How retirement annuity contracts work

What are retirement annuity contracts?

Retirement annuity contracts are individual contracts between you and the pension provider. The pension provider is usually an insurance company.

They’re also known as Section 226 pensions, s226 pensions or self-employed retirement annuities.

It hasn't been possible to take a new retirement annuity contract out since 6 April 1988. Contracts taken out before this date can remain in place, and you might be able to carry on paying into them.

Each year there are limits to the amount you can pay into your pensions schemes and still get tax relief. You could pay more in, but if you pay more than the limit you won’t get tax relief on any extra you contribute.

arrow icon

When you retire, you can take money from your pot however you want . Usually, 25% is tax-free and the rest is taxable.

arrow icon
arrow icon

Replacing retirement annuity contracts

On 6 April 2006, HM Revenue & Customs (HMRC) changed the rules that applied to retirement annuity contracts. They did this to align them with the personal pensions rules.

arrow icon

How are retirement annuity contracts different from personal pensions?

With retirement annuity contracts, individuals usually had a right to a tax-free lump sum of three times the initial annual annuity.

But the maximum tax-free lump sum paid from them now is restricted to 25% of the value of the pension pot being used to take money from.

Some providers don’t automatically claim and add tax relief on your contributions. This means you have to submit a self-assessment tax return to HMRC to get tax relief.

Even when the provider does add tax relief – this is at the basic rate. So if you’re a higher rate taxpayer, you will need to claim the extra tax relief.

Some retirement annuity contracts have guaranteed annuity rates. These might give you a higher guaranteed income for the rest of your life than is available on the annuity market.

arrow icon

Do guaranteed annuity rates apply to your retirement annuity contract?

A guaranteed annuity rate is one that was set in the terms and conditions of your pension policy when you took the policy out. This means you might be offered a guaranteed income at a rate that will be higher than rates available today to most people.

It’s a good idea to check with your provider as this can be a valuable benefit.

arrow icon

Is your pension pot in a with profits fund?

Many retirement annuities contracts are invested in ‘with-profits funds’. These provide bonuses if investments have performed well.

Are you thinking about taking your money out before or after the retirement date in the policy? It will be important to check whether the full value of the bonuses will be paid out.

Sometimes providers apply a Market Value Reduction (MVR) if the fund value has fallen. There’s no MVR when you take money at your selected retirement date.

What happens to your retirement annuity contract if you die?

Check what will happen to your retirement annuities contracts on your death. Will the full fund value be paid out?

Also, if you’re concerned about inheritance tax – many will form part of your estate on death. It’s best to check this with your provider.   

Can I change the amount I pay into my retirement annuity contract?

This may or may not be possible. Before changing contributions, it’s important to check with your pension provider first. This is because it might affect your benefits when you retire – especially if you have a guaranteed annuity rate included.

You can usually find out how much you're currently contributing by checking your annual statement.

Note, your pension provider doesn’t have to send you an annual statement telling you how much you are contributing and how much you have in your pot. Although many providers do this voluntarily. If they don’t, you can ask them what the value of your pot is.

Was this information useful?
Thank you for your feedback.
We’re always trying to improve our website and services, and your feedback helps us understand how we’re doing.
Looking for us? Now, we’re MoneyHelper

MoneyHelper is the new, easy way to get clear, free,
impartial help for all your money and pension choices.
Whatever your circumstances or plans, move forward with MoneyHelper.

Continue to website
Looking for us? Now, we’re MoneyHelper

MoneyHelper is the new, easy way to get clear, free,
impartial help for all your money and pension choices.
Whatever your circumstances or plans, move forward with MoneyHelper.

Continue to website
Looking for us? Now, we’re MoneyHelper

MoneyHelper is the new, easy way to get clear, free,
impartial help for all your money and pension choices.
Whatever your circumstances or plans, move forward with MoneyHelper.

Continue to website
Talk to us live for…
Talk to us live for…
Talk to us live for pensions guidance using…
Talk to us live for money guidance using…
0800 011 3797* Hours
  • Mon – Fri:9.00am – 5.00pm
  • Sat, Sun and bank holidays:Closed

* Calls are free. We’re committed to providing you with a quality service, so calls may be recorded or monitored for training purposes and to help us develop our services.

Talk to us live for money guidance using the telephone
0800 138 7777* Hours
  • Mon – Fri:8.00am – 6.00pm
  • Sat, Sun and bank holidays:Closed

* Calls are free. We’re committed to providing you with a quality service, so calls may be recorded or monitored for training purposes and to help us develop our services.

Talk to us live for pensions guidance using web chat
Hours
  • Mon – Fri:9.00am – 6.00pm
  • Sat, Sun and bank holidays:Closed
Talk to us live for money guidance using webchat
Hours
  • Mon – Fri:8.00am – 6.00pm
  • Sat:8.00am – 3.00pm
  • Sun and bank holidays:Closed
Talk to us for pensions guidance using our web form

We aim to respond within 5 working days

Talk to us for money guidance using our web form

We aim to respond within 2 working days

Talk to us live for money guidance using WhatsApp
+44 77 0134 2744

Download app: WhatsApp

For help sorting out your debts or credit questions. For everything else please contact us via Webchat or telephone.