Retirement annuity plan


A retirement annuity plan is a UK pension plan designed to build a lump sum for retirement. Part of the lump sum must be used to buy an annuity and part can be taken a tax free lump sum.
The plans were introduced under section 226 of the Income and Corporation Taxes Act 1970 and are often referred to as section 226 contracts. However they are currently legislated under section 620 of the Income and Corporation Taxes Act 1988 and are therefore also known as section 620 contracts.

Tax treatment

Contributions receive basic tax relief claimed at source. The income and gains in the plan are free from tax. At maturity the tax free cash can be taken. The tax free cash lump sum is calculated with reference to the initial annual income. The formula is often described as: the tax free cash is equal to three times the residual income.
This tax regime was abolished under pension simplification introduced on 6 April 2006.