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Phased Retirement

If you don’t want to draw down your pension all in one go then a phased retirement is something that you could consider. A phased retirement uses part of the fund that you have accumulated each year to provide you with income whilst the rest continues to be invested. But how does a phased retirement work in practice and what are the advantages and disadvantages of opting for one?

How It Works

At its simplest, phased retirement works by breaking down your pension fund into a series of segments. Some of these segments are used as income whilst the rest continue to be invested. Income streams are arranged each year by way of an annuity or the use of a capped or flexible drawdown. Investment continues to be made until you have used up the balance of the remaining funds.


One of the main advantages is the tax treatment of your pension. Part of the income you are provided with annually with be tax-free. Additionally, the remainder of your fund can continue to be invested under pre-retirement rules, which are more tax-efficient than post-retirement ones. You can choose each year how much to cash in and so have flexibility to vary your income according to your needs.

Annuity rates increase as you get older so you may well benefit from this. Of course, it is important to remember that this will depend upon market conditions at the time and you rate you get could be lower or higher than those available now.

The other main advantage relates to death benefits. The funds that remain invested in your pension pot are usually passed to the beneficiaries you have nominated without incurring tax.


Phased retirement is not usually available to those with pensions in occupational schemes. It can be complex so it is important that you understand how it works. The funds that you have not cashed in continue to be invested and so are exposed to risk. The value of your fund will fluctuate over time so the return you will make on your investment remains unknown. Additionally, future annuity rates are not guaranteed.

It is important to remember that the value of the annuities that you have purchased and the balance of your pension pot may work out to be worth less than if you had used the total to purchase an annuity at the beginning. As well as considering the returns you are likely to make, you will also need to factor in the costs of ongoing investment advice.

Phased retirement arrangements can be complex. If you are interested in using these arrangements it is important to seek appropriate advice to make sure that you choose suitable options when dividing up your pension pot and maximise the returns that you can make.

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