EIM75400 - The taxation of pension income: pensions from registered pension schemes
Registered pension schemes
Identifying the type of payment
Authorised pensions payable under a registered pension scheme
Taxation of authorised pensions
The Pension Protection Fund
Registered pension schemes
Section 579A and 579D ITEPA 2003
Registered pension schemes can pay pension and lump sums to members and to beneficiaries following the death of a member. Some payments are wholly or partially taxable, others can be paid tax-free. This page provides guidance on the tax treatment of pensions paid to members.
EIM75420 provides guidance on the tax treatment of lump sums paid to a member.
EIM75600 provides guidance on the tax treatment of pensions paid after a member’s death.
EIM75620 provides guidance on the taxation of lump sums paid following the member’s death.
A registered pension scheme is a pension scheme that is registered under Chapter 2 of Part 4 of the Finance Act 2004 because either:
- an application to be registered has been made and the scheme has been registered by HMRC
- the scheme is treated as automatically registered (see PTM031300)
The main benefit of a pension scheme being registered is the availability of certain tax reliefs and exemptions.
The member can find out whether the scheme is registered from the pension scheme manager. (This content has been withheld because of exemptions in the Freedom of Information Act 2000)
Pensions paid from a registered pension scheme are chargeable to tax under section 579B. The term ‘pension’ under a registered pension scheme includes:
- annuities purchased using funds from a registered pension scheme
- drawdown pensions
Any payment that is an ‘unauthorised payment’ is not taxable under the pension income provisions in Part 9 ITEPA 2003. Separate tax charges (see PTM131000) apply to unauthorised payments. An unauthorised payment is any payment that is not an authorised payment.
Identifying the type of payment
The sections of guidance below give a broad outline of the conditions for paying the various types of authorised pensions. Sometimes, on the surface, a payment may look like more than one type of authorised payment. For example, a single payment from a money purchase pension scheme could be:
- an irregular payment of drawdown pension
- a pension commencement lump sum paid when a member designates funds to provide drawdown pension (but no drawdown pension has been paid yet)
- an uncrystallised funds pension lump sum
The type of payment not only affects how it taxed under ITEPA 2003 but also how it may be treated under a double taxation agreement.
(This content has been withheld because of exemptions in the Freedom of Information Act 2000)
Authorised pensions payable under a registered pension scheme
Finance Act 2004 sets out which payments are authorised payments, and the conditions for making such payments. There are 3 main types of authorised pension payable to a member:
- scheme pension
- lifetime annuity
- drawdown pension
Generally, for these pensions to be authorised the member must have reached normal minimum pension age (currently 55 but will increase to 57 from 6 April 2028). Pensions paid before the member is 55 may be authorised if they retired early due to ill-health or used a protected pension age (see PTM062200).
A scheme pension
Section 165, pension rule 3, 4 and 6 and paragraph 2 schedule 28 to the Finance Act 2004
A scheme pension may be provided under a defined benefit arrangement or a money purchase arrangement. It may be paid:
- directly from the pension scheme
- by an insurance company where an annuity contract has been purchased to secure the payment of the pension
It is the only form of pension that is authorised to be paid from a defined benefits arrangement. As a result, it is the type of pension payable from some of the largest registered pension schemes. For example, most public sector schemes will pay scheme pensions to a member.
To be a scheme pension, certain conditions must be met; details of these can be found at PTM062310.
Lifetime annuity
Paragraph 3 schedule 28 to the Finance Act 2004
A lifetime annuity is an annuity purchased from an insurance company using funds from a money purchase pension arrangement. It may be purchased from either uncrystallised funds (funds not yet used to provide benefits) or from a member’s drawdown funds. The annuity must be payable for the life of the member. See PTM062400 for more information about the payment conditions for lifetime annuities.
Drawdown pension
Paragraph 4 schedule 28 Finance Act 2004
The member starts drawdown pension by designating sums and assets as available to provide drawdown pension. Drawdown pension may be paid as either or both of:
- income withdrawal
- short-term annuity
Income withdrawal is a payment made directly from the member’s drawdown pension fund or flexi-access drawdown fund. Subject to what the pension scheme rules allow, members can choose to take as much or as little drawdown pension as they like. They can choose to take:
- no payment of drawdown pension
- a regular series of payments
- an irregular payment stream
- their whole flexi-access drawdown fund as a single payment
A short-term annuity is payable by an insurance company under an annuity contract purchased using funds from the member’s drawdown fund. The contract pays the annuity for a maximum period of 5 years.
See PTM062710 and PTM062720 for more about drawdown pensions and short-term annuities.
Taxation of authorised pensions
Sections 579A to 579D and 683 ITEPA 2003
A pension under a registered pension scheme is taxable as pension income on the recipient. This includes payments to non-residents.
The amount chargeable to tax is the amount of pension that accrues to the individual in the tax year. This may be different to the amount of pension the member actually receives in the tax year. EIM75020 provides guidance on issues that may arise where pension is paid in advance or arrears.
PAYE applies to all pensions paid from registered pension schemes. The payer of the pension must apply the PAYE rules before paying the pension. For details of how to operate PAYE correctly please refer to CWG2: further guide to PAYE and National Insurance contributions.
Payments to non-residents
There is no general exemption to Income Tax for non-UK residents receiving a pension from a UK registered pension scheme. However, exemption at source may be available under a double taxation agreement – see EIM75070. Where a pension is exempted from UK taxation under a double taxation agreement whilst a member is temporarily non-resident, it may become taxable when that member returns to the UK. EIM75450 provides guidance on the treatment of pensions paid during a period of temporary non-residence.
The Pension Protection Fund
The Pension Protection Fund (Tax) Regulations 2006 (SI 2006/575)
The Pension Protection Fund (PPF) 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 is not a registered pension scheme. However, regulation 4 provides that payments from the PPF are taxed in the same way as payments from a registered pension scheme. PPF periodic compensation payments are taxed as if they were payments of scheme pension.