The traditional path of full-time employment followed by retirement is less common than it used to be, as the way we live and work has evolved over recent decades.

You may choose to go part-time, for example, search for other employment opportunities, or set up your own business, before you stop working for good.

Alistair McQueen, head of savings and retirement at Aviva, said: “The old state pension ages of 60 for a woman and 65 for a man were set in 1948. But these ages, and this mindset, is very much a thing of the past. More and more people are phasing their way into retirement.

“The worlds of work and personal finances are better equipped than ever before to support a phased approach to retirement. We have more choices than ever, and opportunities. And we have an employment market that increasingly values our skills.”

Many people have no option but to work for longer, as they may need to build up a bigger pension pot before they can afford to retire, as the State Pension doesn’t typically provide enough on its own for a comfortable retirement. Read more in our articles Can I afford to retire? and How much should I save for retirement? 

Here, we look at your options if you are planning to phase your retirement, and how to maximise your pension income at every stage.

What is phased retirement?

Phased retirement is when you gradually move into retirement, perhaps reducing your working hours over several years, slowly freeing up time to spend on hobbies, and with your family and friends. This is known as phased retirement, and can involve drawing some income from your pension savings to boost cash flow, until you have enough saved, or you’re ready to retire completely.

Fortunately, today’s pension rules make phased retirement a possibility for most people. You can typically access your pension from age 55 (rising to 57 in 2028), making it possible to dip into your pot to supplement your income, while you continue working. However, doing so is not without risks, which we explain in our article Should I use my pension to boost my income? Or, you may have other income sources you can tap into as you move towards retirement, such as money in individual savings accounts (ISAs) or from an investment property, for example.

How does phased retirement work?

Since the introduction of pension freedoms in April 2015, you have more options than ever when it comes to how you use your pension pot. You can choose when and how you take an income from your lifetime savings.

From the age of 55 you usually have the option to take up to 25% of your pension as tax-free cash, with a choice over how to draw the rest. You might choose to take some tax-free cash and leave the remainder to hopefully grow over time, for example. Or, if you have other income from employment, for example, or investments, you might delay taking your pension altogether. You can read more about taking some or all of your pension tax-free cash in our guide Should I take a tax-free lump sum from my pension?

Gradually drawing from your pension could help you to supplement your earnings, meeting any shortfalls, while carefully managing your tax allowances so you don’t pay more tax than necessary. You may, for example, decide to take just enough from your pension to stay within the basic-rate tax bracket. You pay tax on your pension income at your marginal rate, so any income above £12,570 (your annual personal allowance) is taxed at the basic rate of 20%, rising to the higher rate of 40% on income above £50,270 and additional rate tax at 50% over £150,000. But how and when you choose to take your pension will depend on your personal circumstances.

Remember that it’s important to take care when accessing your retirement savings to avoid additional tax charges. Bear in mind too that the more you take out of your pension early on, the greater the risk of you running out of money later down the line (see more below on seeking advice).

Rebecca O’Connor, head of pensions and savings at interactive investor, said: “You don’t have to do anything at all if you don’t want to. If you are still working and you want your pension pot to continue growing, you can leave it invested. Just bear in mind the risk of loss right before you want to retire, and consider moving to less risky investments in the few years before you give up work completely.”

When can I phase retirement?

Employers used to force you to retire at age 65, but this law was scrapped in 2011.

McQueen said: “The mindset of employers and individuals may have some catching-up to do with the law. But there should be no legal impediment to a phased approach to retirement, especially if this phasing carries you into your late 60s and beyond.”

“Those aged 50+ should carry confidence in expressing interest in flexible working, if that is their choice. The UK faces a shortage of labour. The UK can no longer afford to “waste” the talents of its most experienced people. There is a war for talent, and older workers are an increasingly prized asset.”

However, whenever you choose to retire, or phase your retirement, there are some important considerations. Often, this will be based on when you can access your pension and, of course, how much you have saved.

While you can usually take some or all of your defined contribution pensions when you reach the age of 55, this isn’t always the case. Some pension schemes have different rules, so you’ll need to check with your provider to see when you can access your pension pot. Ultimately, this will most likely decide when you can start phasing retirement, unless you have other savings and investments to draw an income from.

How can I phase retirement?

If you want to phase your retirement it’s wise to plan ahead. There are plenty of online calculators to find out how much income your current savings may produce in retirement, and how long this may last. These can also show if you have enough to retire, or would need to continue working to boost your pot, and either phase or delay your retirement. Online budget calculators and tools such as those available at Citizens Advice and Money Helper can also help to show what your outgoings might be in retirement, to work out how much income you need.

O’Connor said: “You need to stretch what you have over a period longer than you expect to live for ideally. Remember that the early years of your retirement are likely to be more expensive than the later years, as you might want to make the most of travel opportunities and be able to get out and about more earlier on.

“Think in terms of three to five-year periods. How much work am I likely to want to do over the next five years? What about the following five?”

Some of your options if you’re considering phasing your retirement include:

  • Using drawdown to take a variable income: You could move your defined contribution, or money purchase pension to a drawdown plan from age 55 that gives you flexibility to decide how and when you take an income. Find out more in our article What is pension drawdown and how does it work? Plenty of online drawdown calculators can help you see how long your money might last depending on how much income you require, and the amount of tax-free cash you take out, and where your pension is invested.

For example, if you have other income from part-time work, you may choose to draw down a small amount, which you can increase or decrease over the years as needed. In short, you can start, stop or change the amount you withdraw. Beware, though, that your remaining fund will stay invested so it may rise and fall depending on the performance of the underlying investments. Hopefully, though, you will boost the value of your pension pot given enough time.

If any money is left in your pension drawdown plan when you pass away, this may be passed on to your beneficiaries tax-free, provided you’re aged 75 or less. If you’re older, you can still pass on your remaining retirement savings, but your beneficiaries will usually have to pay income tax on the money they receive.

  • Buying an annuity with part of your pension pot: You could use some of your pension pot to buy an annuity, or guaranteed income for life. This could be used to, for example, pay for essential bills, while you continue working to meet the cost of other day-to-day expenses. If you choose to buy an annuity it’s really important to shop around for the best rate, as you cannot move to a different deal if, for example, rates rise. How much you receive as an annuity income depends on the type you choose, age, and health along with various other factors. The longer you wait to buy an annuity, the greater the income you will receive. Read our guide Annuities explained. 

O’Connor said: “Delay taking out an annuity if you think you can manage drawdown yourself for a few years – the prospect of a slightly higher income could be worth it. Bear in mind, though, that if interest rates rise and if average stock market returns start to decline, then a sustainable drawdown rate of 3% might actually not be that far off an annuity income anyway – you might want to compare annuity rates with a sustainable drawdown rate of 3%.”

  • Taking cash lump sums: You can also take cash from your pension, if you wish, as ‘uncrystallised funds pension lump sums’ (UFPLS). Every time you withdraw money, 25% of this will be tax-free, while the remainder will be taxed at your marginal rate for income tax purposes. The remainder of your fund stays invested, so the value of your pot could fall in value as well as rise.
  • Consolidating your pensions to maximise flexibility: If you discover that you have an older-style pension that doesn’t offer enough flexibility to enable you to phase your retirement, you may want to consider moving your savings into one that does. However, this should be a carefully considered decision, as you may lose valuable guarantees or benefits, so it’s important to seek professional financial advice before taking this route. Find out more in our article Should I consolidate my pensions?
  • Releasing equity from your home: You could consider unlocking some of the wealth tied up in the value of your property to ease cash flow if you’re phasing your retirement. This may provide you with a lump sum, regular income or a combination of both, depending on the equity release product you choose. You won’t pay the money back, with interest on top, until you die, or move into long-term care. Find out more in our article Equity release – what is it and how does it work? 

Can I still pay into pensions if I’ve started to draw from them?

Yes, and if you’re under age 75, you also receive tax relief on your contributions. Read more in our guide How pension tax relief works. However, once you’ve started taking money out of your pension, the amount you can pay into your pension, known as your Annual Allowance falls from £40,000 to £4,000 and becomes known as the Money Purchase Annual Allowance (MPAA). If you simply take a 25% tax-free lump sum from your pension, you will not be subject to the MPPA. Read more in our article What is the Money Purchase Annual Allowance? 

The State Pension and phased retirement

You will currently start receiving your State Pension from age 66, and can take this income while continuing to work. Or, you might choose to defer your State Pension if you don’t need the income, for an increased state pension at a later stage. By deferring your State Pension for 52 weeks, for example, you will receive an extra £10.42 a week income. 

McQueen said: “The state pension age need not be seen at the finish line of our working lives. In a bid to phase into retirement, the government even rewards those who are able to embrace some flexibility.”

However, whether to delay claiming your State Pension or not should be a carefully considered decision. Read more in our article Deferring State Pension – How much can I get and is it worth it? 

Seeking further help

Phasing your retirement may have a range of benefits, not least giving you time to plan ahead for when you eventually want to stop working completely. Even if retirement or phasing your retirement seems distant, it’s wise to review your pensions now to ensure they give you the flexibility you might ultimately need.

What you do with your pension is an important decision. Therefore, we strongly recommend you understand your options and  seek professional advice or guidance if you are at all unsure.

If you are unsure how to manage your pension savings, the Government’s Pension Wise service, run by the Pensions Advisory Service and Citizens Advice, provides people aged 50 and above with free guidance on their pension choices at retirement.

It’s always worth taking advantage of a free appointment with Pension Wise. But if you want individual recommendations and advice rather than guidance, you’ll need professional financial advice..

If you think you might be interested in speaking with a financial advisor, VouchedFor is currently offering Rest Less members a free pension check* with a local well-rated financial advisor. There’s no obligation but once you’ve had your review, the advisor will discuss the potential for an ongoing paid relationship if you think it might be useful to you.

Are you currently phasing your retirement, and how are you managing this? Have you used any of the options above, or are you considering doing so to supplement your income? We’d be interested to hear from you. You can join the conversation on the Community forum or post a comment below.

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