Choosing An Annuity: Phased Retirement – ASP – Pensionfinder
Phased retirement is an option available to those who do not wish to convert the entire value of their pension into either income drawdown or annuities. Instead, you can go through the process of conversion in ‘phases’ with smaller annuities and income drawdown arrangements purchased over time.
If you elect to utilise phased retirement, you will be allowed to withdraw 25% of your fund tax free each time you convert money as well as a taxable income with the remaining money wisely invested. This is a great option for anyone who has no desire to withdraw all of their tax-free cash immediately as well as those concerned about death benefits. This gives the pension holder a number of income options. For example, if you use phased retirement you could purchase one annuity which helps your dependents, another to beat inflation with yearly increases and a third one which combines the yearly increase annuity with income drawdown. It is also an effective way to fight back against tax because you will be allowed withdraw small tax-free cash sums.
There is no doubt that phased retirement provides you with more flexibility than normal annuities. However, although you can convert small amounts of your pension in order to withdraw tax-free sums, a phased retirement plan does not protect you from potentially weak future annuity rates. Should the fund fail to grow beyond a certain level, you may find that you receive less money in total than if you had converted your entire pension into an annuity at the beginning.
Alternatively Secured Pension
Up until a few years ago, all pension pots had to be converted into an annuity by the time you reached 75. This has all changed with the advent of the Alternatively Secured Pension (ASP). It would not be entirely wrong to describe an ASP as income drawdown for over 75’s. Before this option is considered it is only fair to warn you that ASP’s do not reward pension holders with tax-free cash.
In order to get your tax-free cash, you will have to take it out during income drawdown through a Self Invested Personal Pension and before you turn 75. In total, you will receive approximately 25% less maximum income than you were entitled to under the terms of income drawdown. This means an ASP is not the best choice for getting the best out of your pension. This maximum limit is subject to review every 12 months though this review always considers the pension holder to be 75. The minimum income you can withdraw is about half of what could be taken out under the income drawdown umbrella.
Similarities with income drawdown include the fact that the money within the fund is always invested with the fund owner allowed to decide where to invest the money as well as withdrawing cash as taxable income. As the fund’s value could potentially reduce in value, it is important to accept this risk before settling on an ASP.
Once the fund holder dies, the remaining money is used as an income for dependents. Those who have no family members or beneficiaries can choose a charity where their money can be donated free of inheritance tax. This freedom from inheritance tax only occurs when there is a charity involved.