A structured settlement pays the claimant in periodic instalments — monthly, annually, or on a custom schedule — instead of a single lump sum. The payments are typically funded by an annuity purchased from a life insurance company. The key advantage: in the US, the entire income stream (including the return on the annuity) is tax-exempt under IRC §104(a)(2).
Structures provide tax-free income, protection against overspending, and guaranteed payments. PPOs (UK) index payments to care-cost inflation. Best for large awards with long-term needs. Less suitable for small amounts or when flexibility is needed.
Lump sum vs structured settlement
| Feature | Lump sum | Structured settlement |
|---|---|---|
| Tax on investment returns | Taxable | Tax-exempt (US: IRC §104) |
| Flexibility | Full control over funds | Fixed payment schedule |
| Protection against overspending | None | Built-in discipline |
| Inflation adjustment | Self-managed | Can be built in (PPO: ASHE-indexed) |
| Guaranteed income | Depends on investment performance | Guaranteed by annuity insurer |
| Access to capital | Immediate | Limited (factoring is expensive) |
Periodical Payment Orders (PPOs) — UK
In England and Wales, courts can order periodical payments under the Damages Act 1996 (as amended). PPOs are commonly used for future care costs in catastrophic injury cases. Payments are indexed to ASHE (Annual Survey of Hours and Earnings) rather than RPI/CPI — reflecting the reality that care costs rise faster than general inflation.
When structures make sense
- Large awards ($250K+) where the tax benefit is meaningful
- Long-term care needs — guaranteed income matches guaranteed costs
- Minor claimants — payments timed to education and milestones
- Claimants with limited financial literacy — protection against poor investment
- Benefits preservation — combined with a special needs trust