General principles: meaning of pension scheme
Definition of a pension scheme
Section 150(1) Finance Act 2004
A pension scheme is defined in the tax legislation as a scheme or other arrangement(s) that can provide benefits to a person/in respect of a person in any of the following circumstances:
- having reached a particular age
- serious ill-health or incapacity, or
- similar circumstances.
A pension scheme does not have to provide benefits in all of these situations. For example, if a scheme provides only death in service benefits it would still fall within the definition of a pension scheme.
Registered pension schemes
Section 150(2) Finance Act 2004
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,
- or the scheme is treated as automatically registered.
The main benefit of a pension scheme being registered is the availability of certain tax reliefs and exemptions.
A pension scheme is automatically registered because it was either:
- an approved pension scheme on 5 April 2006 and before 6 April 2006 did not opt out of becoming registered, or
- it is a deferred annuity contract purchased on or after 6 April 2006 to secure benefits under a registered pension scheme.
Further information on the registration of pension schemes can be found at PTM030000.
Employer financed retirement benefit schemes (EFRBS)
If a scheme is not a registered pension scheme it may be an employer financed retirement benefit schemes (EFRBS). An EFRBS is a scheme that can pay certain retirement or death benefits for employees or former employees called ‘relevant benefits’. The establishment of an EFRBS should be reported to HMRC.
There’s no tax relief for employee contributions to an EFRBS and such schemes do not get any of the explicit tax advantages that registered schemes get. For example, an EFRBS should pay tax on its investment income.
Employers can get deductions on their contributions to EFRBS as expenses but this is tied to the member being charged on their benefit, so the normal business reliefs that exist for the employer can be deferred if and when the income tax charges are deferred for the employee.
When benefits are taken from an EFRBS, any lump sum is treated as employment income and taxable on the employee primarily under PAYE.
Guidance on the taxation of EFRBS can be found in HMRC’s Employment Income Manual starting at EIM15000.
Overseas pension schemes
Section 150(7) Finance Act 2004
An overseas pension scheme is a pension scheme which is established outside of the UK, is not a registered pension scheme, and satisfies certain regulation and recognition requirements. An overseas scheme may be an EFRBS depending on the facts.
Such a scheme may have many variations of benefits and international taxation. These can interact with the UK system of reliefs and tax charges, in which case they will be mentioned with the relevant guidance in this manual.
Specific guidance on international aspects of pension schemes is at PTM110000.