What is phased retirement?

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In two minds about whether you want to keep working or retire? Well, right now it’s never been easier to get the best of both worlds. Find out if phased retirement could be right for you.

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The working world is changing. People don’t necessarily want a hard-and-fast start to retirement anymore. In fact, our recent research found that 1 in 7 retirees are making a U-turn back to work. And the number of retired people aged between 55-64 taking a step back to working life has almost doubled since last year.

With employees showing a clear appetite to blend working with retiring, many employers are offering phased retirement options.

How does phased retirement work?

Phased retirement is where you gradually move towards retirement by reducing the amount of time you spend working.

It could be a good option for you if you feel ready to take a step back from work but want to keep paying into your pension a little longer. Or it could be a good test run for you if you feel a bit overwhelmed by the thought of giving up decades of work overnight.

There’s no hard rule on what this needs to look like. It could mean you work shorter days, fewer days, moving to a flexible working arrangement like job sharing, or even getting extra holiday entitlement. It really depends on what your employer offers, so check with them to see what your options are.

Can you keep working and saving once you’ve started taking money from your pension?

Earlier this year, the government increased the yearly amount you can pay into your pension plan without paying a tax charge. These changes have made it easier than ever before to keep working and paying into your pension plan, even if you’ve already started taking your pension savings.

Every year, you can now put up to £60,000 (up from £40,000) into your pension plan, or the equivalent of your total salary – whichever is lower. Then, once you start taking taxable income from your plan, you trigger the Money Purchase Annual Allowance. This basically means the amount you could pay into your plan would reduce from £60,000 to £10,000 a year. 

Although these increases give you more flexibility when it comes to working and paying into your plan, the jump down from £60,000 to £10,000 is still a big one. That’s important to keep in mind if you’ve already taken some of your pension money and your plan is to really try to boost your pension pot before fully retiring.

How to plan for a phased retirement

If you’re interested in phasing your retirement, there a few things to think about when creating your retirement plan:

1. The State Pension – take it or defer it

If you continue to work past your State Pension age, you can still choose to take your State Pension. You might find it a good way to top up your income if you’ve reduced your working hours. However, if you’re still getting paid enough from your job to pay for your lifestyle, you might find you don’t need it. In this case, you could choose to defer your State Pension and potentially get a higher yearly amount later.

2. Don’t fall into a tax trap

If you decide to take an income from your pension plan and continue to get income from your job, both sets of income will be subject to tax. You get a personal allowance each year of £12,570, but that’s across all sources of income. So make sure you’re taking into account any payments from your plan which could push you into a higher tax bracket. Find out more about the tax you'll pay on your pension withdrawals.

3. Think about when you’ll access your pension money

This matters for a couple of reasons. First, the longer you put off taking your pension money, the longer it stays invested with the potential to grow. So if you can get away with relying more heavily on your salary than your pension savings at first, you could be better off when the time comes to give up work entirely.

Second, it could make a difference to the retirement option you choose. For example, the older you are when you buy an annuity, the better your rate is likely to be.

Ready to begin planning? Try our five-step guide to retirement planning to get started.

The information here is based on our understanding in November 2023 and shouldn’t be taken as financial advice. 

Standard Life accepts no responsibility for information in external websites. These are provided for general information.

Your own personal circumstances, including where you live in the UK, will have an impact on the tax you pay. Laws and tax rules may change in the future.

A pension plan is an investment. Its value can go down as well as up and you may get back less than was paid in.