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An employer may provide pensions to its employees by means of:

1. Ìý

   •ÌýÌýÌýÌý an insurance based scheme where retirement benefits are secured through an insurance policy

2. Ìý

   •ÌýÌýÌýÌý an unfunded scheme where no specific funds are set aside to pay pensions

3. Ìý

   •ÌýÌýÌýÌý a scheme where the employer provides for the payment of pensions by a segregated reserve fund in the balance sheet, represented by specific assets

4. Ìý

   •ÌýÌýÌýÌý a funded pension scheme where the pension contributions are vested in pension scheme trustees

In relation to the first three of the above four categories, costs are incurred by the employer and VAT on the costs can be recovered by the employer based on the normal input tax rules¹. In relation to the fourth category, funded pension schemes, the pension scheme trustees are usually, but not always, separate from the employer². This separation of pension scheme trustees from the employer affects VAT recovery. Commentary regarding VAT recovery in relation to funded pension schemes is provided below.