Phased Retirement Strategies: Drawing Down Gradually While Still Working

The idea that retirement happens on a single date — one day working, the next day retired — is becoming less common. Longer careers, better health, and greater financial sophistication mean that more people are choosing a gradual transition: reducing hours, taking on consultancy or portfolio careers, and drawing pension income incrementally to supplement reduced earnings.

This guide explains the main phased retirement strategies available in the UK, their tax implications, and the considerations that make one approach more suitable than another.

Nothing in this guide constitutes personal financial advice. Phased retirement involves complex interactions between employment law, tax, and pension rules. Seek independent advice before making decisions.

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What Is Phased Retirement?

Phased retirement is any arrangement where an individual transitions from full-time employment toward full retirement over a period of time — typically reducing working hours, earnings, or both — while drawing some pension income to supplement reduced wages.

It is distinct from full drawdown in the sense that pension income is supplementary rather than the primary income source, and it is distinct from full employment in that earnings are reduced.

Phased retirement may involve:

• Moving from full-time to part-time employment with the same employer
• Leaving a main employer but taking on consultancy or self-employment work
• Drawing a proportion of pension entitlement (from a DB scheme's partial retirement option or a DC scheme's drawdown) while continuing to work
• A structured step-down over three to five years toward complete retirement

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Partial Retirement from Defined Benefit Schemes

Many defined benefit schemes — including public sector schemes — offer a formal partial retirement option. This allows a member to take a portion of their accrued DB pension while continuing to work in a reduced capacity.

How it typically works:

1. The member reduces their hours (and usually, their contractual terms)
2. They "crystallise" a portion of their accrued pension — the percentage proportional to the reduction in hours or earnings
3. That portion of the pension comes into payment immediately
4. The remaining portion continues to accrue for the remainder of their career
5. On full retirement, the second tranche (with any additional accrual) comes into payment

The tax-free pension commencement lump sum (PCLS) can typically be taken on each crystallisation event — both on partial retirement and again on full retirement.

Worked example: A teacher with 30 years' service decides at age 60 to move to three days a week. They crystallise 50% of their accrued pension (15 years' worth), which generates an annual pension of £10,000 and a tax-free lump sum. They continue teaching part-time, accumulating the remaining 50% plus any future service, which they crystallise fully at age 65.

Not all DB schemes offer partial retirement. Check your specific scheme rules. Public sector schemes (NHS, Teachers' Pension, Local Government Pension Scheme, Civil Service) typically do; private sector DB schemes vary.

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Phased Drawdown from DC Schemes (SIPPs)

For those with a defined contribution pension — a SIPP or personal pension — phased drawdown offers remarkable flexibility:

Uncrystallised portion: The portion of your pension not yet "crystallised" (not yet entered drawdown or had PCLS taken) continues to grow tax-free. On death before 75, it can pass to beneficiaries free of income tax.

Phased crystallisation: Rather than crystallising the entire pot at once on retirement, you crystallise tranches over time:

• Each crystallisation takes 25% of that tranche as tax-free cash (the PCLS)
• The remaining 75% enters drawdown and can be drawn as taxable income
• This spreads the tax-free cash over multiple tax years, allowing annual income to be managed carefully

Managing income tax efficiently: By crystallising only as much as you need each year, you can control exactly how much taxable pension income you draw. Combined with other income (part-time earnings, investment income, rental income), careful phased drawdown can keep total income within a target band — ideally below the higher-rate tax threshold or below £100,000 to protect the personal allowance.

The MPAA risk in phased DC drawdown: Taking any flexible income from the drawdown portion triggers the Money Purchase Annual Allowance (MPAA) — reducing future DC contribution allowance to £10,000. For those still working and contributing to a workplace pension, this is a significant constraint. Taking the PCLS alone (without drawing any income from drawdown) does NOT trigger the MPAA. Careful sequencing is essential.

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Tax Efficiency in Phased Retirement

The opportunity to manage income carefully during a phased retirement transition is one of its greatest advantages:

Example: An individual reducing to part-time consultancy at £30,000 per year in 2026/27:

• Personal allowance: £12,570
• Basic rate band: up to £50,270
• Space for pension income without entering higher rate: £50,270 − £30,000 = £20,270

By drawing £20,270 of pension income per year alongside £30,000 of consultancy income, total income is £50,270 — exactly at the basic/higher rate threshold. All income is taxed at 20% basic rate. No higher-rate tax is paid.

Compare this to stopping work entirely and drawing £50,270 from the pension (same total income): tax is the same. But by working part-time, the individual contributes to State Pension qualifying years, maintains professional skills and networks, and may derive substantial personal satisfaction — all while managing income tax identically.

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Employer-Facilitated Phased Retirement

Some employers — particularly in professional services, financial services, and the public sector — have formal phased retirement policies. These may include:

• Formal reduced-hours contracts available to employees over a certain age
• Transition-to-retirement policies with agreed step-down periods
• Retention arrangements for senior staff who would otherwise leave
• Consultancy agreements for post-retirement support

If you are approaching retirement in an employer-sponsored pension scheme, check whether your employer has a partial retirement arrangement — both for the pension and for employment terms. Negotiating the right transition from the employer's perspective (continuity of expertise) as well as the employee's (phased financial transition) is often possible and mutually beneficial.

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The DB and DC Combination

Many individuals have both defined benefit entitlements (from earlier career) and defined contribution accumulation (from more recent employment). Phased retirement in this context can be structured elegantly:

Phase 1 (say age 58–63): Reduce to part-time work. Draw the DC pension incrementally through phased drawdown (taking PCLS and modest income). Leave the DB pension untouched — allowing it to continue accruing (if still employed in the DB scheme) or simply deferring it (if not, to benefit from actuarial enhancement).

Phase 2 (say age 63–66): Stop paid work entirely. Draw full DC pension income, now potentially supplemented by a larger deferred DB pension. Defer State Pension for 2–3 years.

Phase 3 (age 66+): State Pension begins. Reduce DC drawdown accordingly to manage total income below higher-rate threshold. Adjust dynamically as income needs change.

This sequencing maximises the duration of DB accrual or deferral, manages DC drawdown efficiently, and integrates State Pension at the optimal time — while keeping total income in a tax-efficient band throughout.

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National Insurance in Phased Retirement

Phased workers continuing to work remain NI-liable until State Pension age. There is no NI on pension income at any age. This means:

• Workers above State Pension age (currently 66) pay no employee NI — effectively an 8% gross-up on their earnings. This makes part-time work post-66 particularly tax-efficient if pension income fills the remaining income need.
• Workers below State Pension age continuing to work in phased retirement continue to accrue qualifying years for State Pension purposes (if not already at 35 years) — potentially a meaningful benefit.

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Care and Flexibility in Planning

Phased retirement planning requires modelling a range of scenarios: health deterioration, change in care needs, unexpected property or family events, or changes in part-time working arrangements. A rigid plan that depends on exactly a certain income from consultancy through to exactly a certain age is fragile.

Good phased retirement planning builds in:

• Cash reserves (ISA, accessible savings) for the unexpected
• A sustainable drawdown rate that can be reduced without hardship if needed
• Clarity on what income is truly essential vs discretionary
• A financial review at least annually throughout the transition period

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How Global Investments Can Help

Global Investments works with professionals in their 50s and early 60s — many internationally mobile, managing multiple pension arrangements across jurisdictions — who are approaching or actively navigating the transition from full-time work to retirement. We specialise in integrating DB pensions, SIPP drawdown, overseas pension income, investment portfolios, and property income into a coherent phased retirement plan.

Whether you are negotiating partial retirement from an employer pension scheme, designing a DC drawdown strategy for the transition years, or managing the tax efficiency of pension income alongside part-time consultancy earnings, our adviser network can model your specific position and build a plan that reflects your priorities. Contact our team to arrange a phased retirement planning consultation.

Rules on pensions, employment, and tax are subject to change. This guide reflects the position as understood in June 2026 and does not constitute regulated financial advice.