(1)For the purposes of section 83 an annuity is a “steep-reduction annuity” if—
(a)the amount of any payment in respect of it (but not its term) depends on a contingency other than the duration of a human life or lives,
(b)the annuitant is entitled to payments of different amounts at different times, and
(c)the payments include a payment (“a reduced payment”) of an amount which is substantially smaller than the amount of at least one of the earlier payments.
(2)If there are different intervals between the payments, it is to be assumed for the purposes of subsection (1)(b) and (c)—
(a)that the annuitant’s entitlement, after the first payment, to payments is an entitlement to payments at yearly intervals on the anniversary of the first payment, and
(b)that the amount to which the annuitant is assumed to be entitled is equal to the annuitant’s assumed entitlement for the year ending with the anniversary in question.
(3)For this purpose the annuitant’s assumed entitlement for a year is determined as follows—
(a)the annuitant’s entitlement to each payment is taken to accrue at a constant rate during the interval between the previous payment and that payment, and
(b)the annuitant’s assumed entitlement for a year is taken to be equal to the total amount which, in accordance with paragraph (a), is treated as accruing in the year.
(4)In the case of an annuity to which subsection (2) applies, the reference in section 83(6)(a) to the making of a reduced payment is to be read as a reference to the making of a payment which (applying subsection (3)(a)) is taken to accrue at a rate that is substantially less than the rate at which at least one of the earlier payments is taken to accrue.
(5)If—
(a)a question arises whether a payment is substantially smaller than, or accrues at a rate substantially less than, an earlier payment, and
(b)the annuitant or (as the case may be) every annuitant is an individual who is beneficially entitled to all the rights conferred on him or her as such an annuitant,
the question is determined without regard to so much of the difference between the amounts or rates as is referable to a reduction falling to be made as a result of a death.
(6)If the amount of any one or more of the payments depends on a contingency, the annuitant’s entitlement to the payments is determined for the purposes of section 83 and this section according to whatever is the most likely outcome in relation to the contingency (applying any relevant actuarial principles).
(7)If an agreement or other arrangement has effect for varying the rights of the annuitant in relation to a payment, the payment is taken for the purposes of section 83 and this section to be a payment of the amount to which the annuitant is entitled in accordance with the agreement or other arrangement.
(8)For the purposes of this section references to a contingency include a contingency consisting wholly or partly in the exercise of an option.