PSI7.1.9 - Increases of Pensions in Payment: General - Increases on Bought-Out Policies

(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)

When a policy is bought-out from the scheme we do not object to any surplus monies which may arise after securing maximum approvable benefits being used to secure post-retirement increases to the deferred annuity. A policy may guarantee a minimum annual increase of not more than 3% per annum compound regardless of whether the Retail Prices Index in any year falls short of that stated percentage. But as the policy is a commercial contract, the Life Office can be expected to limit its commitment to pay cost of living increases and these increases will usually be made subject to an annual maximum percentage limit in excess of 3% per annum. If, (subject to minimum of 3% mentioned above which may always be paid) the cost of living increase in any year falls short of the specified maximum percentage limit then the cost of living increase will be paid out; the difference between the cost of living increase and the specified maximum limit should either be returned to the employer or retained by the Life Office as a windfall profit. (To avoid this, instead of securing a pension on the basis of a fixed rate revaluation, increases are usually expressed as x% or the rise in the Retail Prices Index if less and the purchase price for the pension on this basis will be costed accordingly. Thus any surplus is avoided by limiting the contracted policy benefits in accordance with our practice with, perhaps, a consequential adjustment to the premium).

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