What are retirement annuities?
A retirement annuity contract was a type of pension plan that was available to individuals prior to 1 July 1988. This type of retirement plan is sometimes known as a Section 226 contract, and you may have one if, for example, you were in employment before July 1988 but your employer did not offer you membership of a workplace pension scheme, or if you were self-employed.
After the cut-off date of 1 July 1988, no new retirement annuity contracts could be taken out, and they were replaced with personal pension plans. However, if you have a retirement annuity contract, you can continue to contribute to it, as long as the provider allows you to do so. Retirement annuity contracts started before 1 July 1988 can carry on until the individual retires.
New regulations came into force on 6 April 2006. Prior to 5 April 2006, there were a number of historical pension schemes with various rules surrounding aspects such as the maximum tax free lump sum, when you could retire, and how you could receive your income at retirement. This was a complicated system to navigate for pension advisers, pension companies and customers alike. As a result of pensions simplification in 2006, most pension scheme rules have been amalgamated.
How did retirement annuities differ from personal pensions?
Before the change to the rules, all retirement annuities were paid with tax taken off at the basic income Tax rate. Now nearly all retirement annuities are taxed through PAYE (Pay As You Earn), in the same way as personal or workplace pensions.
One of the main potential advantages of retirement annuity contracts over personal pensions was their potential for a higher tax free lump sum. The tax free lump sum at retirement was not as simple as a quarter of the pension fund at retirement, as is the case with personal pension plans. The tax free lump sum was based on a maximum of three times the remaining pension income at retirement, which meant that some individuals stood to receive a lump sum of up to a third of the value of their pension pot upon retirement. This had the potential to provide an advantage over the 25% limit imposed by newer pension schemes. However, since the change in the rules, retirement annuities provide the same maximum 25% tax free lump sum as personal pensions.
Since the change in the rules, there is now very little difference between retirement annuity contracts and personal pensions. This can mean that many of the benefits of such schemes no longer apply, so if you hold a retirement annuity contract it could be worth getting it reviewed by an adviser to ensure that you are maximising your pension pot.
To compare a wide range of annuity options and find the one that’s right for you, use the comparison tables below: