This article was last updated on 04/09/2024
Flexible retirement (also called phased retirement) is the term used to describe employees and the self-employed drawing down from their pension while continuing to work.
This could allow you to:
- earn extra income on top of your regular salary;
- supplement your income while reducing your hours;
- continue paying into your pension while you work; and
- defer the State Pension so it pays out more later on.
Is flexible retirement a good idea? These tips will help you decide.
Check the terms of your pension
Pension providers all have slightly different rules about accessing your pension, which could impact your flexible retirement options.
Check your pension policy to find out:
- the age you can start drawing down from your pension (from 55, rising to 57 in 2028);
- whether you need to have have paid into the pension for a qualifying number of years;
- if there’s a minimum or maximum amount you can withdraw while working; and
- whether there’s a limit to the number of times you can change your flexible working arrangements while withdrawing from your pension.
There can be significant penalties for breaking the terms of your pension arrangement, so you may want to check your options with your provider first.
Check if you can really afford flexible retirement
Usually, you can start drawing down from your pension from the age of 55, rising to 57 in 2028. And while you might not have enough in your pension to fully rely on from that age, you may be tempted to draw down smaller amounts early so that you can enjoy a flexible retirement. So you’ll want to make sure there’s enough left in there by the time you fully retire to support you for the next 20 years or so.
To put this into perspective, a pension pot worth £250,000 could last around 19 years if you drew down £1,500 per month.
Of course, you could save or invest your income during flexible retirement rather than spend it. You could even continue paying into a pension. And you’ll be able to claim the State Pension when you reach state retirement age (currently 66), which will supplement your pension.
Consider the tax implications
25% of your pension can be drawn down tax-free, but the rest will count towards your earnings. So you could end up paying more tax if the amount of taxable pension you draw down puts you into a higher income tax band.
Example 1 (before adding pension income)
- you earn £30,000 from your job;
- your total earnings are £30,000;
- this classes you as a basic rate tax payer; and
- you’d pay £3,486 in income tax.
Example 2 (after adding pension income)
- you earn £30,000 from your job;
- you draw down £30,000 from the taxable portion of your pension;
- your total earnings are £60,000;
- this classes you as a higher-rate tax payer; and
- you’d pay £11,432 in income tax.
Both figures calculated using the MoneySavingExpert Income Tax Calculator.
You may decide that it’s better to draw down a smaller amount now, and a larger amount later once you’re fully retired.
Inform your employer ahead of time
Bear in mind that semi-retiring early isn’t completely in your own hands. Your employer will need to agree with the arrangement too - they might need to make their own arrangements to accommodate your plans, after all.
Larger companies are more likely to be familiar with this type of request, so consider speaking with the HR team for their guidance before approaching your manager. If you work at a smaller company, you might want to rehearse your ‘pitch’ with a trusted colleague first to see if they spot any potential problems with your plans. You can then address this before speaking with your manager.
Combine your pensions into one pot
By the time you retire or opt for a flexible retirement, it’s likely that you’ll have picked up several pensions from different jobs. If you haven’t already combined them into one, you might want to do this now.
- a single pension is much easier to manage;
- you’ll know exactly how much retirement income you can expect;
- you won’t have to pay multiple fees; and
- you’ll only need to deal with one point of contact.
Risk warning
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.
