Gradual or phased retirement

Instead of using the whole of your pension fund (or funds) to buy an annuity, you can retire gradually in phases.

Phased retirement uses part of your fund to buy an annuity. The rest of your fund remains invested. You can then use another portion of your fund to buy another annuity at a later date. This method can provide you with a more flexible retirement approach.

Each time you convert part of your fund into an annuity, you can first take some tax free cash from that portion of your fund. By converting portions of your fund regularly, for example, once a year, you can effectively use the Tax free cash, as well as the annuity, to provide your income. Given that annuity income is taxed as earned income, this could be a more tax efficient way of taking your income.

Insurance companies often set a minimum fund size for annuity purchases, which means you have to convert a sufficient amount of your fund each time, to enable you to purchase an annuity.  Therefore, such a phased retirement strategy is only possible if you have a large enough total pension fund to allow you to buy annuities at various times.

Phased retirement can be a useful financial planning tool, if you want to gradually retire, ease out of work/your business and start to replace you salary with pension income.

It is also useful and more flexible for making provisions for your dependents or loved ones in the event of you death. With traditional lifetime annuities (see conventional lifetime annuities), the annuity and income ends on your death (not taking into account spouse/dependents’ pensions or guarantee periods). If you have adopted a phased retirement approach, if you die before converting all your funds into annuities, the unconverted funds can be then used to pay a lump sum or pension to your dependents, depending on the times of your pension policy.  Annuity Arrow can fully investigate the terms of your pension plan/s should you wish to use a phased retirement strategy.

Factors to consider

There are other factors and variables that need to be considered before using a phased retirement approach including:

• The effect of future changes on annuity rates. As you get older, you may receive a higher annuity rate when you convert funds to annuities. However, this is not guaranteed as other factors such as interest rates and mortality rates can change meaning the annuity rates can fall and well as go up.

• By taking phased retirement, you will not be receiving as much tax free cash/retirement lump sum at the outset. If you were to convert all of your fund into annuities at the outside you would receive more tax free cash, that could also be used or invested to produce additional income.

• Legislation and tax rates may change in the future that may benefit or disadvantage phased retirement and the delaying of purchasing annuities.

• Phased retirement is normally only appropriate if you have other sources of income and do not need income immediately from all you pension funds.