Transferring old style Retirement Annuity Contracts & Pre Royal Assent Pensions


Prior to Pensions Simplification in April 2006, there were a number of historical pension schemes with various rules surrounding the maximum tax free lump sum, when you could retire and how you had to take the income at retirement. As you can imagine, this became a nightmare for most advisers to keep on top of and pension companies to administer, let alone the average person. As a result of Pensions Simplification these scheme ruleshave generally been amalgamated to provide one set of rules for all to follow.

We've provided details of some of the types of schemes you may have had in the past in trying to help you understand why you may have been told to leave your pension where it was in the past. Since these benefits generally no longer apply, if you hold an older style contract it is worthwhile getting it reviewed since older style pensions typically have higher charges and in many cases a reduced/inferior fund range.

Retirement Annuity Contracts (RACs) - Also known as Section 226 Contracts

These were the pre-cursor to today's personal pension plan and worked in much the same way as they do today with different final retirement dates and tax free lump sums. Since A-Day and Simplification, they have been brought into line with personal pensions, providing a maximum tax free lump sum of 25% the value of the fund and retirement at age 50, 55 from 2010.

RACs (Old Rules) - Tax-Free Lump Sum
The tax-free lump sum at retirement was not as simple as a quarter of the pension fund at retirement. The maximum tax-free lump sum was based on a maximum of three times the remaining pension income at retirement (annuity), allowing you to receive over and above the 25% limit imposed on newer schemes.

RACs (Old Rules) - Retiring before age 60
One of the downsides of the old style RACs was that the earliest you could take benefits was age 60, however, transferring to a newer style contract was one way around this, allowing you to retire from age 50.

RACs (Old Rules) - Maximum Contributions & High Earners
Up until A-Day, personal pension legislation placed a ceiling on the earnings that qualify for pension contributions (the earnings cap*). RACs were beneficial as they did not have an earnings cap and although they had lower age related maximum contributions, provided you did not pay into a personal pension at the same time, you could pay much larger amounts into these schemes.

* Earnings cap for the 2005/06 tax year was £105,600

Age at 6th April % Net Relevant Earnings
50 or less 17.5
51-45 20
66-60 22.5
61-74 27.5
Net Relevant Earnings are typically earned income

RACs (Old Rules) - Carry Forward
Retirement Annuity Contracts used to allow you to "fill up" unused tax relief from the last 6 tax years even after this ceased to exist for newer style personal schemes. Post A-Day, this has ceased to exist.

Policies Started Pre 27th July 1989 (Pre Royal Assent)

Plans taken out between 30th June 1988 and 27th July 1989 were a personal scheme allowing you to contract out of SERPS (now known as S2P) and could have potentially resulted in a higher or lower tax free lump sum depending on your circumstances. The advantages of holding these policies are no longer relevant since you can now take up to 25% of your Protected Rights** as a tax free lump sum anyway.

Pre-Royal Assent - Old Rules
These schemes allowed you to take up to a quarter of the fund as a tax free lump. However, any Protected Rights fund built up could be used in calculating the tax-free lump sum of the overall fund. The maximum tax free lump sum was equal to a quarter of the overall Protected Rights plus Non-Protected Rights or the total Non-protected rights fund, whichever the lower. (ie you couldn't get a lump sum from the Protected Rights element). There was also an overal limit of £150k tax-free cash pre arrangement.

** The pension fund built up by contracting out of SERPS, S2P into a personal pension is known as Protected Rights