(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)
The use of dynamised final remuneration in a money purchase
scheme to calculate the maximum lump sum is constrained by:
Annuity rates are generally lower than the commutation factors and, unless the scheme has sufficient resources, this can lead to dynamisation of the lump sum which is disproportionate to any enhancement of the pension. This can perhaps best be illustrated in an example:
Male employee aged 60.
Actual final remuneration: £12,000.
Dynamised final remuneration: £13,000.
Maximum approvable benefit fractions: 2/3rds and 1½
times.
Scheme commutation factor: 10.2:1.
Annuity rate: £140 per £1,000.
Fund: £61,900.
Using the formula in
PSI6.5.37 the maximum dynamised
benefits are: pension
£8,667 and lump sum
£19,500.
The pension equivalent of this lump sum is
£19,500÷ 10,2 =
£1,912 and the residual pension is
therefore £8,667 - £1,912 =
£6,755.
But to provide these benefits the scheme would need a fund
of:
£6,755 x 1,000/140 + £19,500 =
£67,750;
whereas the money available can only provide a pension of:
£61,900 - £19,500 = £42,400 x 140/1,000 =
£5,936
Dynamisation has therefore caused the lump sum to be enhanced
disproportionately to the residual pension and this is
unacceptable.
If you are asked about the use of dynamised final remuneration
to calculate benefits under a money purchase scheme consult
SF70/78, which contains an example of the calculation method to be
used.
The value of the available fund, the commutation factor
(which should not be unreasonably low) the annuity rate used and
details of any retained benefits will need to be obtained in all
cases in order to calculate precisely the maximum lump sum and
pension that can be provided from the available fund.
