An annuity is a periodical payment that may be paid under an obligation or voluntarily. Certain annuities are specifically charged to tax as pension income. Guidance about the different categories of annuity chargeable as pension income and the provisions in ITEPA 2003 that tax each category is given under the following headings. See EIM74101 for how to find the taxable pension income for a tax year.
With effect from 6 April 2006, most existing tax approved pension arrangements became registered pension schemes. New schemes seeking the advantages available to registered pension schemes must apply for registration. Section 579A ITEPA 2003 charges a pension under a registered pension scheme. Section 579D provides that pension under a registered scheme includes an annuity under, or purchased with sums or assets held for the purposes of, or representing acquired rights under, a registered pension scheme.
These are frequently referred to as occupational pension schemes (see also EIM74009). Where a scheme is approved or is being considered for approval, Section 580 ITEPA 2003 charges annuities that are:
These funds are occupational schemes approved before 1980 when the code for retirement benefits schemes in Part 14 Chapter 1 ICTA 1988 took full effect (see also EIM74009). Annuities will continue to be paid under such schemes for many years to come. Section 590 ITEPA 2003 charges annuities that are:
Section 595 ITEPA 2003 charges any annuity acquired using funds held for the purpose of an approved personal pension scheme, see EIM74009.
Section 605 ITEPA 2003 charges any annuity paid under a
retirement annuity contract. A retirement annuity contract means an
annuity contract or trust scheme approved by HMRC under Section 620
or Section 621 ICTA 1988. It includes a substituted contract within
the meaning of Section 622(3) ICTA 1988.
Although it has not been possible to enter into new contracts since 1988, these contracts remain an important source of retirement income for the self employed. Annuities will be paid under existing contracts for many years to come.
The following annuities are also taxed as pension income:
Section 150(5) FA 2004 defines an “occupational pension
scheme" as a pension scheme established by an employer or employers
and having or capable of having effect so as to provide benefits to
or in respect of any or all of the employees of that employer or
those employers or any other employer.
Where other employment related annuities arise from a source outside the United Kingdom, then the charge only applies if the recipient is resident in this country. See EIM74500 for how to calculate the taxable pension income for foreign annuities chargeable under Sections 609 to 611 ITEPA 2003.
An annuity will only be chargeable as pension income if it is charged by one of the provisions in Part 9 ITEPA 2003. All other annuities are chargeable as Savings and Investment Income under Part 4 IT(TOI)A 2005 (previously under Case III of Schedule D). Instructions on various kinds of annuities are given at AP896 to AP1020.