Retirement doesn’t have to mean stopping work overnight. Many people are increasingly choosing to retire gradually, reducing their hours, consulting part-time, or pursuing hobbies and passions, while continuing to earn an income. Instead of considering retirement as an “all or nothing” decision, there may be more flexible options available to you. We’re often asked about phased retirements, so we’ve answered some typical questions below.
Can I afford to work 3 days a week instead of 5?
Working 3 days a week instead of 4 or 5 days can be a sensible way to start winding down from work, depending on your role. Assess your current spending versus essential spending to identify the income you need to live your desired lifestyle.
Look at the reality of a part-time income and consider other income sources if you need to bridge the gap. You might have rental income, dividends, or be able to draw down on your pension if you’re over 55 (rising to 57 from 2028).
You will need to build a contingency buffer for any unexpected costs and make sure you have adequate protection. You’ll also need to factor in lifestyle changes such as reduced commuting costs, but possibly more leisure spending.
Your financial planner can stress-test different working patterns to ensure your lifestyle remains sustainable, as well as your retirement plans. Cash-flow modelling will enable you to compare different scenarios to see the impact from your reduced income.
How would reducing my income affect my retirement plans?
As well as affecting your daily lifestyle, lower earnings could reduce your pension contributions and have an impact on your long-term pension growth. Before you lower your income, check whether your employer pension contributions are likely to decrease.
Calculate how many more years you need to work to reach your target retirement pot. You might be able to boost your pension contributions while you’re still working. Through cash-flow modelling, you can create a Lifetime Wealth Forecast to understand any long-term implications. Also, review your retirement goals to set income expectations, so you can still enjoy your current lifestyle. If the numbers don’t work, then your timing may need adjusting.
Should I access my pension while I’m still working?
You can usually access defined contribution pensions from age 55 (rising to 57 from 2028). At the time of writing, you can still take up to 25% of your pension tax-free, with the remainder taxed at your income tax rate. From April 2027, unused defined contribution pensions will be included in your estate for inheritance tax purposes. In the future, there may be more incentive to live off pension income, while allowing other savings and investments to mature.
A phased approach to pension drawdown can provide flexibility but needs careful planning.
Accessing your pension too early may reduce its growth potential and drawing income while working could push you into a higher tax bracket. It’s worth being aware of the Money Purchase Annual Allowance (MPAA), which may limit future contributions if you start withdrawing taxable income. For advice on MPAA, speak to our financial planners.
Can I phase my retirement over several years?
Our team are often asked whether our clients can phase their retirement over several years. The short answer is yes. Many people gradually reduce their hours, responsibilities, or switch to consultancy roles. Some employers offer flexible or phased retirement options, so it’s worth discussing this with them early on.
A phased approach can also ease the psychological transition into retirement. It allows you to continue earning while starting to access pension benefits, if needed. Combining part-time hours with partial pension withdrawals can make the change to a lower income smoother. Over time, you can always adjust your retirement plans if your circumstances change.
However, it’s important to understand the impact this could have on your tax position and long-term financial security. Multiple income streams – salary, pension, investments, etc – can create complex tax situations. Careful financial planning is needed to keep your income within lower tax bands. Pension withdrawals are also taxable beyond the 25% tax-free sum.
As reducing your main income may lower your National Insurance contributions, this could affect your state pension. Check your pension forecast to make sure you have made enough contributions before you retire. Assess your savings and investment strategy because if you draw from your pensions earlier, then your money needs to last longer.
Retirement Planning, Nottingham
The key to financial success in retirement is not just about accumulating wealth, but to also feel comfortable using your money to enhance your life. Start by building a sensible financial plan and make sure you review this regularly to keep your plan on track. Your financial plan should inform your retirement plans. It should also give you a sense of security and the confidence to enjoy what you’ve worked so hard to build in your later years.
At Balance: Wealth Planning, our team will talk to you about your aims and aspirations so we can align your financial plan to meaningful goals. Together we will ensure your financial planning turns your wealth into choice, flexibility, and long-term confidence.
Do you need a financial plan to guide your retirement planning? Get in touch with our team.
Sources:
https://www.gov.uk/plan-retirement-income
https://www.gov.uk/plan-for-retirement
https://www.moneyhelper.org.uk/en/work/employment/your-pension-if-youre-working-part-time
https://www.moneyhelper.org.uk/en/blog/retirement/is-tax-free-pension-lump-sum-ending
