38% 13% 3% 6% 7%

16 Cumpston Sarjeant Pty Ltd % spent 3-4 years after receiving UK award of 20,000+ pounds All of it Over half About half Less than half None of it 22% 14% 33% 9%

17 Cumpston Sarjeant Pty Ltd Investments by UK recipients of 20,000+ pounds None Building society Bank account Company shares/securities Unit/investment trusts Government stocks Property Other 10% 51% 26% 21% 30% 8% 7% 8%

18 Cumpston Sarjeant Pty Ltd Bad investment advice (UK) The solicitor advised us to go to a financial adviser. She put the money left into that bank which crashed which lost all the money we had in that the bank gave us duff information …went to a broker who was a bigger dead loss everyone wants to sell you their own product

19 Cumpston Sarjeant Pty Ltd Bad investments I was advised to invest in stocks and shares, and lost a lot of money Im disappointed because of the drop in the interest rate and the bank charges The return from my investments are only just keeping up with inflation

20 Cumpston Sarjeant Pty Ltd Generosity to friends & relatives Almost half of his 300,000 pounds disappeared in the first 18 months, much of it spent on contributing towards the purchase of properties for his children and mother, and taking his family on exiting holidays … he would have preferred periodic payments to the lump sum

21 Cumpston Sarjeant Pty Ltd Theft Former Geelong mayor pleaded guilty to the theft of $5 million from Tomislav Papic … Mr Papic won a record $6m settlement from a Geelong hospital after a medical mistake left him in a wheelchair The Age 10/3/01

22 Cumpston Sarjeant Pty Ltd Lump sum pitfalls Bad predictions Bad legal advice Bad investment advice Bad investments Generosity to friends & relatives Theft

23 Cumpston Sarjeant Pty Ltd Cases for structured settlements "Structured settlements will be most appropriate for those with lifelong medical treatment and care needs. Structured settlements remove the worry involved in having to invest a large lump sum so as to draw an income that can cover expenses while making sure that the money won't run out. (MAA 1998)

24 Cumpston Sarjeant Pty Ltd Structured settlements less likely if Financially competent to self-invest Financially secure High statutory discount rate Low current interest rates Inexperienced annuity market Distrust of insurance companies

25 Cumpston Sarjeant Pty Ltd Impact of discount rate 3% discount rate –Top down approach and bottom up approach yield similar results (annuity cost and lump sum calculation roughly equal) 5% discount rate –Top down approach will be preferred by defendants (lump sum calculation likely to be less than annuity cost)

26 Cumpston Sarjeant Pty Ltd 3% discount rate Lump sum calculated to provide $5,000 pw for life expectancy of 44 years = $6.4m With mixed investments and drawings of $5,000 pw fund will run out in about 44 years Annuity providing $5,000 pw for life costs about $6m

27 Cumpston Sarjeant Pty Ltd Fund runoff with 3% discount

28 Cumpston Sarjeant Pty Ltd 5% discount rate Lump sum calculated to provide $5,000 pw for 44 years = $4.7m With mixed investments and drawings of $5,000 pw, fund runs out after 28 years

29 Cumpston Sarjeant Pty Ltd Fund runoff with 5% discount

30 Cumpston Sarjeant Pty Ltd 5% discount rate Lump sum of $4.7m allows drawings of $3,884 pw for life expectancy of 44 years Annuity costing $4.7m provides $3,949 pw for life –avoids the risks of living too long –avoids the risks of high inflation –avoids the risks of poor investments

31 Cumpston Sarjeant Pty Ltd Size of UK structures "In the UK, 100,000 pounds is suggested as a minimum total value of a case, though typical cases involve damages of 600,000 pounds, of which about 350,000 pounds is used to purchase annuities. MAA 1998 p11

32 Cumpston Sarjeant Pty Ltd Size of Australian structures Legislative requirement for minimum monthly level of support (Bill s.54-40) –Must be a lifetime annuity –Must start at level of current Aged Pension –Must be indexed to the CPI Minimum case size depends on age Expect cases $1m+

33 Cumpston Sarjeant Pty Ltd UK types of cases Road Medical Work Riding Skiing Criminal Unknown Total

34 Cumpston Sarjeant Pty Ltd UK types of disabilities Brain Quadriplegia Paraplegia Cerebral palsy Death Arm Unknown Total

35 Cumpston Sarjeant Pty Ltd Estimates for Australia from UK Based on UK take-up rates and 1997 Walsh/Davies lump sum figures 30 to 60 structured settlements pa Average award $1.75m Average life expectancy 33 years JR Cumpston, Potential costs and savings from structured settlements, 4/2/00

36 Cumpston Sarjeant Pty Ltd Conclusions Will be possible in most large personal injury cases where common law lump sums are now paid Will address some of the pitfalls of lump sums Likely in motor vehicle, medical indemnity and public liability cases involving brain and spinal injuries Attractiveness will vary depending on personal and economic circumstances

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