Can I phase retirement using stakeholder pensions?
|Retirement | Stakeholder Pension
Asked by hdeakin299, submitted
17 March 2011.
Are Stakeholder Pensions less flexible than their more expensive predecessors?
In the 1980's I remember the old Section 226 "flexible" personal pension plans. Some companies had them with premiums as low as £10 per month, so people could, if they wanted, "phase" in their retirement in small segments by having ,for example, a range of plans set with different retirement ages: eg from ages 60 to 65. The downside was that a lot of these plans were "tiddlers" producing very small benefits and had high charges.
When they were replaced by the newer Stakeholder Plans the charges were reduced and these new plans also became very good at taking transfers in . So all the "pension flotsam and jetsam" from the transitory nature of many peoples employments could be brought together by " transfers in" in to one "ocean going" pension arrangement. They could "suck in " rebates from National Insurance, funds from otherwise non viable occupational schemes , personal pensions with exotic but unsuitable funds or funds that become more expensive when you leave . So the "tiddlers" become ocean going "bloaters" that are almost too valuable to put in the net for conversion because of their abilities to "gobble up " the pensions bits and pieces of the future.This is particularly the case now as the Government wants us all the work longer so there is a need to maintain some capacity for future transfers in.
By now the "fish" has grown a bit: If this slightly bigger "fish" is brought back to port to early all that ability to "suck in" the bits and pieces from the employments of the future is lost . But these bigger pension "creatures" do not like being cut up into segments either so they cannot be treated like the "tiddlers" as per above. If one mentions segments to a financial services industry helper one is likely to ger a slightly "non plussed" response together with a denial of their present availability. So what to do with these Stakeholder plans? New options for drawdown are available. If I select this "non annuity" drawdown route and start drawing down will the residual fund still have the ability to accept transfers in? Will the new drawdown rules help or would a SIPP be more flexible in this regard for transferring in and drawing down at the same time?
Answered by Justin on 18 March 2011
Stakeholder pensions are cheap and flexible in so far as you can stop/start contributions and transfer to another pension without penalty. The downside, as you point out, is that stakeholder pensions don't currently offer an income drawdown option (called an 'unsecured' pension) and I doubt they ever will - it'd probably be unprofitable for pension providers to do so given their low margin on stakeholder.
If you want more control over taking your pension benefits gradually then an alternative to drawdown is 'phased' retirement, whereby a pension is segmented into 1,000 policies and you can take each policy (i.e. withdraw 25% tax free cash and buy annuity with remainder) at a different time. Again, stakeholders don't offer this option as the providers probably take the view it's more hassle than it's worth.
But even if you require such flexibility in the future, stakeholder pensions can still be worthwhile meanwhile. When the time comes to drawdown or commence a phased retirement simply transfer the stakeholder pension (with no penalty) into another personal pension offering the required drawdown or phased facility. This avoids paying potentially higher charges up until retirement.
Once you start taking benefits from an unsecured pension you'll need to take the tax-free cash (if selected) and won't be able to make any further contributions. However, it is possible to transfer pensions already in drawdown from one provider to another, so it should be viable to consolidate more than one unsecured pension in this way.
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Comment by hdeakin299 at 12:01pm on 21 Aug 2011:
I have reread the answer to this one and noticed the bit about "unsecured Pensions" and not being able to pay in any more (and presumably transfer in any more )once drawdown has started . I think I missed this point first time I read it. It does seem that this does limit the ability to switch into retirement mode gradually and largely anwers my later question about whether pensions are too "binary" inflexible (on/off only mode available with nothing inbetween ) . So I suppose it means that whichever pension one chooses one has to wait until all the "bits and pieces" are transferred over into the main fund before drawing an income from it unless using an expensive option like phasing. I was hoping for a bit more flexibilty from the "Capped Drawdown" facility. Thanks for answering this technical point which has been hard to get detail on elsewhere.