Phased Drawdown

How phased drawdown works

This type of plan was primarily introduced for those individuals who retire gradually and wish to ‘phase’ the taking of their retirement benefits, instead of buying a lifetime annuity and being tied in to annuity rates.

One way to operate phased drawdown is to use a combination of income drawdown and tax-free cash to provide an income. At the plan’s commencement your fund is invested in a portfolio of investments in a similar way to drawdown.

Part of your pension fund is encashed to provide you with an income, which in the first year is made up of a tax-free cash sum or a combination of tax free cash and drawdown income. As and when further income is required, additional funds can be encashed to provide this.

There is an alternative to using income drawdown, you could purchase a series of annuity contracts. This type of plan is known as phased retirement. Each time you buy an annuity, you can purchase an annuity of any design.

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Drawing your income

When you require income, you select the amount you wish to draw and then the pension fund pays this out to you in the form of tax free cash and income. You can make further income withdrawals from your fund when you require additional income. Maximum levels of income are subject to overall limits set by HM Revenue & Customs.

This approach will provide you with an income in a tax efficient manner and can also provide higher levels of benefits in the event of your death than either an annuity purchase or full drawdown.

Please note that this type of arrangement is complex to set up and specialist advice should be taken.