How a retirement annuity contract works

A retirement annuity contract (RAC) is a type of pension scheme you could open until January 1988. It’s also known as a section-226 (s-226) pension or self-employed retirement annuity. It’s usually run by an insurance company. 

You might have set one up if you were self-employed or your employer didn’t offer a workplace pension. Even though you can’t open one now, you can often still pay into an existing one. 

If you set up your own pension after 1 July 1988, it’s likely you have a type of personal pension instead.

A retirement annuity contract, or RAC, is a type of defined contribution pension.  

This means your provider will invest the money you pay in (including tax relief) to grow a pot of money you can use for retirement. The earliest you can access your pension is usually age 55 (57 from April 2028). 

With a RAC, you usually use the money to buy an annuity – a guaranteed income for life or a set number of years.

You’re able to take up to 25% as a tax-free lump sum and use the rest to buy an annuity – either at the same time or a later date. This will be taxed along with any other income you have. 

But you also have other options, like taking the whole amount in one go. See our guide about your options for using your pension pot for more information. 

If you’re 50 or over, you can also book a free Pension Wise appointment to understand the different ways you can take your pension. 

If you’re still contributing to your retirement annuity contract, there are two main things to check.

Your pension contributions can usually be boosted by at least 20% due to tax relief, even if you don’t earn enough to pay tax. Tax relief is essentially where the Income Tax you would normally have paid on the money is added to your pension instead. 

Many RAC providers are unable to claim tax relief for you, so you’ll often need to claim it yourself. Your provider will be able to confirm if this is the case. 

Even if they are claiming tax relief for you, it will be basic rate tax relief at 20%. If you pay a higher rate of tax than this, you’ll need to claim the extra tax relief yourself. 

To claim tax relief, you can contact HMRCOpens in a new window or complete a Self Assessment tax return.   

Each tax year until you're 75, you can usually get tax relief on all your pension contributions up to: 

• the amount you earn (see what counts as ‘relevant UK earnings’Opens in a new window on GOV.UK) and  
• your annual allowance – this is £60,000 for most and covers all payments into your pension, including any from your employer. 

If you earn under £3,600, you can get tax relief on up to £2,880 of your pension contributions. 

If you’re considering changing or stopping your contributions, always ask your RAC provider how it will affect your pension benefits beforehand. For example, your provider might not accept contributions below a certain amount.  

You can usually find out how much your pension is currently worth, and the impact of your contributions, by checking your latest pension statement. This is often found by:

• logging in to your provider’s online account
• checking paperwork you’ve been sent or
• asking your provider for a copy. 

If you’re planning how to use your retirement annuity contract, or considering transferring your money to a new provider or scheme, check that you won’t accidentally miss out on valuable benefits. 

If you want to convert some or all of your pension pot into a guaranteed income, you’ll need to buy an annuity. 

The amount of income you’ll get depends on the annuity rate you can get. For example, if you bought an annuity for £100,000, a rate of 5% would give you £5,000 a year.  

Annuity rates depend on many things, including your health, how long you want it to pay out for and the rates on the market. This means you usually won’t know the rate you’ll get until you get a quote. 

But some RACs have guaranteed annuity rates that were set when you took out the pension. This means you might be able to get a higher rate than the ones currently on offer. 

Check your terms and conditions or ask your provider if you have a guaranteed rate. You can then compare it to the rates available on the open market.  

For more information, see our guides and tool: 

• Guaranteed retirement income (annuities) explained 
• Buying an annuity: annuity options and shopping around
• Annuity comparison tool.      

Many retirement annuity contracts are invested in ‘with-profits funds’. This means you’ll usually get regular bonuses if the investments perform well, such as every year. 

There’s also typically a final bonus when you take your money and it stops being invested. Your provider usually plans this to be at your normal pension age, as set out in the terms and conditions.  

This means your bonuses might not pay out in full if you take your money before or after your normal pension age. Your provider might also reduce the amount you get if you take it at a different date and the investments haven’t performed as expected. This is called a market value reduction (MVR).  

Ask your RAC provider what would happen to your money if you die before taking the money, as a lump sum death benefit can often be paid out.   

You can usually name the people you’d like the money to go to, called beneficiaries, but your provider will often make the final decision.