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| pensions:
retirement options
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Phased Retirement
You could transfer your existing fund into a phased retirement plan - this is a personal pension divided, typically, into 1,000 arrangements. Any number of these arrangements can be used at any time between age 50 (55 from April 2010) and age 75, in phases to provide your retirement income. This income, each year, will be a combination of tax-free cash and an annuity.
A disadvantage of phased retirement is that you will be unable to take the maximum tax-free cash at retirement as this is used each year to provide part of your income.
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How does it work?
Each year you can choose to use a number of your 1,000 arrangements to provide an income. Each arrangement provides up to 25% tax free cash, with the balance being used to buy an annuity at the best rates available at that time.
You will be able to vary your income to a certain extent by altering the number of arrangements you encash each year. But, the annuities purchased in previous years will still provide a level of income, which cannot be altered.
What happens on death?
If you were to die before all 1,000 arrangements are used to provide income, the value of any arrangements, which are still fully invested, may be used as follows:
- Taken as a lump sum, normally without any Inheritance Tax liability
- To purchase an annuity for your spouse or beneficiaries, or
- To provide income withdrawals for your spouse or beneficiaries
If you were to die after all 1,000 arrangements are used to provide income, your death benefits would depend on the annuity you purchased.
Advantages
- In the early years a high proportion of your income will consist of tax-free cash - this could reduce your tax liability substantially.
- You will benefit if annuity rates improve in the future.
- Each time you purchase an annuity you will be able to decide on the most appropriate one for you at that time.
- You will retain investment control of your pension fund, and could increase your pension income with good investment growth.
- Your pension fund will continue to be invested in a tax efficient environment
- On your death any part of your fund, which has not been used to buy annuities, can be used to provide benefits for your beneficiaries.
Disadvantages
- There are no guarantees your income will be greater than if you used all your fund to purchase an annuity at retirement. If annuity rates fall, or investment growth is poor, your retirement income could be lower.
- You still need to purchase annuities, when income is needed, even if annuity rates are poor.
- Initial and on going charges are usually higher than those associated with a conventional annuity and have to be taken into consideration.
- Continuing advice is essential, at least annually in order to monitor the investment performance of the fund and your income requirements.
Protected Rights
Under current legislation, it is not possible to take benefits from Protected Rights via phased retirement.
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