19th January 2024 - Sean Banks

Retirement planning: Should you consider a phased retirement?

Retirement can be an exciting milestone, but one you might feel nervous about. One of the first things you may have to consider is how you’ll retire – would a phased retirement suit you?

Over the next few months, you can read about key considerations if you’re nearing retirement, from contemplating the emotional side of stepping away from work to how to access your pension. Read on to discover if a gradual retirement transition could be right for you. 

A retirement transition period could help you create a work-life balance that suits you 

Not too long ago, many retirees followed the same path – they’d give up work on a set date.

Now, there are more choices, which could enable you to strike a balance that suits you. An increasing number of people are choosing a phased retirement. 

According to the Great British Retirement Survey 2023, almost half (47%) of people aged between 55 and 65 who reduced their working hours say it’s due to them winding down. Cutting your working hours could help you create a work-life balance that suits your needs if you’re not ready to give up work completely. 

Reducing your hours isn’t the only way to transition into retirement either. You could switch to a less demanding job, work on a freelance basis, or even start your own business.

As well as allowing you to blend work and life in a way that’s right for you, there are other benefits to transitioning into retirement, such as:

If a phased retirement is an option you think could suit you, there are some key decisions you might need to make.

5 useful questions to consider if you’re transitioning into retirement 

1. What does your ideal work-life balance look like?

Transitioning into retirement gives you the option to create a work-life balance that matches your goals.

So, it’s worth spending time to set out what your ideal situation would be – do you want to remain in your current role? Do you want the freedom to set your working hours?

2. Will you need to supplement your income? 

As you transition into retirement, your income may fall. If you can supplement your income from other sources, such as accessing your pension or savings, it’s useful to factor this into your plan.

You should also consider how your day-to-day expenses will change. You might find some areas fall if you reduce how much you’re working, such as the cost of commuting, while other outgoings could rise with your newfound free time. 

3. Will you continue paying into a pension?

Even though your income may fall, it might still be worth contributing to your pension when you consider the long-term benefits. 

You should note that if you start taking an income from your pension, your Annual Allowance may fall. This is the amount you can tax-efficiently add to your pension each tax year.

In 2023/24, the Annual Allowance is usually £60,000. However, accessing your pension may trigger the Money Purchase Annual Allowance, which would reduce how much you can tax-efficiently contribute to your pension to £10,000. 

4. Will you defer the State Pension?

The State Pension Age is 66 in 2023/24, but is gradually rising. The government’s State Pension forecast could help you understand when you’ll be eligible for the State Pension, as well as how much you could receive. 

If you’ll be transitioning into retirement after the State Pension Age, you may want to consider deferring your State Pension. 

For every nine weeks you delay taking it, your State Pension will increase by the equivalent of 1% – defer for a year, and the income you’d receive would rise by just under 5.8%. 

As well as boosting your future income, deferring your State Pension could reduce your Income Tax liability in the meantime.

5. How will a phased retirement affect your long-term finances? 

You might not be giving up work completely, but don’t put off thinking about your long-term plans. The decisions you make now could affect your financial security for the rest of your life. 

As a result, reviewing your retirement plan could be valuable and provide peace of mind by helping you understand the long-lasting effect of decisions like:

Next month, read our blog to find out what questions you may want to consider when setting out your retirement lifestyle. 

Risk warnings

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results. 

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.  

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