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Phased retirement


We suggest you read our Introduction to annuities before you read this section if you haven't already

Phased Retirement

Most personal pensions can be arranged not as a single plan, but as a cluster of many separate policies, sometimes called ‘segments’. The segments can be crystallised at various times to provide income by way of either an Annuity or Unsecured Pension as explained in those sections. All the segments must be used by the time you reach the age of 75.

When you crystallise a segment you can take a lump sum of up to 25% of the value of the segment. Once the tax free lump sum has been paid, the remaining fund is used to provide an income either via Annuity purchase or as Unsecured Pension, both of which are treated as earned income and taxed accordingly.

It is possible to vary the type of annuity on each occasion and it need not be on the same basis as the first or subsequent years. On death, segments that have not yet been converted to annuities can provide a pension for your surviving dependants or a lump sum, depending on the terms of the pension plan.

With Unsecured Pension, you can start to draw an income from the underlying fund, which remains invested. If you need to increase your income at a later date, you could either increase the rate of withdrawal, provided this does not exceed the maximum limit, or start to draw an income from a further segment of your pension fund.

Phased retirement can be a very useful financial planning tool if you want to ease back on work gradually and start to replace your earnings with pension income. It also provides more flexible benefits for your survivors if you die before all the segments are crystallised. However, it is generally deemed to be more suitable if you have a fairly large pension fund or other assets or income. This is because the remaining pension fund remains invested in an appropriate portfolio in accordance with your agreed risk profile and income requirements.


• As you can use tax free cash as ‘income’ it is possible to reduce your overall liability to Income Tax (compared to taking a standard annuity without a lump sum where all income is taxed).

• The balance of your pension fund - i.e. the segments which are yet to be crystallised, continues to be invested, thus providing you with the possibility of higher future income. This depends largely on how much income you take out of the pension fund, especially in the early years, and future investment returns achieved on the residual pension fund.

• As you get older there is the prospect of annuity rates rising and providing you with higher income. This is because it is likely to be cheaper for insurance companies to provide 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 remain the same. This is because life expectancy is expected to be shorter for a 70 year old so less pension fund is required to purchase the same level of income - the expectation is that the insurance company will pay out an income for a shorter period of time.

• If your market expectations are that medium to long-term interest rates and gilt yields may rise, annuity rates might also rise. If this happens, you 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’.

• You will be able to change the shape of your retirement income to reflect your personal circumstances in the future. However, once you have purchased an annuity, this income payment will continue for the rest of your life.

• The remaining pension fund - i.e. the segments which are yet to be crystallised, can be returned to your beneficiaries normally free of Inheritance Tax on your death.


• 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.

• If you want to purchase an annuity to provide income when you draw part of your tax free cash sum. Annuity rates may not be favourable at that time.

• Deferring the purchase of the annuity does not guarantee a higher level of future 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.

• 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 as those achieved through the purchase of a conventional compulsory purchase annuity purchased at outset. 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 on the balance of the fund still invested.

• 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.

• You will not receive all of your tax free cash as a lump sum at outset, because you may be using the cash to supplement your income and can only take this from segments that you vest i.e. put into service.

• As explained under Unsecured Income, annuity providers make a profit from the fact that not all annuitants will live as long as expected and use this “mortality gain” to subsidise current annuity rates. By delaying the purchase of your annuity, the benefit of this potential profit may be lost.


Learn about the more complex options that you haven't read about yet:
Unsecured Pensions (also known as Income Drawdown), or
Phased Retirement or
Third Way options

or return to the start of the annuities guide.

Once you have understood as much as you need to about annuities, be sure to use our Retirement Finance Checklist in your run up to retirement.

However if you feel that you need some help from a financial advisor, then visit our section on obtaining financial advice, or our page on Laterlife selected services and associated advice.



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