What is a retirement annuity contract (section 226)?

A retirement annuity contract (RAC, or Section 226 policy) is an older type of personal pension, sold until 1988 and aimed at the self-employed.

If an old policy with that name has turned up, it may carry features that newer pensions do not, and some can be lost by moving it. Prudential's policy conditions point readers aged 50 or over to Pension Wise, which gives free and impartial guidance as part of the government-backed MoneyHelper service (what Pension Wise offers). Papers from the 1980s are hard to follow alone, which makes a Section 226 policy a good case for the form on this page, since the phone call that follows, from an FCA-authorised adviser, is not charged for.

What is a retirement annuity contract (Section 226)?

HMRC's inheritance tax manual says retirement annuity contracts "were the forerunners of personal pension plans" and describes one as an annuity policy between an individual and an insurer that "was originally aimed at the self-employed who did not have access to an occupational pension." The "Section 226" label comes from the tax law that once governed them. The Pension Advisory Group's guide to pensions on divorce says they were introduced by the Finance Act 1956 and governed by Section 226 of the Income and Corporation Taxes Act 1970.

Sources give two cut-off dates, both for new policies. HMRC says "No new RAC could be taken out on or after 4 January 1988." The Pension Advisory Group's guide gives July 1988, when personal pension plans replaced them, and adds that some very early personal pensions, typically those started between 1988 and 1990, carry similar guarantees. Neither date stopped payments into an existing contract, as the next section explains. If your paperwork sits near that cut-off, the provider can confirm which type you hold. A RAC is a personal contract with an insurer, so it is a different thing from a defined contribution workplace pension or a modern personal pension.

Who has a retirement annuity contract today?

Mostly people who were self-employed or outside an employer's scheme in the 1970s and 1980s, and who still hold the policy. HMRC says those who took a RAC out before the cut-off can continue to make contributions, so some contracts are still being paid into; the rules on relief for those payments are in retirement annuity contract tax relief. Many holders have simply left theirs alone for decades and may hold other pensions too (see holding more than one private pension). If you cannot trace a policy, how to find a lost pension is the place to start.

Several insurers wrote them. Prudential's policy conditions, for example, say its FlexiPension (Series 5) and IndePension (Series 3) policies are retirement annuity contracts, sometimes called Section 226 plans. That is one provider's wording, so your own policy document is what counts.

How does a retirement annuity contract work, and at what age can you take it?

You paid contributions to the insurer, either regularly or in lump sums, and the money built up in the funds the contract allowed. At your chosen retirement date you took benefits: a pension, which could be bought from an insurer, and sometimes a tax-free lump sum. Prudential's conditions, for instance, let the holder put some or all of the fund towards a pension from an insurer of their choice, with a lump sum of no more than 25% of the benefits taken and kept within the lump sum allowances. How the pension is bought is explained in how a pension annuity works.

On the earliest age, the normal minimum pension age is 55, moving to 57 on 6 April 2028, and a protected pension age can be lower. The latest age comes from the contract itself. Prudential's terms say its policies "require you to take your benefits on or before your 75th birthday", after which the holder would need to transfer to a registered pension scheme that offers a later date. Other insurers' contracts may set a different age, which is why the maximum age is a question for your own policy.

What features can an old retirement annuity contract have?

HMRC says that "In general, the terms of these contracts are far less flexible than for other personal pension policies." Against that, three features come up often.

A guaranteed annuity rate

The Pension Advisory Group's glossary says RACs "often contain guarantees regarding income or annuity rates", and its guide lists guaranteed annuity rates, guaranteed pensions and guaranteed lump sums among the implicit guarantees some carry. Aviva's transfer page makes the same point about such policies in general: pensions with guaranteed annuity rates "can also offer a retirement income (annuity) significantly better than offered by current annuity rates". What a rate is, how to find out whether you have one and the rules around it are in what a guaranteed annuity rate is. One catch is worth knowing: Prudential's conditions also say a guaranteed annuity rate from one of its other retirement annuity policies does not carry across to the policy in that booklet, so at Prudential, at least, a guarantee stays with the policy that gave it.

Tax-free cash under today's rules

Since 6 April 2006 a RAC pays tax-free cash under the same rules as other registered pensions: Prudential's conditions, for example, say the lump sum must not be more than 25% of the value of the benefits taken, within the lump sum allowances. HMRC's Pensions Tax Manual explains that some people who had a right to more than 25% before that date keep it through scheme-specific lump sum protection, but the Finance Act 2004 limits that protection to the older schemes it lists at paragraphs (a) to (e), and lists retirement annuity contracts separately, at paragraph (f). The detail is on the RAC tax relief page. If you think your policy carries a lump sum right from before 2006, dig out its papers before the free call an adviser makes once the short form here goes in.

A with-profits fund and a market value reduction

Some contracts invested in a with-profits fund. Prudential's conditions say bonuses are set by its board and that "The rate of any future bonuses cannot be guaranteed." They also say that when units are sold at any time other than the selected retirement date or on earlier death, the provider can cut their value through a market value reduction. The reduction, covered fully in what a market value reduction on a pension is, matters most if you move the money before your chosen date. For the general picture, see how with-profits pensions work.

How is a retirement annuity contract treated now?

A RAC is not a separate class of pension that has been closed down. Prudential's conditions say the contract "is not a pension scheme as such", yet "HMRC nevertheless treats the arrangements as a Registered Pension Scheme", so tax advantages are available on some types of contribution, on investments and on benefits. That puts it inside today's framework of the annual allowance, the lump sum allowances and the tax-free lump sum rules.

Some pre-2006 protections attach to RACs, such as a protected pension age for certain occupations, set out with the relief rules in that page. On death, HMRC says that from 6 April 1980 it has been possible to assign death benefits on trust; before then a lump sum death benefit could only be paid to the estate. Today's position is in pension death benefits.

What should you check before transferring a retirement annuity contract?

Start with the contract and the provider's valuation, because the loss on moving is often a guarantee that does not show on a statement. A few questions to put to the provider:

• Does it carry a guaranteed annuity rate, a guaranteed pension or a guaranteed lump sum, and what happens to each if the money moves?
• Is any of the fund in a with-profits fund, and would a market value reduction apply on a transfer? Prudential's conditions say the amount paid on termination is reduced by any market value reduction that applies.
• Has the provider recorded any lump sum or other protection from before 6 April 2006 on the policy, and would a transfer keep it?
• Does anyone hold a protected pension age? HMRC says a member with one "will lose that protection if they transfer to another scheme unless the transfer is" a block transfer, and the same manual says a RAC cannot normally make a block transfer, as it has only one member.

The receiving provider matters too. Aviva's page on transferring in says it cannot accept a defined contribution pot "that has any safeguarded benefits or guarantees, including guaranteed annuity rates", and warns that a refused transfer can leave people worse off financially after they have left the old scheme. The advice that the law requires before some transfers is covered in the transfer advice requirement, and the broader steps are in how to transfer a pension. Unexpected calls offering to move an old pension are a recognised scam tactic; pension scams shows what to watch for.

Going through these with the contract in hand works best by phone, so the form here can book a free call with an authorised adviser who can weigh the contract against your other pensions and your plans.

Retirement annuity contract questions

Is a retirement annuity contract the same as an annuity I buy at retirement?

No. The contract is the pension you paid into; the annuity is an income you may buy with it, from the same insurer or another. The name dates from when the policy itself promised an annuity. Pension annuities explains the purchase.

Is a Section 226 policy the same as a Section 32 policy?

No. The divorce guide treats them separately: it describes Section 32 buy-out policies as plans built to receive an occupational pension benefit and keep it in its original form. For those, see what a Section 32 pension is.

What happens to a retirement annuity contract when the holder dies?

It depends on the contract and on whether death benefits were put in trust. HMRC notes that from 6 April 1980 death benefits could be assigned on trust. Pension death benefits covers the general rules.

Can the money stay in a retirement annuity contract past a certain age?

That depends on the terms. Prudential's conditions require benefits to be taken on or before the 75th birthday, but another insurer's contract may differ. The provider can tell you what yours says.

Unsure whether an old contract is worth keeping as it is? The short form here arranges a call from an authorised adviser, who will talk it through with you for free.

Sources: HMRC Inheritance Tax Manual, IHTM17024; HMRC Pensions Tax Manual, PTM062240; HMRC Pensions Tax Manual, PTM063130; Finance Act 2004, Schedule 36; Prudential, Retirement Annuity Policy Conditions (1990 Series), print reference P411 01/2026_WEB; Aviva, transferring into an Aviva pension; guide to pensions on divorce from the Pension Advisory Group, second edition.