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The first of the flexible retirement solutions will appeal to individuals who do not need all their tax free cash lump sum straight away.
Phased retirement means splitting your pension fund into segments. Each segment is like a separate personal pension plan with an entitlement to a tax-free cash sum, normally 25% of its value. The other 75% is used to buy an annuity or operate an income Drawdown plan. This income is taxable.
However, instead of using all of the segments of your pension fund when you retire, each year you only use the segments you need to provide the amount of income you want for that year. The tax free cash sum from these segments is used as part of your income so you will only need a few segments each year.
Each year as the segments are used, an amount of income (either an annuity or income Drawdown) is set up and continues each year. The cumulative effect of this over a number of years is that your regular income builds up and a smaller and smaller number of new segments are used as each year passes.
There are many advantages of phased retirement including death benefit, flexibility, the investment period and taxation.
- Death benefit: If you die during the phased process all the unused segments can be paid to your dependants free of inheritance tax.
- Flexibility: You are able to vary your income by reducing or increasing the number of segments you use each year.
- Investment period: The unused segments remain invested in a Personal Pension and therefore will change in value. By choosing your funds carefully you may be able to invest your money in a fund that increases in value, which means the amount of money you have in your Pension policy has also increased. The reverse applies, and careful selection of your funds to match your attitude to risk is very important.
- Taxation: There are many ways you can use phased retirement as part of your overall tax planning including using your tax free cash as tax free income, increasing your overall tax free cash by letting the unused segments of your policy grow, recycling income back into your fund and claiming tax relief and inheritance tax planning.
Our experienced advisers will be able to explain this complex subject and help you make an informed choice about how best to draw your pension benefits.
Comparing features of phased retirement and income drawdown
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