IR31

9 March 1999

TAXATION OF FREE STANDING AVC ANNUITY PAYMENTS

Pensions paid by Free Standing Additional Voluntary Contribution
(FSAVC) schemes are taxable in full in the same way as pensions paid
by other types of pension scheme, the Chancellor confirmed today. The
new rules, which correct a flaw in the existing legislation, will be
treated as if they had always applied.

No action is needed by those receiving annuities from FSAVC schemes
or by pension providers as a result of this measure, which maintains
the present treatment on payment, so that the full amount of the
pension remains taxable.

DETAILS

1. The tax regime for approved pension schemes provides for relief on
contributions made to, and on investment build up of, the schemes. In
all cases, the pension is taxable in full on receipt.

2. This contrasts with the tax treatment of annuities that people can
buy from their own savings. In general these purchased annuities are
only partly taxable. This is because part of each annuity payment
includes a return of capital.

3. At present, and in keeping with the original intentions, annuities
paid by FSAVC schemes are being taxed in full like other tax approved
pensions. But, a flaw in legislation has been identified which would
treat annuities received from FSAVC schemes like purchased annuities
which attracted an exemption to tax on part of the payments. This
would create an unintentional and unfair taxation advantage for
annuities received from FSAVC schemes compared with other pension
payments.

4. The effect of the Chancellor's proposal is to correct the flaw in
a way which confirms the present treatment of annuities from FSAVC
schemes, so that they remain taxable in full. This will maintain
parity of treatment between all types of pension payments.

NOTES FOR EDITORS

1. Employees who are members of occupational pension schemes can
choose to make additional voluntary contributions (AVCs) to an
approved scheme in order to increase the amount of pension that they
will receive on retirement.

2. Employees have a choice between two types of approved scheme into
which AVCs can be made. They can be paid into a scheme provided by
the employer, or into a FSAVC scheme operated by a provider of the
employee's choice.

3. No extra tax will be payable as the result of this measure. Its
purpose is to confirm the present treatment of FSAVC annuities and so
maintain the current level of tax payable on them.

INLAND REVENUE PRESS OFFICE
Media enquiries to:      0171 438 6692/6706/7327
(Out of hours: 0860 359544)

Non-media enquiries to:  0171 438 6420/6425
(Office hours only)

Inland Revenue information is on the Internet:
www.inlandrevenue.gov.uk

# = pounds sterling