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Contract-based schemes

Retirement annuity contracts

Retirement Annuities Contracts (RACs) are a type of pension scheme that were available to the self-employed, or workers not offered a workplace pension before July 1988.

How retirement annuities work

It hasn't been possible to take out a new retirement annuity contract since 1 July 1988, although contracts taken out before this can remain in existence.

RACs are individual contracts between you, the member, and the pension provider. The pension provider is usually an insurance company. They were also known as Section 226 pensions, s226 pensions or self-employed retirement annuities.

RACs were designed to help the self-employed, or workers not offered a workplace pension scheme, to build up retirement benefits. Members of these schemes receive tax relief on any contributions that they make.

Replacement of RACs

On 1 July 1988, retirement annuities were replaced by personal pensions, although retirement annuities on existence on this date were able to continue. On 6 April 2006, HM Revenue & Customs (HMRC) changed the rules that applied to retirement annuities contracts to align them with those applying to personal pensions.

To find out more about personal pensions and how they work please click here.

 

How RACs differ from Personal Pensions

With RACs, individuals commonly had a right to a tax-free lump sum of 3 times the initial annual annuity. However, the maximum tax-free lump sum paid from any type of pension plan including RACs, is now restricted to 25% of the value of the benefits coming into payment. If individuals had a right to a higher lump sum, providers should have advised them that this entitlement was now restricted.

Some RACs will have guaranteed annuity rates which may be higher than those available on the annuity market. If guaranteed annuity rates apply to your RAC, these may not apply on early retirement. We suggest you check your policy’s terms and conditions, to see if the guaranteed annuity rates are favourable for you.

 

Frequently asked...

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

Before changing contributions, you should check with your pension provider, although normally this should not be a problem.

Where can I find out more?

If you need more information, please contact us. A pension specialist from our team will be happy to help with whatever pensions-related question you have. Our help is always free.

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