PSI8.2.6 - Lump Sum Benefits and Communication: Commutation Factors - Interest Assumptions - Level Pensions

(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 interest which will be earned on the scheme investments is the second important element in calculating commutation factors. For a level pension the minimum interest assumption was usually set at 6%. This minimum assumption was not always the same as current interest rates on which Life Office annuity rates were based. However, for commutation purposes the interest assumptions are meant to reflect the period over which the pension will be paid and not current rates. Thus for a man of 65 who has a life expectancy of about 14 years it is the likely interest rates over that period which are important.

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