Phased Retirement
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Phased retirement is an important option to consider when you're coming up to retirement, but it pays to have an understanding of the pros & cons.
Phased retirement, sometimes also known as staggered vesting, allows you to phase your pension in stages rather than purchasing it outright. This is achieved by encashing segments of the plan. It's common for a plan to have in excess of 1,000 segments to assist this process. Every year you decide what level of income is required & 'cash in' however many segments are needed. The desired annual income is made up from a combination of tax free cash and small annuities. The rest of the fund remains invested with the plan provider & benefits from any subsequent growth in it's investments.
This process is available up to the plan holders 75th birthday, at which time any remaining segments (the rest of the fund) must be converted into tax free cash and an annuity.
Phased retirement plans tend to have higher management charges associated with them than ordinary personal pensions. As a result, they are generally only worthwhile if your pension fund is valued over £100,000.
Advantages
Probably the main advantage gained with phasing your retirement is the control you have over when you commit your pension fund to an annuity, right up to your 75th birthday. This is an advantage if rates are particularly low when you come to retire. In addition, annuity rates improve in relation to age, so the older you get, the better your annuity rate.
Phased retirement gives you a great deal of flexibility in the amount of income you receive annually. Unlike income drawdown plans, there are no upper or lower limits to the amount of income you can take annually.
An ordinary single life annuity stops paying when you die. This could be disastrous if it happens very early on in retirement & a spouse is left. With phased retirement, all of the segments that have remained with the pension provider pass onto your spouse with no tax liability. The spouse is then free to convert them into an annuity of their own. If you don't need the income in the early years, & you have a spouse to leave the fund to, phased retirement may well be suitable.
Disadvantages
Phased retirement does not guarantee better annuity rates in the future. There is always the risk that annuity rates will worsen in the future, which will of course result in lower income.
The same is true of the remaining pension fund. Whilst you 'encash' segments of the fund during phased retirement, those that remain invested in the pension fund are susceptible to the rises & falls of their underlying investments. This could result in your fund shrinking which would further reduce the annuity income you could buy.
For many people, the main sticking point with phased retirement is that fact that the fund's tax free cash is not available to you when you retire. The tax free part of the segments you encash actually form a significant part of your annual income. The main tax free lump sum is not available until you encash all of the remaining segments.
Most personal pensions are actually made up of a number of segments, however the number of segments & therefore flexibility varies dramatically. Basic personal pensions are often 'split' into just 10 segments. These allow for a less extreme version of phased retirement, called staggered vesting. Plans designed for true phased retirement are often made up of up to 1,000 segments. However the cost of managing these are higher, & these costs are passed onto the consumer, in the form of extra management charges when the phased retirement commences.
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