4.1 Phased Retirement

4.1 Phased Retirement

Retirement no longer needs to happen all at once. Many people now choose to wind down gradually — working part-time, drawing some income early, or changing careers. This chapter explores how to plan a flexible, phased retirement that suits your life and financial goals.

What Is Phased Retirement?

Phased retirement is a gradual transition from full-time work to full retirement. Rather than stopping work on a set day, people reduce hours, change roles, or take career breaks while drawing some pension income or savings.

There’s no fixed definition — it’s about designing a retirement path that works for you.

Common phased retirement approaches:

• Reducing hours with your current employer
• Switching to consultancy or part-time work
• Taking a “semi-retirement” role in a different field
• Drawing some pension income while still earning
• Using savings or ISAs to cover a gap before State Pension starts

Why People Choose a Phased Retirement

• Maintain a sense of purpose or identity through work
• Stay mentally and socially engaged
• Smooth the financial transition
• Delay drawing down pensions
• Avoid a sharp drop in income or lifestyle

Planning Considerations

Phased retirement involves more moving parts than traditional retirement. Key things to think about include:

1. Income Planning

• How will you fund your lifestyle as earnings reduce?
• Will you need to top up income with:
  • DC pension withdrawals?
  • ISAs or savings?
  • Other investments?

Tip: Consider using ISA income first — it’s tax-free and doesn’t trigger the MPAA.

2. Tax Efficiency

• Combining part-time earnings and pension income can push you into a higher tax band
• You may trigger the Money Purchase Annual Allowance (MPAA) if you flexibly access your DC pension

📌 MPAA Warning: Once triggered, your annual allowance for new pension contributions drops to £10,000/year.

3. Employer Flexibility

• Does your employer support part-time or flexible working?
• Some schemes allow partial retirement from age 55+ while continuing to work and contribute

4. State Pension Timing

• Your State Pension will start from age 66–68 (depending on birth year)
• You can defer it to increase the future amount — useful if other income covers you for a few years

Simple Example: Flexible Transition Plan

Julie, age 61, earns £40,000/year and plans to retire fully at 65. She proposes a phased exit:

This flexible plan lets Julie reduce stress, manage tax bands, and stretch her pension pot by combining income sources.

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Advantages of Phased Retirement

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⚠️ Potential Pitfalls to Avoid

• Drawing taxable pension income too early may reduce long-term growth
• Triggering MPAA limits future pension saving
• Some employers may not support flexible working
• May delay access to employer or DB pension benefits
• Health issues could interrupt your phased plan unexpectedly

Summary: Designing Your Phased Retirement

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Next Chapter Preview:
We’ll explore how to manage your pension pot long-term — covering drawdown strategy, investment reviews, and income sustainability

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