Phased retirement, income withdrawal, alternatively secured pensions - income from pensions - by independent financial adviser John Bramwell

Phased Retirement, Income Withdrawal and Alternatively Secured Pensions

What is phased retirement and income withdrawal?

These are pension plans that allow you to receive an income from the pension fund, while delaying the purchase of an annuity. This can have important benefits, such as providing a potentially greater income and allowing part of the pension fund to pass to your heirs.

Phased retirement - this type of plan is initially split into many policies (typically greater than 1000). The retirement income comes from converting some of the policies each year into an annuity and tax-free lump sum. The income therefore comes from a mixture of annuities from newly converted and previous conversions, and the tax-free lump sums from newly converted policies. This means that phased retirement plans are much more flexible than simpler schemes and allow some variation of the income received. A further benefit is that on death the proceeds of unconverted policies can pass to the deceased's beneficiaries (subject to tax).

Income withdrawal - these plans are schemes where an income is taken directly from the pension fund. The level of income allowed is subject to limits set by the Government Actuaries Department (GAD). These limits are set to protect an individual from depleting their fund excessively before purchasing an annuity. The schemes are flexible and allow some variation of the income taken between the applied GAD limits (reviewed periodically). Any tax-free cash required from a pension fund must be determined and taken before a scheme goes into the drawdown mode, as it cannot be taken afterwards. On death of the policyholder any remaining fund can pass to the deceased's beneficiaries (subject to tax).

Can you combine phased retirement and
income withdrawal?

Phased retirement plans and income withdrawal plans can be combined into a hybrid scheme to give a combination of the benefits of each type.

What happens at age 75?

Like all pension schemes, at age 75 any remaining funds must be converted into an annuity (apart from the tax-free cash component of unconverted phased retirement plans). This has been a concern for many years because of the annuity rates offered and so, from A-Day in 2006, a second type of income withdrawal scheme is now allowed (called an Alternatively Secured Pension).

This Alternatively Secured Pension means that it is possible to continue to take an income from a pension fund after the age of 75, but at a reduced rate compared to the income withdrawal schemes up to age 75.