The transition from full-time work to full-time retirement can feel overwhelming, leading many people to phase their retirement. This means gradually reducing their work hours and drawing part of their pension. It's called a phased retirement, and increasing numbers of people are choosing to enter retirement this way.

If you’ve worked full-time for most of your life stopping that routine overnight could hit you hard. There’s a sudden loss of purpose and identity that comes with working, particularly as a member of a team.

On the other hand, you might be looking forward to retirement and taking life a little easier, but you can’t afford to maintain your lifestyle just yet so need to keep earning.

Phased retirement offers the flexibility to gradually reduce your working hours, making the shift more manageable – both financially and emotionally.

Here are some practical tips to help you plan for a reduced working week in the years leading up to retirement.

Talk to your other half

If you have a partner, talk to them about your plans to reduce your working hours before making any firm decisions. Retirement is one of life’s major milestones, and you might assume you both want the same things, but if you haven’t discussed it, how do you know?

If you’re both approaching retirement, aligning your plans is crucial. Your partner might envisage you both retiring early and spending more time together, and they might be surprised if you plan to continue working, even part-time.

Alternatively, they might want to continue working full time because they have big (and expensive) plans for retirement. Accessing the pension pot early could jeopardise these plans.

Early discussions can help prevent misunderstandings and ensure you’re both on the same page.

Discuss with your employer

Reducing your work hours will need to be agreed with your employer, so it’s crucial to discuss your plans with them well in advance. They might need to hire part-time help to cover your reduced hours or train a colleague to take on some of your responsibilities.

By giving your employer ample notice, you allow them to plan and accommodate your new schedule, making the transition smoother for everyone involved.

Plan your finances

Reducing your working hours typically means a reduction in income. To manage this change, you’ll need to take a close look at your finances:

– Assess your income needs:
Determine whether or not your reduced salary will cover your household expenses. You might need to cut back on non-essential spending or adjust your budget to fit with your new income level.

– Supplement your income:
You can start drawing from a private pension from the age of 55, but you’ll need to be aware of the consequences, which we’ll cover in a moment.

– Long-term planning:
Think about how reduced earnings and potentially taking part of your pension will affect your long-term financial goals and retirement savings. It’s essential to have a strategy in place to ensure your financial stability in the years to come.

Your pension needs to last throughout your retirement, which could be 30 or even 40 years

Check your pension terms

Before you decide to take a phased retirement, it’s important to review the terms of your pension carefully. Each pension scheme has specific rules about when and how you can access your funds:

  • Age restrictions: Most personal pensions will allow you to drawdown income when you reach the age of 55.
  • Drawdown limits: There may be limits on how much you can withdraw while still working.
  • Contribution requirements: Check that you meet any required contribution years before accessing your pension.

Drawing down your pension

If you do choose to supplement your income by drawing down cash from your pension, there are a few things to be aware of:

– Financial considerations:
While you can withdraw 25% of your pension tax-free, the rest is taxable. Combining pension drawdowns with your salary could push you into a higher tax bracket. For example, supplementing a £30,000 salary with £30,000 of taxable pension income would make you a higher rate taxpayer, incurring a 40% tax on earnings above £50,270. Conversely, drawing down just £10,000 on top of a £30,000 salary keeps you in the basic rate tax bracket, with a 20% tax rate on income over £12,570.

– Pension longevity:
Your pension needs to last throughout your retirement, which could be 30 or even 40 years depending on when you start to draw an income from your pension. The earlier you start, the more you’ll reduce your pension’s growth potential, and without careful planning, you could risk running out of funds leaving you solely reliant on the State Pension.

Given the complexities of phased retirement and its impact on your finances, consulting with an expert is crucial. They can help create a tailored financial plan based on your unique circumstances and goals, ensuring your retirement strategy is robust and adaptable.

Cashflow modelling

One of the most valuable tools a financial planner has at their fingertips is cash flow modelling. This allows you to accurately visualise how a reduced wage or phased pension payment will impact your current and future lifestyle.

By modelling different scenarios, you’ll be able to test the long-term effects of any decisions. This helps to provide a clear picture of your future life, and will help you make informed choices about how best to phase your retirement.

Amber River financial planning

Phased retirement can make the transition to retirement smoother by gradually reducing your working hours. But before you do, an Amber River planner can map out your income and outgoings, giving you a visualisation of how the decisions you make now will affect your long-term financial security.

Get in touch

Amber River has a network of Chartered financial planners right across the UK, ready to offer truly independent advice. If you want to set up an initial appointment, call 0800 915 0000, or alternatively use our contact form here.