Could a phased retirement help you transition into the next stage of life?

From helping your savings stretch further to easing you into a new lifestyle, there are many reasons some people choose to take a phased retirement.

In fact, in 2024, PensionsAge reported that nearly half of workers over 50 either have already started phasing into retirement or want to do so in the future.

The feasibility and benefits of retiring gradually will depend on your unique circumstances and plans, such as your savings, desired retirement age, and how long you plan to work part-time. So, before you start making plans to reduce your working hours, it’s important to consider the impact on your finances.

Read on to explore the pros and cons of taking a phased retirement and the key factors to consider when planning to leave the workforce.

Pro: Delaying full-time retirement could help boost your savings

Working part-time in the early years of your retirement could help boost your pension pot by a potentially significant amount.

Not only will that part-time income generally mean you take less from your savings at the start of your retirement, but it can also give you more time to continue growing your pension pot.

For instance, whilst you’re still working, your retirement savings could benefit from:

• Your own contributions, should you continue them
• Your employer’s contributions, unless you are self-employed
• Tax relief at your marginal rate, as well as National Insurance (NI) savings if using a salary sacrifice scheme
• Compound investment returns, depending on the performance of your pension fund.

As such, continuing to work on a part-time basis can help build your pension pot, meaning you could enjoy a more comfortable retirement when you choose to leave the workforce full-time.

It’s also worth noting that you may be able to defer your State Pension payments, taking them at a higher rate once you retire full-time. Alternatively, you could start claiming your State Pension whilst you continue working, potentially reducing the amount you draw down from your pension so your funds can stay invested for longer.

Con: Phasing into an earlier retirement could mean your savings need to stretch further

Conversely, if you plan to use a phased approach to retire earlier, it’s important to consider the impact on your retirement savings.

According to data from the Office for National Statistics, the number of people aged 90 and over in the UK rose by 53.7% between 2004 and 2024.

With average life expectancies rising, some people could already need their savings to last throughout a 30-year retirement. Without careful financial planning, retiring early – even on a part-time basis – could place further strain on your savings later.

Most likely, reducing your working hours will result in you making smaller, if any, contributions to your pension pot in your final years of work. As such, your retirement savings could lose out on many of the growth opportunities outlined above.

If you’re planning to draw down from your pension whilst working part-time, it’s important to consider the impact on your taxes:

• Once you flexibly access your pension funds, you could trigger the Money Purchase Annual Allowance (MPAA). This means that tax relief could only be available on contributions up to £10,000 a year.
• Whilst you can take 25% of your pension tax-free, subsequent withdrawals are typically taxed at your marginal rate and count towards your Income Tax threshold. As such, it’s important to be aware of how much you’re earning from your salary and drawing from your pension simultaneously, to avoid moving into a higher tax bracket where possible.

That said, creating a comprehensive retirement plan and prioritising pension saving could make phasing into an early retirement achievable. A Financial Planner could help you define a savings plan tailored to your needs and financial circumstances to help you reach your goals.

Learn more about how we could support you with pension planning.

Pro: A phased retirement could help you adjust to your new lifestyle

Although some people may be eagerly awaiting the day they can stop working, it’s not uncommon to feel apprehensive about the significant lifestyle shift retirement can bring.

According to research cited by the Actuarial Post, 30% of over-55s are worried they’ll be bored in retirement, whilst across all working generations, 42% said they were concerned about being lonely.

Consequently, 1 in 5 respondents said they will continue working beyond the State Pension Age to stay mentally active, whilst 1 in 10 will do so because they enjoy socialising.

If you enjoy your work, you might not be ready to give it up entirely when you reach retirement age. Taking a phased approach may allow you to enjoy the best of both worlds, continuing to do the work you love whilst having more time to spend with loved ones and enjoying hobbies.

Con: Working for longer could mean sacrificing valuable time for hobbies and loved ones

For those keen to retire, continuing to work part-time might not offer the same balance as described above.

Extending your working life into your retirement years could see you lose out on valuable time spent with loved ones, enjoying hobbies, or travelling whilst in good health.

In this case, it could be worth consulting with a Financial Planner to explore whether it’s necessary for you to continue working in retirement. If you have saved enough to prepare for retirement, you might find you can afford to leave the workforce full-time when you reach State Pension Age – or sooner.

Ultimately, the advantages of phasing into retirement will depend on how you plan to approach it and your goals for retirement. A Financial Planner can help you create a retirement plan tailored to your preferences, goals, and financial circumstances to help you enjoy the retirement you’re dreaming of.

Find out more about our retirement planning services.

Get in touch

To find out how we could support you in planning for your ideal retirement, email us at enquiries@pen-life.co.uk or call 01904 661140.

Please note

This article is for general information only and does not constitute advice. The information is aimed at individuals only.

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

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate tax planning.

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.

Workplace pensions are regulated by The Pensions Regulator.

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.