Retirement annuity contract tax relief is either added by the provider or claimed through your tax return, and is limited to your earnings for the year.
HMRC describes retirement annuity contracts (RACs) as "the forerunners of personal pension plans": no new one could be taken out on or after 4 January 1988, though people who took one out before then can still pay in. Their tax relief can work differently from newer pensions. Pension Wise gives free, government-backed guidance if you are thinking of taking benefits. For your own contract, the form on this page produces a ring-back, and an FCA-authorised adviser goes over its relief with you at no charge.
Is relief on a retirement annuity contract added for you?
Not always. HMRC's Pensions Tax Manual says that, unless it is a retirement annuity contract, tax relief on personal pension contributions is obtained by the relief at source method, where the provider claims basic-rate tax from HMRC and adds it to your fund. For a RAC the manual says: "The member should ask the provider which method they use." HMRC adds that relief on a RAC "is not required to be given under the RAS system; it can be given by making a claim. The decision whether to operate RAS rests with the annuity provider." If the provider does not use relief at source, you make a personal claim to HMRC yourself.
The Act behind this is the transitional schedule to the Finance Act 2004. It treats "an annuity contract or trust scheme approved under section 620 or 621 of ICTA" as a registered pension scheme from 6 April 2006, and says relief on contributions to these older contracts is not required to be given at source. Where it is not, "relief in respect of the contributions is to be given in accordance with section 194 (relief on making of claim)". Section 194 itself says the contribution may be deducted from your net income "on the making of a claim".
In practice, check your paperwork or ask the provider which of the two applies. HMRC's manual describes the claim method as the one for members who pay their contributions gross, with no tax taken off. For the other ways relief is given, see relief at source, net pay and salary sacrifice.
What limits apply to payments into a retirement annuity contract?
The limits are the same ones that apply to most registered pensions. GOV.UK sets the ceiling at 100% of your annual earnings, and leaves it to you to make sure you do not get relief on more than that. The manual describes the maximum as potentially the greater of the "basic amount" (currently £3,600 as HMRC prints it) or the relevant UK earnings on which you are taxed that year. Profits from self-employment count towards that figure; pension income does not.
Two further points from HMRC's manual. Relief can only be claimed for the tax year the contribution is actually made, and unused relief can no longer be carried backwards or forwards to other years. Separately, total payments by you and anyone else into all your pensions still count towards the annual allowance; going over it can bring a tax charge.
That £3,600 figure only helps through relief at source. HMRC's manual says that where earnings are below it, "RAS is the only method by which the member can get tax relief on the excess contribution (up to £3,600)." So if your RAC provider does not use relief at source, relief stops at your earnings. Paying in with no earnings covers the low-income position in general.
How to claim tax relief on retirement annuity payments
If you are already in Self Assessment, the claim goes on your tax return for the year the payment was made. GOV.UK says to "Claim tax relief in your Self Assessment tax return if your pension scheme is not set up for automatic tax relief." HMRC's claims guidance adds: "If you complete a Self Assessment tax return, you must claim through your tax return (for the current tax year and any previous years)." If you do not file a return, GOV.UK points you to its guidance on claiming tax relief on private pension payments. Keep the provider's statement showing what you paid in the tax year (6 April to 5 April).
The claim works by deduction. HMRC's manual says the contribution is deducted from your total income for the tax year in which you paid it, and "The deduction will be shown on the member's Self-Assessment to give them the correct amount of tax relief." Because nothing is added to the fund, what the relief is worth depends on your own tax position that year. Rates differ in Scotland, covered in pension tax relief in Scotland. If you are self-employed, relief for sole traders covers the wider picture.
Does your tax band change the claim?
It changes how any relief above the basic rate reaches you. If your provider uses relief at source, it adds basic-rate relief and higher or additional-rate taxpayers claim the rest, as with other personal pensions; pension tax relief explained sets out those rates. If you claim instead, the whole contribution comes off your income on your return, so the relief for your band is worked out there rather than in two steps. Scottish taxpayers have different bands.
Taking benefits early: protected pension age and tax-free cash
Pension benefits are normally locked until the normal minimum pension age, which rises from 55 to 57 on 6 April 2028. HMRC explains that some members of RACs on 5 April 2006 who worked in an occupation on HMRC's prescribed list may have a protected earlier age, but "protection is given only to those who on 5 April 2006 had the right to take benefits before age 50". These were mainly sports people and people in hazardous jobs, with a retirement age below 50 approved by HMRC. The manual adds that there is no protection for rights between 50 and 55, that the member must become entitled to all their benefits under the contract on the same date, and that a transfer to another scheme may lose the protection.
HMRC's manual says that before 6 April 2006 some people had the right to a tax-free lump sum of more than 25% under a pension scheme, and that scheme-specific lump sum protection keeps it automatically, with no claim to HMRC. The Act's main test (Condition A in the Act's Schedule 36) covers only the schemes listed at paragraphs (a) to (e) of its list of pre-2006 arrangements; HMRC describes these as retirement benefits schemes and deferred annuity contracts. Contracts approved under sections 620 or 621, which are RACs, are listed separately at paragraph (f). The Act's other route (Condition B) is for someone who joined a scheme through a block transfer from one that meets Condition A. Whether either route reaches your own RAC is something to raise with the adviser who returns your enquiry from this page's form; that conversation is free. The normal limits are covered in tax-free cash from a pension.
Retirement annuity contract tax relief questions
Who decides whether my RAC uses relief at source?
The provider. HMRC's manual says "A member cannot choose which method of tax relief applies to their contributions", and for a RAC the choice of relief at source belongs to the annuity provider.
Can I still pay into an old retirement annuity contract?
Yes, if you took it out before 4 January 1988: HMRC says people in that position can continue to make contributions. The same earnings limit and annual allowance apply as for other pensions.
How does a retirement annuity contract differ from a personal pension plan?
HMRC calls RACs the forerunners of personal pension plans and says their terms are, in general, "far less flexible". The Finance Act 2004 lists them separately from approved personal pension schemes, though both became registered pension schemes on 6 April 2006.
Still unsure how your contract handles relief or its lump sum? Request a callback through this page's form; the FCA-authorised adviser who phones will not charge you.