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HMRC internal manual

Employment Income Manual

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Employment income provided through third parties: exclusions: retirement benefits etc: purchases of annuities out of pension scheme rights: example

Section 554V ITEPA 2003

This example illustrates the rules of Section 554V discussed in EIM45625.

A is a member of an EFRBS (not registered) which operates on a money purchase basis. The accruals in the fund consist of both contributions and income.

On 1 February 2012, the EFRBS purchases for A an annuity contract in respect of A’s rights under the scheme for £1million. Of the £1 million, £900,000 is attributed to rights accrued before 6April 2011. The purchase of the annuity is a relevant step within Section 554C.

On entering into the annuity contract, the insurance company earmarks the consideration with a view to making the annuity payments to A. This is a relevant step within Section 554B, and the arrangement outlined in this example is likely to come through the Section 554A gateway (see EIM45025). The annuity payments made under the contract will be further relevant steps within Section 554C.

The rights out of which the annuity contract was purchased accrued partly out of pre-6 April 2011 annuity rights. So, an apportionment is needed.

The consideration needs to be apportioned between A’s ‘pre-6 April 2011 rights’ and A’s other rights.

A’s pre6April 2011 rights consist of:

  • contributions made before 6 April 2011, and
  • growth on those contributions up to the time of the annuity purchase.

A’s other rights consist of:

  • contributions made after 5 April 2011, and
  • growth on those contributions up to the time of the annuity purchase.

On a just and reasonable basis, A’s pre-6 April 2011 rights (see above) are valued at £900,000 and A’s other rights are valued at £100,000.

So, Section 554V treats the EFRBS’ purchase of the annuity as two separate relevant steps:

  • one in relation to the annuity contract so far as it is purchased out of rights which are pre-6 April 2011 annuity rights, and
  • one in relation to the annuity contract so far as it is purchased out of other rights.

As noted above, the former step is valued at £900,000. Section 554V stops it giving rise to Part 7A income.

The latter step is valued at £100,000. As far as Section 554V is concerned, there is nothing to stop it giving rise to Part 7A income.

The same apportionment will apply to relevant steps arising upon the insurance company’s act of earmarking assets in readiness to pay pension and for the pension payments.

Depending on the facts, however, other reliefs in Part 7A may reduce the value or impact of these steps.

  • Section 554S is likely to exclude relevant steps that are also pension payments see EIM45610.
  • Overlap relief under Section 554Z5 may apply see EIM45725.