(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)
A pension which increases during retirement costs more than a
level pension. For example, a Life Office may quote an annuity rate
of £100:11 (see
PSI20.3.4) for a level
pension and £100:8 for a pension increasing at 5%. This means
for the purposes of this example that each £100 capital will
buy £3 less annuity if the scheme gives pension increases of
5% per year. It has been argued that if a scheme which gives
post-retirement increases uses a conventional factor as in Table 1
of Appendix A the member will not get full value for the
post-retirement increases prospectively payable on the commuted
part. If, however, an enhanced commutation factor is used the
member gives up less pension and so post-retirement increases will
be given on a large residual pension. This is acceptable so long
as:
