PSI7.1.15 - Increases of Pensions in Payment: General - Increase on Whole Pension Before Commutation

(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)

[PN9.8]

Generally post-retirement increases should be based on the amount of residual pension being paid to the member. The increase cannot be given on any part of the pension that has been surrendered to provide a widow's, widower's or dependant’s pension. But the scheme rules can, in respect of members with continued rights, provide for the increase to be given on the member's commuted pension as well as the pension in payment (in other words on the total pension before commutation took place) provided the commutation factor used takes no account of future increases in pension, ie it is an unenhanced factor (see PSI8.2.27).

Example A male employee NRA 65, final remuneration £12,000, service 20 years plus, no retained benefits

MAP = £8,000, MALS = £18,000.

£2,000 pension is commuted at 9:1 to provide MALS, leaving a residual pension of £6,000.

The Retail Prices Index increases by 5% in the year following retirement.

A cost of living increase of 5% can be given on the total pension before commutation viz 5% increase on the full £8,000.

The member's residual pension of £6,000 is thus increased by £400 to £6,400 pa and not restricted to £6,300 as it would have been if the 5% increase had been applied to the residual pension of £6,000 only.

Where, however, the scheme adopts the 12:1 basis for arriving at the pension equivalent of the value of a lump sum retirement benefit for all members, then this is regarded as an enhanced commutation factor and post-retirement increases must be confined to the residual pension in payment only.

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