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Negative Interest Rates and How These Affect Your Clients

09/11/2016

Many of us have seen the news about the threat of negative interest rates here in the UK, and whilst this may be a new concept to many of us, I thought I’d share some of my thoughts on what this meant to personal injury and clinical negligence clients.

By way of explanation, a negative interest rate policy (NIRP) is an unconventional monetary policy tool whereby nominal target interest rates are set with a negative value. It effectively means that the Central Bank (and private banks) charge you for having your money on deposit, rather than paying you interest.

Whilst it may be still only a threat, it is worth noting that negative rates are already being charged by the European Central Bank; along with the central banks of Japan; Denmark, Switzerland, Sweden and Hungary. Some banks in Germany now charge clients for depositing their monies with them, and some investment banks here in the UK are implementing this approach.

The Monetary Policy Committee at the Bank of England did, on the 4th August cut the base rate to 0.25% and they have hinted it will put in place a “package” of measures, which will likely include a further round of quantitative easing. The BOE have they may not stop at zero interest rates and may eventually go lower. A number of High-Street Banks have already warned their customers that they may have to pay a fee to deposit their money.

You may have seen the news articles about RBS warning their customers that they should be prepared for the fact that they too may have to charge for deposits on normal bank accounts. Now in my experience, banks rarely invest in technology, if they don’t think that there is a possibility of something happening.

This will affect our clients in a number of ways.

Firstly, when looking at a cost that many of our clients face, such as care costs, the increase last year (according to the ASHE 6115 90% percentile) was 2.2%. If our client has capital on deposit then the effect of a negative rate means that the monies will not be able to keep up with inflation.

Secondly, when looking at a client’s future losses, they are calculated based on Ogden 7 and assumes that a client receives 2.5% return net of tax and inflation. Clearly with negative interest rates this is hard to achieve.

Whilst it has been debated by a number of people that the discount rate may need to be reviewed by the Lord Chancellor, many of us will be aware that this has been under review for many years now, and any resolution is not likely to be forthcoming.

Therefore, this does leave us with a predicament for helping clients.

It is at time like this, when I am mindful of the advantages of Periodical Payments, especially as they provide our clients with a Tax Free income that is guaranteed. Negative interest rates may at this time only be a threat, but we should consider all the options available to our clients.

For more information on periodical payments and negative interest rates, please contact us at adroitfp.co.uk