A look at phased retirement, the different options available, and how you can get the most from your retirement savings and keep working,

With people living longer, healthier lives, and companies struggling to find experienced, high-skilled employees, it’s not surprising that more people are choosing to retire gradually, rather than suddenly.

The opportunity to reduce the amount you work, providing a gradual transition into full retirement

What is phased retirement?

Phased retirement gives people approaching retirement age the opportunity to reduce the amount they work, providing a gradual transition into full retirement. For example, you may decide to move from full-time to part-time employment, begin job-sharing, or change your working pattern to something that frees up more of your time.

Phased retirement can be good news for employers and employees alike. Although employers are not legally bound to offer their employees reduced working hours, it does give them the chance to retain experienced staff, make salary savings and help with succession planning and training of younger staff.

How does phased retirement affect your pension?

Most employees who take phased retirement still expect to earn a good income from their working situation. And if you’re fortunate, you might be able to scale back on your work commitments without needing to draw on your pension at all.

However, many people find it’s necessary to top-up their lower level of earnings with income from their pension pot. Thankfully, this has become much easier in recent years. That’s because before pension freedoms were introduced in 2015, people had little alternative but to use their pension pot to purchase an annuity, which would pay a guaranteed income for the rest of their life.

However, since 2015, people can access their pension savings from as early as age 55 (57 from 6 April 2028). Additionally, anyone who wants to use their pension funds as part of a phased retirement strategy has a few options to consider.

Tax rules relating to pension withdrawals are highly complex, so it’s important to talk to a financial planner

What pension withdrawal options are available?

Broadly speaking, there are three types of pension withdrawals (or drawdowns) that employees can use to supplement or replace earnings lost from reduced working.

Uncrystallised funds pension lump sum (UFPLS)

Your personal pension becomes ‘crystalised’ as soon as you request any money from your pension – either through a lump sum or income payments. ‘Uncrystallised’ simply refers to pensions that haven’t yet been accessed, and therefore haven’t been taxed yet, either.

With a UFPLS, you can take out an authorised lump sum, which is paid directly out of the pension. When you choose to take a UFPLS, 25% of the amount taken out will be tax-free. The remaining 75% is taxed as ordinary income, at the same rate of income tax you would pay as an employee. You should seek financial advice before taking your benefits in this way to protect you against any unforeseen adverse tax implications.

Income drawdown

The second option is to take the regular ‘top-up’ income you’ll need directly from your pension (known as income drawdown), while ensuring the remainder of your pension fund remains invested, and can keep growing.

Since April 2015, all new pension products let you access your pension savings whenever you need to, so you can adjust the amount you take from your pension depending on your needs. But it’s important to remember that after your tax-free lump sum of 25% has been taken, any amounts you withdraw from your pension will be taxed as ordinary income.

Pension commencement lump sum (PCLS)

The third option is to request a pension commencement lump sum from your pension. This is a tax-free payment of up to 25% of your pension benefits and can be paid to you as a one-off lump sum or in regular instalments to supplement your income in retirement. This PCLS can be paid alongside any other funds being crystallised, such as through income drawdown.

Finding the right phased strategy for you

During phased retirement, these withdrawal options can be combined to ensure you take income from your pension pot in the most tax-efficient manner. However, tax rules relating to pension withdrawals are highly complex, so it’s important to talk to a financial planner who can advise you on the best course of action, based on your personal circumstances and income needs.

Once you’ve fully retired you can still purchase an annuity with your remaining pot

Other aspects of pension drawdown to consider

It’s worth remembering that whatever is left untouched in your pension pot can be inherited by your beneficiaries, without any Inheritance Tax to pay – although beneficiaries may have to pay Income Tax if you die after the age of 75.

And, if you would still prefer the reassurance of a guaranteed level of income later in life, once you’ve fully retired you can still purchase an annuity with your remaining pot.

You might also find this article useful:  A brief guide to pension drawdown

How an Amber River financial planner can help

Making a decision on when to start drawing money from your pension is a critical decision. After all, your pension savings should last you for the rest of your life.

At Amber River, our independent financial planners are well-versed in helping clients design a retirement income strategy that won’t result in a shortfall or trigger unnecessary tax bills. For example, they can help you to make the most of your remaining personal tax allowances each year, to ensure your pension withdrawals are maximised.

To find out more about the benefits of seeking advice from a financial planner: The true benefits of paying for financial advice

There have been significant changes to pension savings in the Spring Budget 2023 that may impact your retirement planning. To find out more, see: How does the 2023 Budget affect your pension and retirement planning?

Get in touch

At Amber River, we use Life Landscaping® to help people take advantage of the flexibility available within their pensions to help them plan for a more comfortable retirement. To speak to one of our team, arrange an appointment or find out more, call 0800 915 0000, or alternatively use our contact form here.