A short guide to phased retirement

A short guide to phased retirement

This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult an independent financial adviser.

Retirement looks different to everyone. Some people look forward to retiring fully from age 57 and living off their investments for the rest of their lives. Others are happy to wait until their state pension kicks in (e.g. at age 66, in 2021-22). Yet full, immediate retirement is not for everyone. Some people like the idea of scaling back work hours gradually; taking some of their pension to replace the lost income.

Is this type of “phased retirement” a good idea, and if so, what’s the best way to approach it so that you do not run out of money? In this article, our team at Cedar House offers some answers. We hope you find this content useful. If you’d like to discuss your own financial plan with us, please contact us for more information or to access personalised financial advice:

020 8366 4400 or


What is phased retirement?

Traditionally, workers have had a “retirement date” in mind as they near the end of their careers. This is the point from which paid, salaried work ceases and the former employee starts living off their pension benefits. However, retirement is no longer this cut-and-dried. In 2021, increasingly it is popular to gradually retire over 5, 10 or more years. 

Much of this change can be attributed to the Pension Freedoms introduced by the government in 2015 to give people more flexibility over how they access their pension savings. Prior to this, it was possible to “retire gradually”, but the pension system made this harder to achieve (mainly because the law required that you buy an annuity with your pension savings). Today, however, you likely have more options open to you. For instance, you could use some of your pension to buy an annuity and keep the rest invested. 


How phased retirement works

Cutting back on work hours to gradually access your pension works differently for everyone. This is partly due to the specific rules in your scheme. For instance, those on the Teachers’ Pension can withdraw up to 75% of pensionable benefits provided you are aged 55-75. Your salary must also be reduced by at least 20% compared to the previous 12 months averaged earnings. The rules also vary depending on whether you are on the final salary arrangement – in which case, you can take two phased retirements before finally retiring.

For police officers, they can start to take pension benefits, with a reduction, if they retire after reaching minimum pension age (55). Other public services also have their own rules. For those with a personal pension and/or a private sector pension pot, however, the system can be more complex to navigate. It can help to get the assistance of a financial adviser, for best results.


Types of pension withdrawal

For the aforementioned group, there are many possible ways to start withdrawing from your pension so you can “ease into” retirement. The suitability of each option will depend on your own financial goals and situation. As a brief summary, the main methods include:

  • Uncrystallised Funds Pension Lump Sum (UFPLS). This involves taking some of your pension (the “uncrystallised” funds; or those untested against the ‘lifetime allowance’), as a lump sum, and using the money to help fund your lifestyle.
  • Pension Commencement Lump Sum (PCLS). A tax-free payment which you can access from your pension savings either all-at-once, or in stages.
  • Drawdown Income. Taking money from crystallised funds in your pension, which would be subject to marginal rate income tax.

Here, for the person thinking about phased retirement, the main aim will be to find the best way to withdraw from the pension(s) to meet the income requirements – and minimise needless tax. One option, for instance, might be to make taxable withdrawals in tax years when you have a remaining personal allowance (£12,570 in 2021-22). Tax-free withdrawals could then be made alongside this – e.g. via PCLS – to provide extra income that may otherwise be taxable.


An example: Mary

Let’s take an imaginary case study to illustrate how this can work. Mary is 60 and wants to take a step back from her working hours, until age 66 (when her state pension starts paying out). At present, she earns £20,000 per year – after tax – from her job and would like to maintain this, although could accept a degree of fluctuation. She lives in England so is not affected by the Scottish Rate of Income Tax (SRIT) or the Welsh Rate of Income Tax (CRIT). 

She expects that, by stepping back from paid work (going part-time), her net income would half to £10,000 per year. Therefore, she needs to access £10,000 from her pension(s) to make up for the shortfall. At this point, a few different options present themselves. One strategy might be to use a PCLS after withdrawals from crystallised drawdown funds have used up her remaining personal allowance. Another strategy could involve using a UFPLS (i.e. uncrystallised funds pension lump sum) to provide the full shortfall in income for a given year. This option is likely to result in more tax being paid, but also retain the highest level of uncrystallised funds.



Interested in discussing your financial plan with an experienced financial adviser? Get in touch today to discuss your financial plan with a member of our team here at Cedar House via a free, no-commitment consultation:

020 8366 4400 or


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