Considering a phased retirement? Here’s what you should know

Back in December 2023, we wrote about the five questions to ask yourself if you’re planning to retire in 2024.

To recap, the questions were:

1. What will be my top three priorities when I retire?
2. How am I going to draw my defined contribution (DC) pension?
3. What will my annual retirement income be?
4. How much tax can I expect to pay in retirement?
5. Have I discussed my plans with a professional?

Now that we’re a few months into 2024, we have one more question to add to the list: “Could a phased retirement be right for me?”

The term “phased retirement” describes gradually easing out of your working life, rather than coming to a hard stop. This normally involves continuing to work part-time for a few years after you officially retire.

Keep reading to learn more about what a phased retirement could mean for your financial security, tax circumstances, and emotional wellbeing.

A phased retirement could improve your financial security in later life

With life expectancies higher than in previous generations, and the cost of living crisis creating some anxiety among both workers and retirees, many are questioning the affordability of the retirement they’ve planned.

A phased retirement could help to soothe these anxieties and make you more financially comfortable in later life. Having a part-time income for several years after you “officially retire” could:

• Prevent you from depleting your pension funds, savings, and investment income too quickly
• Help you to save for later-life care costs
• Allow you to provide financial support to the next generation
• Give you financial peace of mind in retirement.

Indeed, some people may feel it is “not worth” working part-time in retirement – but even small amounts of income can make a large contribution to your retirement security.

For instance, earning £20,000 a year for the decade after you stop full-time work means you would have earned an additional gross amount of £200,000 in retirement – a significant amount that could go a long way in funding your and your family’s lives in the coming years.

What’s more, a phased retirement could allow you to defer your State Pension entitlement. Deferring the State Pension means that when you do decide to take it, your payments may be higher than if you began receiving it from State Pension Age.

So, remember not to underestimate the financial significance of having a phased retirement. While this model is not for everyone, continuing to work at your own pace for the first few years of this new chapter could make a big difference down the line.

Be careful of overpaying Income Tax during a phased retirement

One crucial component to consider when planning your phased retirement is tax, particularly Income Tax.

If you draw from your DC pension pot(s), including any workplace pensions and self-invested personal pensions (SIPPs) you have, only 25% of your withdrawal will be tax-free. Beyond this, you may pay your marginal rate of Income Tax on the amount you withdraw.

Combine your pension withdrawals with any part-time work you undertake, and you could lose track of how much income you are receiving, and crucially, may be pushed into a higher Income Tax band without realising it.

And, whether you take the State Pension immediately or defer it, the State Pension counts towards your Income Tax bill too.

As such, staying appraised of your tax situation is essential. If your phased retirement is designed to increase your financial prosperity in retirement, a high tax bill could nullify some of these efforts, so make sure to consult a professional Financial Planner if you are considering this move.

A phased retirement may be better for your wellbeing than a hard stop

While the “hard stop” retirement may be right for some people, many report that the transition from full-time work into being completely retired is emotionally challenging.

Easing into this next chapter could help you adjust to retired life and take care of your wellbeing more easily. You could:

• Continue to enjoy the social aspects of work, without the pressure of a full-time schedule
• Feel more confident about affording the retirement you want
• Maintain a part-time working routine that helps to stabilise your mental health in a time of change.

Moreover, considering a phased retirement from an emotional perspective as well as a financial one may also be very useful.

Get in touch to work with a Financial Planner who puts your retirement goals first

You may wish to explore phased retirement options, but remember: there is no one-size-fits-all retirement plan. Working with a Financial Planner may help you work out the ideal route into retirement for you and your family.

Email us at enquiries@pen-life.co.uk, or call 01904 661140.

Please note

All information is correct at the time of writing and is subject to change in the future.

This article is for general information only and does not constitute advice. The information is aimed at retail clients only. All contents are based on our understanding of HMRC legislation, which is subject to change.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.