PSI8.2.7 - Lump Sum Benefits and Communication: Commutation Factors - Interest Assumptions - Escalating 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)

[PN7.43]

Where the pension includes provision for cost of living increases the actual interest rate is not so important. The most important factor is the amount by which the assumed gross interest yield exceeds the rate of pension increase (this is called the net yield). Where the rate of pension increase falls between nil and 5% a gross yield of 8% per annum should be assumed. Where the rate of pension increase exceeds 5%, the commutation factor must be based on an assumed 3% net yield. The explanation for the apparent discrepancy between interest assumptions for level and escalating pensions is that interest rates tend to be related to inflation. (The principle of a long term 3% net yield for valuing pensions with more than 5% escalation has the approval of the Government Actuary).

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