PSI6.4.37 - Total Benefits on Retirement at Normal Retirement Age: Pensionable Remuneration and Final Remuneration - Adding for cost of living - Restrictions on Use of Dynamised Final Remuneration

(This archived guidance relates to HMRC discretionary practice before the 6th April 2006. For current guidance on Registered Pension Schemes see the Registered Pension Schemes Manual)

In order to prevent the lump sum retirement benefit being disproportionately increased, dynamised final remuneration is restricted to increases in total benefits. It cannot be used to increase the amount of lump sum retirement benefit in isolation. The lump sum can only be increased to the same proportionate extent that total benefits are also increased, as shown in the examples below. Whilst these examples illustrate the general principle, calculation may be complicated where money purchase schemes are concerned because of differences between annuity rates and commutation factors (see PSI6.4.39).

Example 1

Employee with 20 years' service. Actual final remuneration = £12,000. Dynamised final remuneration = £13,000. The maximum approvable pension is 40/60ths and the maximum lump sum 120/80ths. The total pension actually provided is £8,000. Part of this may be commuted for a lump sum of up to £18,000 (120/80 x £12,000). The lump sum may not be increased to £19,500 by using dynamised final remuneration (120/80 x £13,000) unless the total pension before commutation is similarly augmented to 2/3rds x £13,000 = £8,667.

Example 2

The remuneration figures are as in Example 1 but service to retirement is 15 years. The maximum approvable pension for a pre-Finance (No 2) Act 87 member is 40/60ths and the maximum lump sum 72/80ths. The total pension actually provided is £8,500 (an increase of £500 justified by the use of dynamised final remuneration). The maximum approvable lump sum is:
72/ 80x £12,000 x 8,500/8,000 = £11,475

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