The time value of money
If someone offered you R100,000 today or R100,000 in five years, you'd take it today. Why? Because you can invest today's money and earn a return. This is the time value of money — a fundamental concept in all present value calculations, including loss of income claims.
When a court awards a lump sum for future loss of income, the claimant receives all the money now, even though the loss would have been spread over many years. The discount rate adjusts for this by reducing future amounts to their present-day equivalent.
The gross discount rate
In South Africa, the standard gross discount rate used in personal injury litigation is 8.65% per annum. This represents the assumed long-term return on a conservative investment portfolio. It's the rate at which future rand amounts are discounted back to today.
For example, R10,000 due in one year has a present value of:
The further into the future, the greater the discount.
The problem with using gross alone
If you discount future income at 8.65% but ignore the fact that salaries grow over time, you'll understate the loss. Salaries in South Africa typically grow at around 6% per year (roughly in line with CPI). A claimant earning R20,000 per month today might be earning R36,000 in ten years. Using today's salary for all future years and then discounting at 8.65% doesn't account for that growth.
The net discount rate
The solution is the net discount rate, which combines the gross discount rate and the earnings growth rate into a single figure:
With a 6% earnings growth rate, the net discount rate is approximately 2.5%. This is mathematically equivalent to projecting salary growth year by year and discounting each year at 8.65% — but much simpler to apply.
The lower net rate means future losses have a higher present value, which correctly reflects the fact that the claimant's lost income would have grown over time.
Why it matters for your claim
The difference between using a gross rate and a net rate can be substantial. On a 30-year future loss, using 8.65% instead of 2.5% could undervalue the claim by 40–50%. If you're reviewing an actuarial report, check which rate was used and whether earnings growth was accounted for. If the report uses 8.65% with no earnings growth adjustment, the quantum may be significantly understated.
WikiQuantum accounts for earnings growth automatically. You can set the growth rate on the calculator (default is 6%).