Although many people wish to cut back on work as they get older, few can afford to completely retire as early as they would like. Many people therefore work part time as they reach their 50's and 60's, getting the best of both worlds - more free time and a continued, albeit reduced, income stream.
Taking an annuity at age 55 can offer security, but isn't the most flexible option for those early years of retirement. Your requirements at 55 are likely to be very different from those at 77, and many people are not ready to lock into the fixed terms of an annuity so early on.
Drawdown offers you more flexibility. You can take your 25% tax-free cash from age 55, either in full or in stages, releasing smaller segments at a time. This is know as Phased Retirement.
After taking the tax-free cash from a segment, the remaining 75% is moved into drawdown. You do not have to take any income at this stage. As and when you decide to start drawing an income you can increase it gradually, perhaps as you reduce your working hours and therefore your pay. The amount of income you take is entirely up to you as long as you stay within the maximum income allowable for the year. This is usually slightly more than the annuity you could have bought with the same fund value. Income Drawdown is allowed from age 55 years onwards. There are two types of Income Drawdown available, Capped Drawdown and Flexible Drawdown, see Taking Retirement Benefits from your SSAS.
To calculate how much you can draw from your SSAS via Capped Drawdown, please see our Income Drawdown Calculator.
Care is required
While drawdown offers a lot of benefits, it is important that clients also consider the risks. Your pension remains invested during drawdown. You choose the investments and need to monitor them over time. If they do well, it is possible for your maximum income to increase. However, if they perform poorly, your fund value and hence your income will be reduced. In particular, if you are taking your maximum allowable income each year and your investments are falling in value, you could find yourself quickly depleting the fund, and in the worst case it could run out entirely leaving you with no income in later retirement. It is also important at this stage to ensure that there is sufficient cash in the fund to pay your benefits, and that there is not too much tied up in illiquid investments yielding insufficient income.
SSAS Practitioner.com can help tailor your investments to suit your drawdown requirements and provide a projected income stream. This is all included in our annual fee. Remember we do not provide investment advice.