(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 controlling director may, like any other member subject to
the pre-Finance Act 1989 basis for late retirement, be given the
option to take part of his or her employer funded benefits and
defer the balance until actual retirement. Where the lump sum is
taken at NRD (or later but in advance of actual retirement) the
pension equivalent of total benefits must be restricted to the
maximum approvable calculated at the date on which the lump sum was
paid. The deferred pension may be increased in line with the cost
of living during the period of postponement to maintain its
purchasing power (see
PSI9.2.10) but it cannot normally be
increased actuarially except for any period of deferment after age
70. No account can be taken of increases in remuneration or
additional years worked after the lump sum benefit was paid.
Example A male controlling director has a normal
retirement age of 65, and his final remuneration is £12,000.
His maximum approvable pension is £8,000. He commutes
£2,000 of it and takes a lump sum of £18,000 but defers
the remaining benefit.
He then serves for four more years (earning eventually
£17,000 per annum), during which time the cost of living rises
by 30%. On final retirement he may draw a pension of £8,400
calculated as follows:
| Deferred pension after commutation | £6,000 |
| plus 30% cost of living on original £8,000 | £2,400 |
| £8,400 |
Had an enhanced commutation factor (say 11.48:1) been used in the calculations underlying the £18,000 lump sum, the 30% cost of living increase should only be calculated by reference to the residual pension of £6,432 (viz £18,000 ÷ 11.48 = £1,568 pension equivalent deducted from maximum approvable pension of £8,000), so that the maximum approvable residual pension payable at actual retirement is £6,432 plus (30% of £6,432) £1,930 = £8,362.
[If he had not taken his lump sum at normal retirement date, the maximum pension on final retirement would be 2/3 x £17,000 = £11,333.]
[PN8.33]
Where, unusually, a controlling director takes his or her
employer funded pension benefit at NRD or later and defers the lump
sum, the deferred lump sum may be increased during the period of
deferment in proportion to the increase in the cost of living
during that period.
