1 This clause corrects a flaw in existing legislation relating to annuities received from Free Standing Additional Voluntary Contributions (FSAVC) schemes. The clause confirms that these annuities are, and always have been, correctly taxable in full on receipt in line with the tax treatment of all other pension payments.

2 Some annuities that are purchased with a lump sum are referred to as Purchased Life Annuities (PLAs). They are treated as containing a capital element, which in each instalment of the annuity, is exempt from tax. There are specific types of purchased annuities, which include those received from approved pension schemes, which are not treated as PLAs. These exceptions are listed in Section 657(2) of the Taxes Act.

3 They include annuities purchased for the purposes of a sponsored scheme, which is defined broadly as a scheme relating to service in a particular office or employment where any part of the cost is borne by someone other than the employee. Schemes that have been approved, and which are sponsored, fall within the existing exceptions to PLA treatment within Section 657 (2)(d). This includes employers’ main and Additional Voluntary Contributions (AVCs) schemes because it is a requirement of approval of such schemes by the Inland Revenue that employers contribute to them.

4 FSAVC schemes are approved under Section 591(2) (h) of the Taxes Act on the basis that the employer cannot contribute to them. Because of the reference to sponsored schemes in existing legislation, it is possible that annuities from FSAVC schemes are not covered by the existing list of exceptions to PLA treatment. This would give pensioners receiving FSAVC annuities an unintentional and unfair advantage over other pensioners.

5 Clause 71 makes it clear that annuities received from FSAVC schemes are included in the list of annuities that are not to be treated as PLAs. This means that the annuities are correctly taxable in full on receipt. This treatment is confirmed as if it had always had effect. This is in line with both the current treatment of FSAVC annuities and the original intention. This maintains fairness of treatment between pensioners. It also maintains consistency in the underlying tax treatment of pension contributions and payments.

6 Although Clause 71 is being introduced to cover annuities from FSAVC schemes, the wording deliberately covers all schemes approved under Section 591. There is no suggestion that other types of schemes approved under Section 591 are not currently within the list of annuities that are not to be treated as PLAs. The intention is to put beyond any future doubt that any annuity received from schemes approved under Section 591 are not to be treated as PLAs.

7 Clause 71 does not refer to schemes approved under Section 590 of the Taxes Act because they have to be sponsored schemes to receive approval and are therefore clearly within the existing list of annuities not to be treated as PLAs.

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8 The clause inserts an addition to the list of annuities in Section 657(2) of the Taxes Act that are not to be treated as Purchased Life Annuities within Section 656 of the Taxes Act.

9 The addition is for annuities purchased under or for the purposes of a pension scheme approved under Section 591 of the Taxes Act. This includes annuities that are purchased directly from the operator of the scheme as well as those purchased from another provider under the exercise of an open market option or a deferred annuity purchased following withdrawal from schemes membership. It also includes an annuity from an insurance policy that has been purchased in substitution for a deferred annuity policy.

10 The insertion is made as if it had always had effect.

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11 The underlying tax treatment of approved pension schemes is that contributions to them are tax relieved and the investment build up within the schemes is exempt from tax. Pension payments are taxed in full on receipt.

12 The Inland Revenue must approve pension schemes which meet the very strict conditions set out in Section 590. Alternatively, schemes may be approved under Section 591, which allows the Inland Revenue a broad discretion when approving schemes.

13 Employees who are members of approved occupational pension schemes may make additional contributions to increase their retirement benefits. Both the main and additional contributions are tax relieved.

14 There are two ways that an employee may do this. They may make contributions, known as AVCs, to their employer’s scheme. When the employee retires, the trustees of the occupational pension scheme pay the whole of the enhanced pension to the employee.

15 Alternatively, employees may make AVCs to a pension scheme that is set up separately from their employer’s scheme. These schemes are commonly referred to as Free Standing Additional Voluntary Contribution (FSAVC) schemes. When the employee retires, the pension is paid from two separate sources; the occupational pension scheme of the employer and from the FSAVC scheme. Both payments should come within the operation of PAYE so that both payments are taxed in full. This is currently how annuities from FSAVC schemes are treated.