Phased Retirement

What is Phased Retirement?

Click here for a leaflet on unsecured pensions.

Phased retirement (also known as staggered vesting) is an alternative to taking a pension annuity when you retire from a pension. Many people do not realise it, but when they retire from a pension scheme, they do not necessarily have to immediately take their income in the form of a pension annuity.

The main purpose of phased retirement is to provide more control over the level of income in retirement, especially in the earlier years.

The principle behind phased retirement comes from policy segmentation. Most modern policies are split into many segments. These can then be vested (or retired from), and a pension annuity can be taken at that time. Under phased retirement, these segments can be converted into an annuity at any time, and in any number until age 75. This allows you to control the level of income you need under an annuity, and also the benefits that go with this.

Phased retirement also allows for you to control the invested funds in your pension until the final annuity is taken.

However, one downside of phased retirement is that the tax free cash normally allowed under pensions is lost, as this must be converted into 'income'. If the full tax free cash is required at outset, then this option should not be considered.

However, death benefits under the unencashed segments of phased retirement are significant in that they are tax free, and can be passed to your dependants.

Those considering phased retirement should also look at income drawdown as an option.

It is the income flexibility which is one of the most attractive features of phased retirement. You may choose the level of income each year. Obviously there is a risk associated with this approach, since annuity rates may get worse, and a careful watch must be kept on the underlying funds so that the funds are not eroded too much.

Also, there can be extra charges associated with phased retirement, since it is a specialised product. Overall, phased retirement should only be considered for those clients that are prepared to take the risks.

Overall, phased retirement is a very complicated product, and should only be considered after receiving advice. To speak to us about phased retirement, please contact us.

Click here to see a leaflet on why you should review your pension plans.