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   Phased retirement
  Phased Retirement
  Plan structure   Disadvantages
  Advantages   
     
     

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Plan structure
The main aim of phased retirement, or staggered vesting as it is also known, is to provide pension income flexibility at retirement. Although an individual can accumulated a number of separate pension arrangements over their working life and take benefits from each at different times, a specific phased retirement pension plan will provide the maximum control and flexibility.

This is because the plan is divided into 1,000 segments allowing the individual to gradually convert their pension fund to income by using a number of segments each year to provide the desired level of income. However, the protected rights portion of the pension fund must be ring-fenced and placed in a single segment.

At the time of encashment part of the pension can be taken as a tax free lump sum and the balance must be used to purchase pension annuities, providing a guaranteed income for life.


Advantages
The following are a number of advantages of phased retirement that reflect the benefits of deferring taking pension annuities until later:

The pension fund not encashed remains in the phased retirement plan and continues to be invested, thus providing the individual with the possibility of higher future income. This depends largely on how much income is taken out of the pension fund (especially in the early years) and future investment returns achieved on the residual pension fund.
   
The individual can change the shape of their retirement income to reflect their personal circumstances in the future, although once a pension annuity is purchased, this income payment will continue for the rest of their life.
   
As they get older there is the prospect of annuity rates rising and providing the annuitant with a higher income. This is because it is cheaper for insurance companies to purchase an annuity to provide a given level of income for someone age 70 than someone age 60, assuming the returns provided by medium to long-term gilts remains the same.

This is because life expectancy (years left to live) is expected to be shorter for a 70 year old so less pension fund is required to purchase the same level of income as the mortality figures show. The expectation is that the insurance company will pay out income for a shorter period of time. The annuity is purchased by cashing in those contracts not previously cashed in or 'vested' to provide benefits in the form of a pension income.
   
By delaying the purchase of a pension annuity the individual is more likely, due to age, to suffer from an illness that will then mean they qualify for enhanced rates or even impaired rates. This could greatly increase the pension income payable for the rest of their life.
   
If the individual is nearing retirement age and has recently started smoking 10 cigarettes or more per day, delaying the purchase of an annuity until they have been a smoker for 10 years or more could mean they qualify for enhanced rates. This could significantly increase the pension income payable for the rest of their life.
   
If the individual's market expectations are that medium to long term interest rates and gilt yields may rise, income might also rise as the annuity rates for pension income shows. If this happens, they will be able to achieve a higher amount of income, through the purchase of an annuity, for the same amount of pension fund 'cashed in'.
   
The remaining pension fund being the policies not cashed in or "vested" can normally be returned to the individual's beneficiaries free of Inheritance Tax on his or her death.
   
The individual can use the tax free cash as 'income' and thus, for a given level of income, reduce their liability to income tax.

Before making a decision regarding phased retirement learn more about pension annuities, compare annuity rates, and secure a personalised annuity quote offering guaranteed rates.


Disadvantages
The following are a number of disadvantages of phased retirement that reflect the opportunities lost of deferring taking a pension annuity until later:

There is no guarantee that your income will be as high as that offered under the compulsory purchase annuity or transfer routes referred to earlier.
   
You may not receive all of your tax free cash as a lump sum at outset, because you are using this cash to supplement your income.
   
You may still purchase annuities to provide income whenever you draw part of your tax free cash sum. Of course, annuity rates at that time may not be favourable.
   
The value of your remaining pension fund, when aggregated with any annuity you have purchased, may not achieve the required level of growth to maintain income levels at the same level to those achieved through the purchase of a compulsory purchase annuity (Option One & Two of this report). This is because withdrawals of tax free cash and annuities purchased may erode the value of your pension fund, if investment returns are not sufficient to make up the balance (including charges for the ongoing administration of the plan).
   
Deferring the purchase of the annuity does not guarantee a higher level of income, as annuity rates can go down as well as up and the value of the continued investment of your pension fund may go down as well as up.
   
Annuity providers make a profit from the fact that some individuals die sooner than is expected. They utilise some of this mortality profit to enhance current annuity rates. By delaying the purchase of your annuity, the benefit of this potential profit, which can be significant, may be lost. This is especially true the longer you defer the purchase of an annuity.
   
You may feel that the prospect of future higher income does not compensate you for not being able to enjoy a guaranteed and secure level of income today and for the rest of your life.
   
If you have not purchased annuities by age 75, at that point you will have to purchase a pension annuity at the rates current at that time.
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