Phased retirements are on the rise – Structuring your transition away from work

As attitudes towards retirement evolve, more people are choosing to take a gradual approach to stepping away from full-time work. Rather than making an abrupt exit at a set retirement age, many are opting for a phased retirement, allowing them to reduce their hours and responsibilities over time.

A study by WTW in its 2024 Global Benefits Attitudes Survey showed that 49 per cent of workers aged 50 or older have either started phasing into retirement or want to do so.

This shift requires thoughtful planning – especially in relation to pensions and investments – to ensure that your needs are met later in life.

The rise of phased retirement

Work plays a significant role in our lives, offering not just financial stability but also structure, purpose and social connections. For many, the prospect of spending several decades in retirement can feel daunting, as work often forms a key part of their identity.

Consequently, and as the WTW study shows, many are choosing to phase into retirement gradually, by reducing their working hours, stepping back from leadership roles or even pursuing freelance or consultancy opportunities.

A phased retirement offers the opportunity to continue earning while beginning to live the lifestyle they’ve been working towards, gradually transitioning into full retirement over time.

This gradual change allows individuals to explore personal passions and interests, travel or take on volunteer roles while still maintaining a steady income.

The financial implications of phased retirement

One of the key benefits of a phased retirement is the ability to supplement your income from pensions and investments with earnings from part-time, freelance or consultancy work.

This can help preserve your savings for a longer period, ensuring that your retirement funds stretch further.

In some cases, individuals may choose not to start drawing their pensions and investments immediately and continue working, either in a reduced capacity or on a freelance basis.

This allows them to defer pension and investment withdrawals, potentially benefiting from the growth of their pension and investment portfolio pot over time.

However, there are important financial considerations to keep in mind. If you choose to draw from your pension while earning additional income, you could find yourself in a higher tax bracket due to the combined total of your salary and pension income.

This could reduce the effectiveness of your tax planning, so it’s crucial to consider the potential impact on your overall financial situation.

Structuring your phased retirement plan

When considering a phased retirement, it’s essential to have a well-structured plan that balances your income sources and ensures tax efficiency. Here are a few key considerations:

• Income strategy: Plan how you will allocate income between part-time work and pension and investment withdrawals. This will help maximise your savings and manage the potential tax implications.
• Tax implications: Understand how combined income from freelance work and pensions and investments might affect your tax bracket and overall tax liability.
• Pension deferral: Consider delaying pension and investment withdrawals to allow your savings to grow, if your finances allow for it.
• Health insurance and other benefits: Make sure to address your healthcare and benefits coverage during the transition, as this can change when you reduce your working hours.

Phased retirement requires a detailed strategy that ensures you maintain financial stability while enjoying greater flexibility in your personal life. By working with a financial adviser, you can ensure your approach to retirement is tailored to your unique needs and goals.

How can we help

If you’re considering a phased retirement or are already on the path to reducing your work commitments, it’s important to seek professional advice to help you structure the transition effectively.

Our team can help you understand the financial implications of your phased retirement strategy and ensure your pension and investment planning align with your new lifestyle. Get in touch with Director, Andrew Tricker (andrewtricker@lfwm.co.uk) today to start planning your transition into a fulfilling and financially stable retirement.

A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless the plan has a protected pension age). The value of your investments (and any income from them) can go down as well as up which would have an impact on the level of pension benefits available.  Your pension income could also be affected by the interest rates at the time you take your benefits.

The information included in this article may be subject to changes in taxation following its publication. This article is intended for informational purposes only and does not constitute advice. The Financial Conduct Authority does not regulate estate planning.