What is a phased retirement, and is it right for you?


An older man helps his younger colleague while laughing togetherOne of the most important things to consider when approaching retirement is how you want to do it. Perhaps you have a bucket list that you want to complete, and once you leave the office for the final time, you’ll never look back?

Maybe you’re done with the nine-to-five office grind but would like something a little more casual in your later years? If you’re lucky, maybe you love your job so much you just aren’t ready to leave.

In these cases, a “phased retirement” could give you the flexibility you need when approaching retirement age. But what is it, and could it be right for you? Read on to find out more.

A phased retirement is a way to slowly transition from work to full retirement

According to research conducted by Aegon in 2019, half of workers over the age of 50 favour a gradual transition into retirement over the traditional “cliff-edge” approach. This is known as a “phased retirement”.

The aim is to slowly cut down your work hours over time, while also drawing from your pension or investments to supplement your income.

You could approach this in several different ways, depending on how you want to take your income. If you want to stay with your current employer, you could try reducing your role to part-time, or consider taking up another position, such as a consultant.

Alternatively, you could find a new part-time job, become a freelancer, or try setting up your own business and working on your own terms.

While the idea of slowly reducing work hours as you approach retirement is nothing new, it was often not a practical option for many people.

It was the introduction of Pension Freedoms in April 2015 that offered more flexible retirement options for older workers, as it gave people the opportunity to access their pension at 55 (although this will rise to 57 from 2028).

A phased retirement approach can have many benefits

There are many reasons why a phased retirement could be right for you. Firstly, it gives you a better work-life balance, allowing you more time to do what you want.

Furthermore, it could be good for your later-life finances, as you most likely won’t be draining your funds as quickly as you would with a cliff-edge approach to retirement.

This is because you might only need to draw a small amount of your pension while you’re still earning a regular income. This could be especially true at the beginning of your phased retirement journey, where you may still be working most of your regular hours.

Finally, a phased approach to retirement can allow you to continue to see your friends and colleagues at work. This can help to keep you socially active, even after you’ve retired.

Some people may prefer a traditional cliff-edge retirement

There can be a few potential drawbacks to consider around phased retirement, however. A big one is that you will not be fully retired for many years, so you won’t be able to simply do what you want, whenever you want.

By taking a phased approach to retirement, you are still agreeing to work, which may impact your plans. As you might imagine, it can be hard to take a weeks-long trip around the globe when you’re still needed in the office every Monday.

Furthermore, work can sometimes be stressful, and wanting to leave it all behind in one go is understandable. If reducing your hours, and thus your income, means you may have to work longer to achieve the retirement you desire, it may be worth considering working longer hours over a shorter time frame.

It might also be worth taking your own financial situation into account, as you may not be able to afford a comfortable and sustainable retirement after working on a reduced income.

There can be tax considerations to be aware of with a phased approach to retirement

If you plan to enjoy a phased retirement, one important thing to bear in mind is the Money Purchase Annual Allowance (MPAA). This may limit the amount you can contribute into your pension once you start to draw from your fund.

Each tax year, you can contribute up to £40,000 or 100% of your annual earnings (whichever is lower) into your pensions and still receive tax relief.

However, if you begin drawing from your pension, you trigger the MPAA, thus reducing the amount that you can contribute into your pension in a tax-efficient way to just £4,000 each financial year.

So, if you plan to keep working and to make pension contributions, drawing from your pension fund will restrict your potential to save tax-efficiently.

Get in touch

If you are considering a phased retirement, we can help. We’ll consider both your financial and personal aspirations and help you to make a retirement plan with those goals in mind.

We can also give you advice about saving for your retirement in the most tax-efficient way and forecast your wealth to ensure you have enough to live a comfortable lifestyle.

If you’d like more details on how our financial planners can help you with your retirement plans, please email info@investmentsense.co.uk or call 0115 933 8433.

Please note

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.

The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.