Phased Retirement

‘Phased Retirement’ is a process of ‘crystallising’ your pension fund in stages, rather than securing your retirement income all at once. This method uses only a part of the accumulated pension fund each year, and in particular uses the tax-free cash amounts for income purposes. This means that, particularly in the early years, it is possible to create a highly tax efficient income stream.

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As only part of the pension fund is being used for income purposes, the remaining fund continues to be invested and remains under pre-retirement rules for death benefits, which are more tax efficient than post crystallisation rules.

Phased Retirement can be conducted through sophisticated encashment processes, or alternatively by simply breaking down the pension fund into a number of segments.

By the nature of the arrangement, a series of small income streams are established each year, which can be done through the purchase of an Annuity, (Lifetime Annuity, Investment Linked Annuity or Fixed Term Annuity) or the use of Capped Drawdown.

You can decide when you wish to phase in the value of your pension plan. Each element of phasing will provide the option of another tax-free cash lump sum, and will increase your pension income by the value of the Annuity or Capped Drawdown arranged.

This will continue until your entire pension fund has been crystallised.

You may continue to make contributions to your plan to build up future pension income during this period.

Complexity

Phased Retirement can involve a complex series of contracts and should be understood by the investor.

Investment risk

Funds that have not been encashed remain invested and are exposed to normal investment risks dependent on how they are invested.

Funds moved into Capped Drawdown may also be invested.

Ongoing advice

This is a complex arrangement that will need annual management and advice, as well as ongoing reviews of the investment and income strategy. It is important that you engage with the review process to ensure you are on track to meet your goals, whilst factoring the cost of advice into your decision making process.

Split funds

It is important to understand that the pension funds that have been used to generate an income, or tax-free cash, are treated as having been crystallised. These funds are treated differently than the remaining ‘uncrystallised’ funds in the event of death, which would normally be passed onto your nominated beneficiaries without the deduction of tax.

Advantages of Phased Retirement

  • You can draw benefits from your Pension gradually with just some of the fund buying an Annuity or Capped Drawdown plan in the earlier years
  • As part of the ‘income’ is provided by tax-free cash, the level of income tax paid is minimised
  • The balance of your fund continues to be invested in a tax efficient environment
  • The older you become, the better the underlying Annuity rates are likely to be. However, the actual amount of Annuity income payable to you will depend upon the rates available at the time, and may be higher or lower than the rates currently available
  • The uncrystallised pension fund can be returned to your beneficiaries on your death free of tax
  • You can vary the level of income each year according to your needs and tax position, although once you have bought a Lifetime Annuity this income will continue for the rest of your life
  • You can choose to buy the type of Annuity which suits your personal circumstances on each occasion that you crystallise your pension fund, subject to the terms of each contract
  • The lump sum death benefits can be higher with Phased Retirement than with Annuities or Income Drawdown
  • You have the option to continue to contribute to your pension fund subject to the legislative limits applicable at the time

Disadvantages of Phased Retirement

  • The tax-free cash lump sum entitlement is utilised for income purposes and is therefore not available for other expenditure. It is though still possible to encash the remaining funds in one event if required at a later stage, enabling you to benefit from a tax-free lump sum at that time
  • Future investment returns are unknown and the value of your fund will fluctuate over time
  • Annuity rates are not guaranteed and may be lower in future
  • The value of your remaining Pension fund when added to the Annuities you have already bought may not finally give you the same income as an Annuity would have given you at the outset
  • Phased Retirement can be a complex arrangement requiring annual reviews, decisions to be made on desired income levels and an appropriate investment strategy. It is likely to require ongoing advice with ongoing advice costs

Next steps

Our team of Independent Financial Advisers in are experienced in developing retirement income strategies for clients the length and breadth of the UK. If you are approaching retirement and would like advice on your options call one of our IFAs today on 0115 933 8433, alternatively enquire online or email info@investmentsense.co.uk

Further Information

Key Considerations
Options
Lifetime Annuity
Investment Linked Annuity
Fixed Term Annuities
Income Drawdown
Steps to consider leading up to retirement