PSI7.1.4 - Increases of Pensions in Payment: General - Advance Funding of Pension Increases

(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)

[PN9.4]

An employer cannot fund in advance for post-retirement increases unless the scheme rules contain a commitment for pensions in payment to increase. Scheme rules may provide for increases to be given to off-set the rises in the cost of living. They may include a commitment to raise pensions in line with the full increase in the Retail Prices Index from retirement, but if this is not practical, we will accept a rule expressed in one of the following ways:

1. fixed increases of not more than 3% per annum compound, whether or not the increase in the Retail Prices Index reaches that level, or
2. provision for regular reviews of pensions in payment and for increases (not exceeding the rise in the Retail Prices Index since the pension came into payment) to be given at the employer's or administrator's discretion where sufficient funds are available or out of bonuses on policies, or
3. increases equal to the rise in the Retail Prices Index subject to a maximum percentage of 5% per annum compound i.e. Limited Price Indexation.

Where there is scope, i.e. Where the residual pension at retirement will be below the Inland Revenue maximum, fixed percentage increases in excess of 3% per annum compound may be provided, but must be capped by the limit in PSI7.1.1.