Old Style S226 and S620 Retirement Annuity Contracts

Published / Last Updated on 23/03/2024

Back in the 50s and 60s it was common for employees of medium and larger companies to join their company pension plan but for those working for small businesses without a scheme or the self employed, there were little or no options.

Section 226 of the Taxes Act 1970 introduced the Retirement Annuity Contract (RAC).  A retirement savings plan for individuals that were not members of any workplace company pension plan as well as the self employed.  Indeed, they were commonly known as Self Employed Retirement Annuity Contracts as well a s226 annuity.

Section 620 of the Taxes Act 1978 reaffirmed the Retirement Annuity Contract (RAC) again.  Still for the self employed and employees without a workplace company pension and still known as Self Employed Retirement Annuity Contracts as well a s226 annuity in addition to s620 annuities.

Retirement Annuity Contract Rules

  • Premiums were paid gross (indeed a few, but not many are still paid this way today). 
  • Gross premiums mean if you paid in £100, then £100 was invested in your pension fund (unlike most personal pensions today, where you receive basic rate tax relief at source i.e., you pay in £80 in your personal pension, and it is automatically made up with 20% tax relief to £100 gross contribution)
  • Tax relief was then claimed back for your gross pension contribution via your tax return.
  • Your retirement fund then grows tax free.
  • Earliest retirement age was age 60 (unlike personal pensions where the original early retirement age was age 50, currently 55 and rising to 57 in 2028).
  • At retirement, your maximum pension benefits were:
    • Tax free cash sum of 3 X the residual annuity income (this could be more than 25% of the fund)
    • Annuity income of 1/3rd of the tax-free lump sum and could be bought from the existing pension provider or by shopping around for a better ‘open market option’ rate.
    • All of this done by actuarial calculation.

Financial Services Act 1986

FSA 86 introduced the personal pension plan from 1/7/88 and cancelled any new RACs.  RACs set up on or before 30/06/1988 could continue.  Personal Pension Plan premiums were paid net and RAC premiums continued to be paid gross.                                                           

Pension Simplification 2006

A major overhaul of pensions from 6 April 2006 saw RAC rules disappear and all old-style retirement annuity contracts RAC s226 s620, were treated from then on as personal pensions with the ‘Maximum Tax Free Cash rule of 3 X residual annuity being replaced by the standard  25% tax free cash rule with the balance of 75% being available for annuity or capped drawdown (and from 2016 flexible drawdown).

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