Having worked with Phoenix employees for many years we have noticed several common themes. One of which is that many of you have old Final Salary schemes. These pensions are fantastic because they provide an inflation linked income for life and are a great underpin to your retirement spending. However they are inflexible when it comes to retirement age and often when we are going through future cashflow forecasting with staff, they want to retire earlier than the Normal Retirement Age of their Final Salary pension.
Whilst Final Salary pensions and State pensions provide guaranteed income they only come into payment in your 60s. If you are lucky you might have a Final Salary pension that pays out from 60 but very often they will start at 65. The State Pension retirement age has been creeping up and depending on your age could start at 66, 67 or 68.
This is where the current Phoenix pension comes into its own. The current Phoenix pension is a Defined Contribution pension and so, whilst not as attractive as a Defined Benefit (Final Salary) pension, it does have the benefit of being flexible. Benefits can be drawn flexibly from age 55 and you can vary the amount that you draw each year. This means that you can draw more in the early retirement phase (where there is no fixed pension income coming in) and ease off the withdrawals in the mid to later retirement phase (once the fixed pension incomes start flowing).
We refer to this early, flexible withdrawal of the current Phoenix pension as the Blue Bridge. We use this name because we are simple creatures and in the cashflow planning software that we use with Phoenix staff, the Phoenix pension shows up as a blue bar chart and bridges the staff member to their Final Salary pension start point.
The following is an example of Blue Phoenix and his wife Bridget Phoenix’s (see what we did there) current retirement plans:
The green bars from ages 47 to 59 are Phoenix employed income, from 65 onwards are Phoenix Final Salary pension income and from 67 onwards are State Pensions.
The red bars from ages 47 to 59 are expenditure whilst working (including mortgage) and 60 onwards are expenditure in retirement.
The blue bars are flexible withdrawals from the current Phoenix Defined Contribution pension to bridge the gap.
As you can see the first five years of retirement requires much larger withdrawals from the DC pension than the rest of retirement.
We then look at whether their current Phoenix pension can enable them to retire earlier:
In this case Blue & Bridget can afford to retire early at 55 but their Phoenix Defined Contributon pension has to be drawn down harder for longer and so it is important to get the investment profile and tax right.
This is just a quick snapshot view of one of the aspects of planning that we are doing for staff who are either full clients or who have opted into this cashflow planning via MyChoice.
If you have any questions, please do get in touch on phoenix@altorwealth.com.
