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The Actuary The magazine of the Institute & Faculty of Actuaries
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More on commutation factors

I disagree with the arguments put forward by Peter Turvey regarding the rates at which pension should be commuted into the tax-free lump sum given to members of defined benefit schemes (Letters, Jan/Feb issue).

Peter makes a moral argument for such commutation being on terms that would make the cost to the employer effectively the same whether the member chose the lump sum option or not. I see no merit in such a case. Given that the cash sum, unlike the pension foregone, would be tax-free, why should the employee enjoy the whole of that tax concession, and the employer none?

Peter uses the ‘reasonable expectations’ argument, using that term to mean ‘understandable expectations’. Since the chancellor removed the tax relief on equity dividends in 1997, surely it is reasonable to expect that the fund should at least share some of the tax benefit of the cash commutation option?