What does section 605 of the Income Tax (Earnings and Pensions) Act 2003 do?

Section 605 establishes a specific income tax charge on annuities paid under retirement annuity contracts, classifying them as pension income. Previously, such annuities were taxed under general rules for interest and annual payments. This specific charge places them firmly within the pension income framework under United Kingdom law.

Why was a specific tax charge introduced for retirement annuity contracts?

A specific charge was introduced for two reasons. First, retirement annuity contracts remain a significant source of retirement income for self-employed individuals, so they should sit within the pension income framework. Second, it establishes a clear distinction between annuities qualifying for particular tax reliefs and those that do not.

Can new retirement annuity contracts still be taken out in the United Kingdom?

No. No new retirement annuity contracts have been available since 1988. However, premiums and annuity payments under contracts already in existence before that date will continue to be made for many years. Section 605 ensures these ongoing payments are properly taxed as pension income.

How does section 605 affect purchased life annuities?

By creating a specific tax charge for retirement annuity contracts, section 605 helps draw a clear boundary between annuities qualifying for certain tax reliefs and those that do not. This distinction is especially important for purchased life annuities, where the line between relieved and non-relieved annuities must be clearly established.

Income Tax (Earnings and Pensions) Act 2003 section 605

Annuities

Section 605 establishes a specific income tax charge on annuities paid under retirement annuity contracts, bringing them within the pension income rules.

Annuities paid under retirement annuity contracts are taxed as pension income under a specific charge rather than under general income tax rules.
No new retirement annuity contracts have been available since 1988, but payments under existing contracts will continue for many years.
The specific charge recognises that retirement annuity contracts remain an important source of retirement income, particularly for the self-employed.
Creating a distinct tax charge helps draw a clear boundary between annuities qualifying for certain tax reliefs and those that do not, which is especially relevant for purchased life annuities.

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