Phased Retirement

Reducing tax on death whilst retaining your standard of living.

Phased retirement is an often underused option available to SSAS members
looking to take benefits. It enables tax-free cash and income to be drawn from a portion
of the fund without 'crystallising' (drawing a pension) from the entire fund.  Hence,
if death was to occur, the remaining uncrystillised part of the fund can be paid to your
nominated beneficiary as a tax-free lump sum.  If death occurs after you have commenced
drawing a pension, the remaining crystallised portion of the fund (or the entire fund if
no 'phased retirement' has been taken) is subject to a 55% tax charge.

Phased Retirement therefore reduces your tax liabiliy on death and is an important
tax-planning tool.

Example of Phased Retirement:

Your personal share of your SSAS is valued at £500,000.   
You decide you require £30,000 net pa to live on:

Year 1

You crystallise £100,000 from your SSAS, providing you with a 25% tax-free cash sum
of £25,000 and a pension of £5,000 pa (6.66%, for example, of the remaining £75,000).

Total annual income: £30,000

If you were to die in year 1, £400,000 of your fund has not been touched and can be paid to
your nominated beneficiary as a lump sum with no tax liability.  The remaining £75,000
(approximately) can be paid with a 55% tax charge to your nominated beneficiary as a lump sum.  This would save £220,000 in tax (£400,000 of your fund is untouched hence the 55% tax charge is not applicable).

Year 2 

You crystallise a further £90,000 from your SSAS, providing you with a 25% tax-free cash
sum of £22,500 and a pension of £4,455 (6.66% for example, of the remaining £67,500).
The portion of your fund crystallised in year 1 above still provides approx £5,000 pa.

Total annual income     £31,955

It is important to realise that you don’t have to draw the maximum income available to
you.   If you were to die in year 2, £310,000 of your fund is untouched and can be paid
to your nominated beneficiary as a lump sum with no tax liability.   This would save £170,500 in tax (£310,000 of your fund is untouched hence the 55% tax charge is not applicable).

These examples carry on year on year until no tax-free cash entitlement is remaining
as your whole fund has been crystallised, at which point your income would  be drawn
entirely as pension with no tax-free cash component. As you can see, the tax savings
can be substantial should you die within these first few years and you also retain a good
standard of income relative to the size of your retirement fund.

Phased Retirement can also be combined with an income tax planning tool, ie you may
wish to keep your taxable income below the 20% threshold for tax or, if you are still working,
below the 40% threshold.   It is important to remember that your pension from a SSAS
can be anywhere between 100% of the maximum allowable and zero.
 
SSAS Practitioner can guide you through Phased Retirement and offer guidance to your
Financial Adviser and Accountant on this issue.   Call us free on 0800 112 3750 for more
information.