Phased retirement is gaining in popularity because it allows income to be taken in segments. It means the investment pot can continue to remain invested, allowing time for potential additional growth should extra needs arise. It also allows the option to buy an annuity at a later date, perhaps at a time when rates have become more attractive.
Currently, the UK remains a market where the conventional annuity is king. According to Alastair Black, head of decumulation at Standard Life, annuities command about 75 to 80 per cent of the market compared to the US and Canada, where they represent about 5 per cent of the market.
But John Stannard, head of consulting at Russell Investments, says the removal of the compulsory annuity purchase means the UK pensions market allows for the sort of flexibility found in the US, where many pension pots are left with some equity exposure at retirement. “The alternative to an annuity, such as adopting a balanced equity drawdown strategy at 65 rather than annuitising, can increase aggregate pension savings by a half,” he says. “Well-informed investors would do well to consider these options carefully.”
Taking it in phases
Phased retirement can mean a number of different scenarios. One option is for the client to shift into part-time work, taking some of the pension pot as an annuity to provide a small income, while the rest of the investment retains the potential for growth.
Another approach is to use phased drawdown, where only enough of the investment pot is crystallised to provide an income for, say, three years, while the rest is allowed to grow while also retaining favourable death benefits.
Yet another option is to use a fixed-term annuity to provide a guaranteed income along with the potential for growth (or a guaranteed maturity value) that can be used to buy another annuity at a later date or go into drawdown if possible.
Greg Kingston, head of marketing at Suffolk Life, says more people are looking to flexible options because of falling gilt yields. “Annuities aren’t the risk-free move they used to be,” he says. “You are crystallising 40 to 50 years of savings in one day and you’re subject to the annuity rates on just that one day.” Mr Kingston adds that drawdown allows those decades of savings to remain invested but also gives the adviser an opportunity to provide ongoing advice through retirement.
