Income Tax (Earnings and Pensions) Act 2003

Chapter 16: Exemption for certain lump sums

Overview

2516. This Chapter is concerned with lump sums paid under tax-advantaged pension schemes.

Section 637: Exemption for lump sums provided under certain pension schemes etc.

2517. This section exempts lump sums paid under tax-advantaged pension schemes from income tax. It derives from section 189 of ICTA.

2518. A lump sum is not a pension. The exemption is included in the pension income Part because the payment of lump sums is a feature of many pension schemes.

2519. Subsection (1) provides the exemption. Section 620(3) of ICTA allows the Board of Inland Revenue to approve a retirement annuity contract that pays a lump sum in specified circumstances. These lump sums have always been considered to be tax-free. The section makes this clear by including these payments in the exemption. See Change 140 in Annex 1.

2520. Subsection (2) limits the scope of the exemption. The exemption applies only if:

• the payment has been earned; or

• the taxpayer has lost his or her job or has suffered a loss of earnings and either event is due to ill health.

2521. This limitation is intended to prevent “golden handshakes” being paid as exempt lump sums.

2522. Subsection (4) limits the exemption given to lump sum payments made under retirement annuity contracts to payments that satisfy the conditions for approval in section 620(3) of ICTA.

2523. Subsection (5) defines and clarifies various terms used in the section. In part it is new and in part it derives from Part XIV of ICTA.

2524. “Approved personal pension arrangements” derives from section 630(1) of ICTA.

2525. “Personal pension arrangements” is defined in section 630(1) of ICTA as follows:

• arrangements made by an individual in accordance with a personal pension scheme.

2526. “Approved” in relation to personal pension arrangements is defined in section 630(1) of ICTA as follows:

(i)

[arrangements] made in accordance with a scheme which is for the time being, and was when the arrangements were made, an approved scheme; or

(ii)

made in accordance with a scheme which is for the time being an approved converted scheme but which was, when the arrangements were made, an approved retirement benefits scheme;

but does not refer to cases in which approval has been withdrawn.

2527. The definition of “office” applies section 5 in Part 2 (Employment income: charge to tax).

2528. Subsection (6) defines “tax-exempt pension scheme”. A scheme described in section 221(1) and (2) of ICTA 1970 is a former approved superannuation scheme. These schemes lost their approval in April 1980. But it is still possible for such a scheme to pay a lump sum and so the reference to these schemes is not obsolete.

2529. Subsection (7) defines “relevant statutory scheme”, “retirement benefits scheme” and, in relation to retirement benefits schemes, “approved”.

2530. Section 611A(1) of ICTA gives the meaning of “relevant statutory scheme” as follows:

(a)

a statutory scheme established before 14^th March 1989, or

(b)

a statutory scheme established on or after that date and entered in the register maintained by the Board for the purposes of this section, or

(c)

a parliamentary pension scheme.

2531. Section 611(1) of ICTA gives the meaning of “retirement benefits scheme” as follows:

‘retirement benefits scheme’ means, subject to the provisions of this section, a scheme for the provision of benefits consisting of or including relevant benefits, but does not include -

(a)

any national scheme providing such benefits; or

(b)

any scheme providing such benefits which is an approved personal pension scheme under Chapter IV of this Part.