Partial Retirement from Defined Benefit Schemes: Flexible Retirement Explained

The standard model of retirement — full stop at 65 — is increasingly unattractive to many defined benefit scheme members. Working longer may not be sustainable, but stopping entirely may mean giving up income and purpose prematurely. Partial retirement, variously called flexible retirement in public sector schemes, offers a middle path: drawing some pension income while continuing to work, typically at reduced hours or reduced responsibilities.

This guide explains how partial retirement works in defined benefit schemes, the actuarial implications of early access, the income reduction requirements that apply, and the tax planning considerations.

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What Is Partial Retirement?

Partial retirement (or flexible retirement) allows a defined benefit scheme member to access a proportion of their accrued pension benefits before their normal pension age, while continuing to work for the same employer — usually on reduced terms.

It is distinct from simply drawing pension and continuing to work with a different employer (which is straightforward under UK pension rules). Partial retirement within the same employer-scheme relationship requires specific scheme rules and, typically, employer consent.

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Which Schemes Offer Flexible Retirement?

Flexible retirement is available in the major UK public sector defined benefit schemes:

NHS Pension Scheme: Flexible retirement is available to members of the 1995/2008 and 2015 NHS schemes from age 55 (the scheme normal pension age for 1995 section is 60; for 2008 section and 2015, it varies by individual). Members must reduce their pensionable pay by at least 10%.

Teachers' Pension Scheme (TPS): Flexible retirement is available from age 55, subject to employer consent. The member must reduce their pensionable service (i.e., move to a materially lower grade or fewer hours) and draw at least 20% of their pension.

Local Government Pension Scheme (LGPS): Flexible retirement is at employer discretion from age 55. The employer can agree to allow the employee to draw their accrued pension early (with actuarial reduction) while continuing in employment at reduced hours or grade.

Armed Forces Pension Schemes (AFPS): Partial retirement provisions exist in AFPS 15, allowing qualifying personnel to take a proportion of accrued benefits on transition to lower commitment roles.

Civil Service Pension (Alpha and Nuvos): Partial retirement is available from minimum pension age (55, or 57 from 2028) with scheme manager approval. The member must reduce their hours, grade, or salary.

Private sector defined benefit schemes may also offer partial retirement but this is much less common — most private sector DB schemes closed to further accrual some years ago, and flexible retirement provisions were not consistently drafted into older scheme rules.

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How Is the Benefit Calculated?

In most public sector schemes, partial retirement involves the member electing to draw a proportion of their accrued benefits. The mechanics differ slightly by scheme:

NHS Pension Scheme: The member specifies what percentage of their accrued benefits they wish to draw (subject to a minimum — typically 20% and maximum — typically 100% of current accrual). The drawn portion is subject to an actuarial reduction if taken before the scheme's normal pension age.

LGPS: The employer (not the member) triggers flexible retirement by granting consent. The member can draw all or part of their accrued benefits, subject to an actuarial reduction applied by the administering authority.

Teachers' Pension Scheme: The member must draw at least 20% of their pension. The drawn portion is actuarially reduced if taken before normal pension age.

The actuarial reduction reflects the fact that the pension will be paid for longer than anticipated under the scheme's pricing assumptions. The reduction is permanent and applies for life — it is not reversed when the member later reaches normal pension age.

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Actuarial Reduction Factors for Early Access

The actuarial reduction for early retirement in public sector schemes is typically calculated using GAD (Government Actuary's Department) tables and expressed as a percentage per year early.

As a rough guide (exact factors vary by scheme and year of birth):

• NHS 1995 section: Approximately 5-6% reduction per year taken early before age 60.
• NHS 2008 section: Approximately 3-5% per year before age 65.
• NHS 2015 scheme: Reduction based on years early from State Pension age.
• LGPS: Typically 3-6% per year early, using scheme-specific tables.
• TPS: Typically 4-5% per year early.

For example, a member with a £20,000/year NHS 1995 section pension, drawing it 5 years early, might face a reduction of 25% (5% × 5 years), reducing the annual pension to £15,000/year — for life.

It is important to obtain the exact reduction factors applicable to your scheme and your specific age before making a partial retirement decision. The figures above are illustrative only.

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The Income Reduction Requirement

A critical condition for flexible retirement in most public sector schemes is that the member must demonstrate a genuine reduction in employment income. This serves two purposes: it satisfies HMRC's requirements for pension crystallisation, and it is evidence that the arrangement is genuine partial retirement rather than a device for accessing pension while maintaining full employment.

HMRC requirements for flexible retirement in public sector schemes:

HMRC does not prescribe a specific income reduction percentage for all schemes, but most scheme regulations require the employee to reduce their pensionable pay or pensionable service significantly. The commonly cited threshold in scheme guidance is a reduction of at least 10-20% in pensionable pay or hours.

The arrangement must reflect genuine changes to working terms — it is not permissible to maintain effectively full-time hours and duties while notionally reducing grade or salary to access pension.

HMRC's own stated position: HMRC's guidance on defined benefit schemes confirms that flexible retirement does not trigger the Money Purchase Annual Allowance (MPAA), as no money purchase benefits are involved. However, if the member also crystallises any DC benefits at the same time, the MPAA may be triggered.

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Tax Implications of Partial Retirement

Drawing pension and salary simultaneously:

When a member takes flexible retirement and continues to work, they receive both employment income (salary) and pension income in the same tax year. This is entirely lawful — there is no restriction on receiving both — but the combined income is taxed under PAYE at the individual's marginal rate.

For a higher-rate taxpayer, this means pension income is taxed at 40%. Tax planning before triggering flexible retirement should consider:

• Whether to use pension commencement lump sum (tax-free cash) to reduce immediate taxable pension income.
• Whether to phase the partial retirement (e.g., draw 30% of benefits one year, further amounts in subsequent years) to manage tax exposure.
• The effect on pension credit and any means-tested benefits (unusual for this group but relevant for some).

Pension crystallisation and the Lump Sum Allowance:

Drawing pension from a DB scheme — even partially — is a benefit crystallisation event (BCE). The capital value of the benefits drawn is tested against the Lump Sum Allowance (and formerly the Lifetime Allowance). For most public sector employees, years of accrual at moderate salaries mean this is unlikely to be a limiting factor, but higher-earning professionals (senior NHS consultants, senior civil servants) should check their position.

The pension commencement lump sum (PCLS — tax-free cash) is calculated using the 12:1 DB commutation factor and capped at the Lump Sum Allowance (£268,275 for those without protection, as of 2024).

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Continuing to Accrue Benefits After Partial Retirement

A key advantage of flexible retirement over full retirement is that the member continues in employment and continues to accrue new pension benefits on the portion of service that continues.

For example, a member who draws 50% of their NHS pension at age 57 continues to accrue pension on the remaining 50% of pensionable pay for subsequent years of service. When they eventually fully retire, the remaining accrual is drawn — usually at a higher level and without (or with a smaller) actuarial reduction.

The interplay between the drawn portion, the actuarial reduction, and the continued accrual requires careful modelling to determine whether partial retirement is financially beneficial compared with continuing to work and deferring the pension entirely.

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Employer Consent and Practical Limitations

In most public sector schemes, flexible retirement requires employer consent. An employer may decline a flexible retirement request, particularly if the reduction in hours would be operationally disruptive. The decision is the employer's — members do not have an automatic right to flexible retirement.

In practice, NHS trusts, local authorities, and schools vary considerably in their willingness to accommodate flexible retirement requests. Members considering this option should discuss it with HR well in advance of their intended date.

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Compliance Caveat

This guide is for general informational purposes. Flexible retirement rules vary by scheme, and the actuarial reduction factors applicable to individual members change each year. HMRC's rules on benefit crystallisation events, the Lump Sum Allowance, and income reduction requirements are subject to change. Nothing in this guide constitutes financial, tax, or legal advice. You should take regulated financial advice before making any flexible retirement decision, and verify the exact terms applicable to your scheme with the scheme administrator. The value of pension savings can fall as well as rise, though this is less directly relevant to defined benefit accrual.

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How Global Investments Can Help

Partial retirement from a defined benefit scheme is one of the more nuanced decisions in pension planning — it involves actuarial calculations, tax modelling, employment considerations, and long-term income planning. Global Investments works with senior public sector professionals and private sector defined benefit scheme members to help them think through flexible retirement decisions in the context of their broader financial plan.

We can help you model the financial outcomes of different retirement scenarios, identify regulated advisers with defined benefit expertise, and ensure that your decision about partial retirement is made with a clear view of the long-term implications. Contact us to arrange an initial discussion.