Retirement Annuity Contracts

The Finance Act 1956 created the option for those who were not eligible for an employer’s pension scheme, to set up ‘tax relieved’ Retirement Annuity Contracts (RACs).

They were therefore used mainly by the self employed but also by employees who did not have access to an occupational pension scheme.

Retirement Annuity Contracts were replaced by Personal Pensions on 1 July 1988 although existing plans were still allowed to continue. If you have a Retirement Annuity Contract (RAC) then this section is for you.

Retirement Annuity Contracts

  • Contributions limits were based on an age-related percentage of taxable earnings (i.e. 17.5% for under 35s up to 40% for over 60s). Unfortunately not many people match that level of pension funding today.


  • Pension contributions were paid gross and received tax relief, which was granted under section 22 of the Finance Act 1959 and then section 226 of the Income Tax Act 1970. Hence why Retirement Annuity Contracts are sometimes known as section 22 or 226 policies. Employer contributions were not allowed.


  • Contributions to existing Retirement Annuity Contracts are allowed to continue and can be increased, if allowed by the scheme but no new Retirement Annuity Contracts can be started.


  • Since 6 April 2006, which was known in the business as A Day, Retirement Annuity Contracts have been able to operate basic rate tax relief at source in the way that Personal Pension Plans do, but most still operate on a gross contribution basis. Employer contributions are still not allowed.


  • If contributions are paid gross then tax relief has to be claimed via self-assessment. If you do not usually complete an annual self-assessment tax return then please make sure that you do not forget to claim your tax rebate on these plans. 


  • One important point is that tax relief works by reducing your income that is subject to tax and so reducing your tax bill. Clearly if your total income is less than the personal allowance then there is no tax relief available to you unlike the position with personal pensions.


  • Retirement Annuity Contracts were originally allowed to pay a tax-free lump sum of three times the value of the initial annual annuity, which could be more than 25% of the fund value. However, since 6 April 2006 you are only entitled to 25% of the fund value (subject to available lifetime allowance).


  • Before 6 April 2006 you could not take benefits from your Retirement Annuity Contract until you reached age 60, unless there were ill-health considerations or you had a special occupation such as a professional footballer or a jockey. After 6 April 2006 it was initially possible to take benefits from age 50, until the normal minimum pension age changed to 55 in April 2010.


  • Before 6 April 1980 Retirement Annuity Contracts couldn’t be written under trust, which meant that any death benefits had to be paid to your estate and were liable to inheritance tax. However, after that date the death benefits could be written in trust to avoid being paid to your estate.


  • Under a Retirement Annuity Contract nobody has discretion over who should receive the benefits on death. Instead, they’re paid directly to your estate or to a named individual. Unless the benefits are put under a trust they will, therefore be liable for inheritance tax except, of course, where they are to be paid to your spouse or civil partner because of the spousal exemption.


  • To take advantage of the new pensions flexibility in providing benefits such as pension withdrawal it would be necessary to transfer your Retirement Annuity Contract to a personal pension or stakeholder pension before benefits are taken.


  • Many retirement annuities are invested on a With Profits basis, and guaranteed annuity rates were particularly common in retirement annuities.


What you should check

  • Are your contributions being paid net of basic rate tax? – If they are being paid gross are you remembering to claim tax relief each year? If you are no longer a tax payer there will be no tax relief on the contributions.


  • Have the death benefits under your policy been put under a trust?  If not, they will be subject to inheritance tax.


  • If you are likely to use pension drawdown when you take your pension benefits rather than an annuity, would it make sense to transfer from the Retirement Annuity Contract now?


  • Is your Retirement Annuity Contract invested in a With Profits Fund? If so, then further analysis needs to be carried out.


  • Does your Retirement Annuity Contract provide a guaranteed annuity rate? If so, then further analysis needs to be carried out.




This information does not constitute personal advice and should not be treated as a substitute for specific advice based on your circumstances.

Information given relating to tax legislation is based on my understanding of legislation and practice currently in force. Whilst I believe my interpretation of current law and practice to be correct in these areas, I cannot be responsible for the effects of any future legislation or any change in interpretation or treatment. In particular you are warned that levels of tax and tax reliefs are subject to alteration and, in any case, the value of such reliefs and benefits may depend on an individual’s circumstances.

If you are in any doubt as to whether any course of action is suitable for you, then you should discuss the matter with a suitably qualified independent financial adviser or other specialist.