An introduction to Phased Retirement

This refers to phasing in your retirement income as opposed to committing 100% of your pension fund at once as you might with a life annuity or drawdown. Phased Retirement means you can buy an annuity with part of your pension pot with the rest of it remaining invested.  You could buy a short term annuity on retirement and then another annuity in the future should your circumstances alter (both financial and medical). One way to draw your income in a tax efficient manner is to buy an annuity each year and then use the tax free lump-sum as income. If you commit all your fund at once with a life annuity, your pension income is of course taxable.  However if you take your pension fund in several smaller annuities you will pay less tax as the ‘income’ part will be lower. Insurance companies do impose a minimum purchase amount for an annuity so this is only a viable strategy if you have a large enough pension pot.

Another benefit of phased retirement is that it allows you to receive an income in retirement whilst keeping some money back for the future.  This can help in transitional periods such as coming up to retirement that may involve not needing a full income in the earlier stages of your retirement. Phased Retirement can also benefit your loved ones or dependents should you die before converting any remaining funds. Any money that has not been converted can be paid out as a lump sum, although this is taxable at a rate of 55%.  This is one attractive feature of phased retirement compared with single life annuities (with no guarantee periods) whereby the remaining fund is pocketed by the insurance company.

Below we have listed what you need to consider when looking at Phrased Retirement

  • Annuity Rate changes. The annuity rate you are offered maybe higher as you will be older. However rates could also fall because of the impact of mortality rates rise and/or if gilt yields worsen. Delaying a life annuity on the presumption rates will definitely increase is not a wise strategy.
  • You will get less of a tax free lump sum by only converting part of your pension fund. This means less money when you retire, whereas investing 100% of your fund would mean a bigger lump sum which could be used as an investment.
  • The government may change the legislation relating to annuities and tax in the future
  • This is only really suited to wealthier retirees with other forms of income
  • Your health could deteriorate in the future which may allow you to get an enhanced annuity

 

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