Phased retirement is the term given to the process by which retirement pensions are split into segments, which are then treated separately. It makes use of the rule in the UK that allows a retirement policyholder to take each pension policy at a time of their own choosing, rather than requiring that they are all taken at a set age or at one time.
In the UK, the only limitations on the use of such policies is that they normally cannot be taken before the age of 55 and must be taken by the age of 75.
Each pension policy can be taken separately and phasing the benefits can be particularly advantageous if you are likely to want to increase your income from your pension over time – for example, where you wish to continue working part-time after retirement age and defer taking your full pension until you cease working altogether.
The initial lump sum available from each policy will be tax-free as normal – it is only the taxable proportion of the subsequent annuity that constitutes taxable income. Any sums left untaken continue to remain in the pension fund, the income on which is itself tax free. Also, if you die before the funds have all been taken, the sums remaining in the pension fund will normally be available for your next of kin. Policies can usually be written to allow any such transfers to be free of Inheritance Tax.
The main advantage of phased retirement is that it lets you control when you receive your income and can be used to supplement other income.
In the Budget on March 2014, the Chancellor of the Exchequer announced plans to radically reform pensions in the UK which sweep away much of the earlier pension regulations and provide contributors to pensions ready access to their entire pension pot. In the light of these changes, formal pensions phasing is likely to disappear.