Phased Retirement

You can arrange most personal pensions as a single plan, or as a cluster of many separate plans, sometimes called ‘segments’. You can use these segments to buy annuities or unsecured pension plans at different times. You must use all the segments to provide a retirement income by the time you reach the age of 75, either via a lifetime annuity or an Alternatively Secured Pension. This process is called ‘phased retirement’.

Each time you convert a segment to an annuity or Unsecured Pension (USP), you can first take part of the segment’s fund as tax-free cash. Converting segments regularly – for example, once a year – means you can effectively use the tax-free cash, as well as the annuity or USP, to provide your income. The drawback is that if you stagger the conversion of segments into annuities or USP, you will not be able to take all your tax-free cash from your pension fund at outset as a single lump sum. You must convert enough segments each time to buy an annuity or USP. Phased retirement can be a useful financial planning tool, for example, if you want to ease back gradually on work and start to replace your earnings with pension income. It also provides more flexible help for your survivors if you die. Segments that you have not yet converted to annuities or USP can provide a pension for your surviving dependants or a lump sum, depending on the terms of the pension plan.

By taking an income in this way you are reducing your overall pension funds and relying on investment growth to replace part or all of what you have taken. Taking withdrawals may erode the capital value of your fund and result in lower income in the future.

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