Retirement annuity contracts are a type of defined contribution pension scheme. They were available to self-employed people and workers not offered a workplace pension before July 1988.
What’s in this guide
- What are retirement annuity contracts?
- Replacing retirement annuity contracts
- How are retirement annuity contracts different from personal pensions?
- Do guaranteed annuity rates apply to your retirement annuity contract?
- Is your pension pot in a with profits fund?
- What happens to your retirement annuity contract if you die?
- Can I change the amount I pay into my retirement annuity contract?
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 out a new retirement annuity contract 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 pension schemes and still get tax relief. You could pay in more, but if you pay more than the limit you won’t get tax relief on the extra amount.
When you retire, you can take money from your pot however you want. Usually, 25% is tax-free and the rest is taxable.
Find out more in our guide Tax relief and your pensions
Find out more about the ways you can use your pension pot in our guide Your options for using your defined contribution pension pot
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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.
Find out more in our guide Personal pensions
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.
Beware
It’s important to check you’re getting the full tax relief you’re entitled to if you’re still paying into your pension.
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.
Find our more in our guide Guaranteed annuity rates
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 when you die. 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 showing what you are contributing and what you have in your pot, but many providers do this voluntarily. If they don’t, you can ask them.
