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HMRC internal manual

Employment Income Manual

The taxation of pension income: Pensions etc under registered pension schemes

Registered pension schemes

Finance Act 2004 made fundamental changes to the tax regime for pensions. These changes came into effect on 6 April 2006. Most pension arrangements approved under the previous regime became registered pension schemes on 6 April 2006. These include approved retirement benefit schemes, former approved superannuation funds, approved personal pension schemes and retirement annuity contracts. New schemes seeking the advantages available to registered pension schemes must apply for registration.

The Pensions Tax Manual provides guidance about registered pension schemes including tax relief, allowances, member benefits and unauthorised payments.

Taxation of pensions under registered schemes

From 6 April 2006, all pensions and annuities paid under registered pension schemes are taxable under the rules in Part 9 Chapter 5A ITEPA 2003. Section 579A ITEPA 2003 charges a pension under a registered pension scheme.

Section 579D ITEPA 2003 provides that a 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. The definition of pension in Section 579D also includes income withdrawals.

See EIM74101 for how to find the taxable pension income for a tax year.

Treatment of lump sums

Chapter 15A ITEPA 2003 makes provision about exemptions and charges in relation to lump sums under registered pensions schemes. Section 636A ITEPA 2003 provides that no liability to income tax arises on specified lump sums.

Some lump sums are taxed as pensions. This includes the taxable part of uncrystallised funds pension lump sums (section 636A ITEPA 2003), trivial commutation lump sums and winding-up lump sums (section 636B ITEPA 2003). See PTM063000 for details of these lump sums.

Certain lump sum death benefits are also taxed as pension income of the beneficiary (sections 636AA and 636C ITEPA 2003). See PTM073000.

The Pension Protection Fund

The Pension Protection Fund is a statutory fund established under the Pensions Act 2004 and became operational on 6 April 2005. It pays compensation to members of certain pension schemes where employer insolvency means that there are insufficient assets in the pension scheme to cover specified levels of compensation.

The Pension Protection Fund not a registered pension scheme. However, under separate regulations, the payment of periodic compensation by the Pension Protection Fund to an individual is treated for tax purposes in the same way as the payment of a scheme pension to a member of a registered pension scheme.