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HMRC internal manual

Employment Income Manual

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HM Revenue & Customs
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Employment income provided through third parties: exclusions: retirement benefits etc: purchases out of annuities out of pension scheme rights

Sections 554V and 554Z17(2) ITEPA 2003

Conditions
Annuity contract
Insurance company
Pre-6 April 2011 annuity rights
Relevant step taken by the purchaser
Relevant step taken by the insurance company
Sourcing
How Sections 554T to 554X are related

In summary, Section 554V shelters the capital cost of annuities from Part 7A ITEPA 2003 to the extent that they are bought out of pre-6 April 2011 annuity rights.

There is an illustrative example in EIM45630.

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Conditions

Section 554V applies if three conditions are met.

  • An ‘annuity contract’ is purchased from an ‘insurance company’.
  • It is purchased wholly out of rights which A has under a pension scheme (within the meaning of Part 4 of FA 2004). You will find this definition of ‘pension scheme’ in RPSM20000000 (Registered Pension Scheme Manual: glossary).
  • These rights are ‘pre-6 April 2011 annuity rights’.

If Section 554V applies, it gives two exclusions one for relevant steps taken by the purchaser and one for relevant steps taken by the insurance company.

Section 554V can prevent a step within Section 554Z18 or 554Z19 from giving rise to Part 7A income.

On Sections 554Z18 and 554Z19 (undertakings given by employers etc in relation to retirement benefits etc: earmarking etc and provision of security), see EIM45150 and EIM45155 respectively.

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Annuity contract

‘Annuity contract’ means a contract for the provision of an annuity:

  • granted for consideration in money or money’s worth in the ordinary course of a business of granting annuities on human life, and
  • payable for a term ending at a time ascertainable only by reference to the end of a human life.

It does not matter if the annuity may in some circumstances end before or after the life.

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Insurance company

There are three types of ‘insurance company’. They are bulleted below.

  • A person who has permission under Part 4 Financial Services and Markets Act 2000 to carry out contracts of long-term insurance.
  • An EEA firm of the kind mentioned in paragraph 5(d) Schedule 3 Financial Services and Markets Act 2000 (certain direct insurance undertakings) which has permission under paragraph 15 of that Schedule (as a result of qualifying under paragraph 12 of that Schedule) to effect or carry out contracts of long-term insurance.
  • A person resident in a territory outside the EEA:

    • whose normal business includes the provision of annuities, and
    • who is regulated in the conduct of that business by the government of that territory or by a body established under the law of that territory for the purpose of regulating such businesses.

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Pre-6 April 2011 annuity rights

‘Pre-6 April 2011 annuity rights’ are rights which:

  • accrued before 6 April 2011, and
  • are specifically to receive an annuity.

Section 554V uses the concept of ‘pre-6 April 2011 annuity rights’ to prevent people from obtaining an exclusion from Part 7A income by converting rights to other types of benefits held before 6 April 2011 into rights to receive an annuity on or after that date.

The term ‘rights’ includes both actual rights and prospective rights.

The term ‘pre-6 April 2011 annuity rights’ includes both actual rights and prospective rights accrued by that time. In this context, ‘accrued by that time’ refers to the fund value at that time plus later investment growth up to the time of the annuity purchase.

Suppose that on 5 April 2011 a member had the actual or prospective right to receive an annuity:

  • unconditionally,
  • under a member’s election, or
  • at the option or discretion of the trustee.

Then the intention is that the value of relevant steps taken in the process of purchasing, transferring or paying the annuity will be excluded from Part 7A income but only to the extent that no other rights are involved (such as those arising from contributions paid after 5April 2011).

The detailed time-test for whether the member had such a right to receive an annuity (whether by explicit provision, by election, by trustee’s option or by discretion) is that the right to receive an annuity:

  • could have been exercised at 5 April 2011, or
  • could have been exercised at that date had the member met the sufficient conditions (for example, around age).

For the purposes of this test, it does not matter if:

  • the right is exercised later, or
  • the purchase amount includes growth occurring after 5 April 2011.

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Relevant step taken by the purchaser

There are three scenarios in which a relevant step taken by the purchaser will not give rise to Part 7A income. They are bulleted below.

  • The purchaser takes a relevant step for the sole purpose of purchasing the annuity contract.
  • The purchaser takes a relevant step for the sole purpose of transferring the beneficiary’s rights under the annuity contract to:

    • A, or
    • a person ‘linked’ with A (see EIM45860).
  • On the purchase of the annuity contract, the purchaser otherwise takes a relevant step within Section 554B the subject of which is the beneficiary’s rights under the annuity contract.

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Relevant step taken by the insurance company

There are two scenarios in which a relevant step taken by the insurance company will not give rise to Part 7A income. They are bulleted below.

  • The insurance company takes a relevant step for the sole purpose of selling the annuity contract.
  • On the sale of the annuity contract, the insurance company otherwise takes a relevant step within Section 554B the subject of which is a sum of money or asset representing the purchase price received for the annuity contract.

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Sourcing

If A’s rights out of which the annuity contract is purchased are partly but not wholly pre6April2011 annuity rights, you treat the relevant step as being two relevant steps:

  • one in relation to the annuity contract so far as it is purchased out of rights which are pre6 April 2011 annuity rights, and
  • one in relation to the annuity contract so far as it is purchased out of rights which are not pre-6 April 2011 annuity rights.

And you then apportion the sum of money or asset which is the subject of the relevant step on a just and reasonable basis between those two relevant steps.

Section 554V only shelters the former.

In general, you can take investment returns on funds held on 5 April 2011 into account when valuing the ‘pre-6 April 2011 annuity rights’ which are sheltered from Part 7A income by Section 554V.

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How Sections 554T to 554X are related

Sections 554T, 554U, 554V, 554W and 554X are exclusions relating to retirement benefits etc.

To the extent that they apply, you apply them in that order.

On Section 554T (employee pension contributions), see EIM45615.

On Section 554U (pre-6 April 2006 contributions to EFRBS), see EIM45620.

On Section 554W (certain retirement benefits etc), see EIM45635 onwards.

On Section 554X (transfers between certain foreign pension schemes), see EIM45645 onwards.