Phased Retirement: Using Your Pension Flexibly as You Wind Down

The concept of retirement as a single event — working on a Friday and retired on a Monday — is increasingly at odds with how people actually want to finish their working lives. Many clients prefer a gradual wind-down: moving from full-time to four days a week, then to three, perhaps taking on consultancy work for several more years before fully stopping. Others reduce their hours to care for a parent, pursue a long-deferred project, or simply enjoy a better balance.

Phased retirement makes this possible in a tax-efficient way. Used well, it allows you to draw on your pension precisely as needed, use your annual tax allowances efficiently, and preserve capital for longer — while genuinely enjoying the financial flexibility that a well-structured pension provides.

The Mechanics: How Flexi-Access Drawdown Enables Phased Retirement

Flexi-access drawdown (FAD) is the mechanism at the heart of phased retirement. Once you have reached the minimum pension access age (55, rising to 57 in April 2028 for most people), you can move some or all of your pension into drawdown. The drawdown fund remains invested — in equities, bonds, or a diversified portfolio — and you withdraw from it as and when needed.

The key feature for phased retirees is flexibility: there is no minimum withdrawal, no fixed schedule, no requirement to take a regular income. In a year when your employment income is still substantial, you might take nothing from the pension. In a year when you reduce to two days a week, you might draw £20,000. In a year with an unexpected expense, you draw more. Flexi-access drawdown adjusts to your life, not the other way around.

This contrasts sharply with an annuity, which pays a fixed income for life regardless of your needs in any given year. An annuity is appropriate for ensuring a guaranteed income floor but provides no flexibility to vary the amount. For the phased retirement period — when income needs are changing from year to year — drawdown is almost always the more suitable structure.

The Tax Case for Phasing

Phased retirement is not just about lifestyle flexibility — it is often significantly more tax-efficient than a single retirement event.

Using the personal allowance each year: If you draw pension income during your phased retirement, you should plan withdrawals to use your annual personal allowance (£12,570 in 2026/27, frozen until at least April 2031) each year. In years with low employment income, your pension withdrawal capacity at the 20% basic rate is higher. In years with full employment income, you may draw little or nothing from the pension to avoid higher-rate tax.

Avoiding the 40% trap: A common mistake is delaying all pension access until full retirement and then drawing large amounts in a single year. If your pension pot is substantial, drawing it all after retirement — combined with investment income, state pension, and other income — can push you into 40% or even 45% tax. Phasing the withdrawals over many years, using the basic rate band efficiently each year, materially reduces the lifetime tax burden.

The personal savings allowance: Basic rate taxpayers receive a £1,000 personal savings allowance on interest income; higher rate taxpayers only £500. Keeping your annual income below the higher-rate threshold (£50,270 in 2026/27) during phased retirement preserves the full savings allowance — one of many marginal benefits of sensible income planning.

The interaction with employment income: During phased retirement, your employment income and pension withdrawals combine for income tax purposes. If you earn £25,000 from part-time work, you have room to draw approximately £25,270 from the pension before hitting 40% tax (£12,570 personal allowance plus £37,700 basic rate band = £50,270 threshold, less £25,000 employment income). This tax planning requires a comprehensive view of all income sources — something worth modelling annually with an adviser.

The Money Purchase Annual Allowance: The Critical Constraint

The Money Purchase Annual Allowance (MPAA) is the most important technical constraint in phased retirement planning. Understanding it is essential.

Before you trigger flexi-access drawdown, you can contribute up to the full annual allowance (£60,000 in 2026/27, subject to earnings) to your pension. Once you flexibly access any defined contribution pension — by taking anything from a drawdown pot beyond the 25% tax-free lump sum — the MPAA of £10,000 applies. All future defined contribution pension contributions (employer and employee combined) must stay within £10,000 per year to avoid an annual allowance excess charge.

For phased retirees who are still employed, this creates a genuine conflict:

• If your employer contributes 5% and you contribute 5% on a salary of £60,000, total DC contributions are £6,000 — within the MPAA.
• If your employer contributes 10% and you contribute 10% on the same salary, total DC contributions are £12,000 — exceeding the MPAA. A charge applies on the £2,000 excess.

The solution in many cases is timing: if you can delay triggering flexi-access drawdown until you have stopped making significant pension contributions, the MPAA is not triggered until a point where it no longer constrains you. Alternatively, some clients reduce contributions to stay within the £10,000 threshold once they begin drawdown.

It is also worth noting that:

• Taking a tax-free cash lump sum only (a pension commencement lump sum, or PCLS) does not trigger the MPAA. Designating the remaining 75% to flexi-access drawdown does not trigger it either — the MPAA is only triggered once you actually draw taxable income from the flexi-access drawdown fund. (Note that capped drawdown has been closed to new arrangements since 6 April 2015, so it is no longer an option for those crystallising a pension for the first time.) Using the PCLS to buy a lifetime annuity also does not trigger the MPAA.
• Taking an Uncrystallised Fund Pension Lump Sum (UFPLS) — where 25% of each withdrawal is tax-free and 75% is taxable income — does trigger the MPAA from the first UFPLS payment.
• Small pot commutation (taking a pot under £10,000 as a lump sum under the small pots rules) does not trigger the MPAA.

These distinctions matter enormously in phased retirement planning. Taking the wrong type of withdrawal can inadvertently trigger the MPAA and create problems for continuing contributions.

Segmented Crystallisation: Multiple Bites of the Tax-Free Cash

Many high-quality SIPP providers allow a technique known as segmented crystallisation (sometimes called "phased crystallisation" or "fund segmentation").

The idea is to divide your pension pot notionally into a series of segments — perhaps 100 equal "slices" or a number of discrete clusters. Each time you need income during phased retirement, you crystallise one segment. From that segment:

• 25% is paid as a Pension Commencement Lump Sum (PCLS) — tax-free, within your Lump Sum Allowance of £268,275
• 75% moves into a flexi-access drawdown fund, from which you can draw taxable income

By crystallising only what you need each year, you:

1. Preserve the remaining uncrystallised funds — they continue to grow in the pension wrapper, potentially free of further tax
2. Take your tax-free cash in tranches over time rather than in a single lump at outset
3. Keep maximum flexibility: the uncrystallised portion can still be taken as UFPLS, converted to annuity, or left to grow

Example: Your SIPP is worth £500,000. At 58, you begin phased retirement and crystallise £50,000 (10% of the fund). You take £12,500 tax-free and move £37,500 to drawdown. The remaining £450,000 stays uncrystallised, fully invested. Next year, you crystallise another £50,000. And so on. Over ten years, you have phased the tax-free cash and managed income tax exposure year by year.

Not all SIPP providers support segmented crystallisation — some require you to crystallise the entire fund at once. If phased crystallisation is important to you, confirm the provider's capability before selecting a SIPP.

Planning Around the State Pension

For most clients, the state pension is the most significant step-change in income during phased retirement. The state pension age is currently 66, rising to 67 between 2026 and 2028. The full new state pension in 2026/27 is £12,547 per year (£241.30 per week) — a meaningful addition to retirement income that arrives automatically.

Before state pension age, the client's income is typically a combination of employment income (reducing) and pension drawdown (increasing). Once the state pension begins it adds to the mix — which means less pension drawdown is needed, or the same drawdown takes the client over the basic rate threshold.

A well-structured phased retirement plan accounts for this explicitly:

• Before state pension age: Draw more from pension to fill the gap left by reducing employment. The state pension is not yet in payment.
• From state pension age: State pension arrives. Pension drawdown may reduce. Total income increases. Check whether any tax-rate thresholds are crossed.

For clients with a final salary (defined benefit) pension also in payment at a fixed age, there may be a similar step-change when that income commences. All guaranteed income sources — state pension, DB scheme pensions, annuities — should be mapped onto a timeline before setting the drawdown strategy.

The State Pension Deferral Option

Some phased retirees have sufficient other income and prefer to defer their state pension beyond age 67. Deferral increases the state pension by approximately 1% for every nine weeks deferred — roughly 5.8% per year. If you defer for two years (to 69), the enhanced pension is approximately 11.6% higher for life.

The break-even for state pension deferral is approximately 17 years from the deferred start date. Whether deferral makes sense depends on health, other income, and personal preferences. For those with substantial private pension wealth who do not need the state pension immediately, deferral can be worth modelling.

Sequence of Returns: The Risk in the Winding-Down Phase

The years immediately before and after full retirement are the period of greatest vulnerability to what investment professionals call sequence of returns risk — the danger that poor market performance in the early years of drawdown permanently depletes the fund.

In phased retirement, this risk is slightly different from traditional retirement, because:

1. Employment income is still present during the transition, reducing the amount needed from the pension
2. Drawdown is partial — withdrawals are lower than at full retirement — which means the invested fund has more time to recover from market falls

Nevertheless, the risk is real. If markets fall 30% in the year you significantly increase your drawdown, the remaining fund has a much larger burden to bear. Maintaining a cash or short-dated bond reserve equivalent to 1–3 years of planned withdrawals is a common approach: you draw from the reserve during market downturns and allow the equity portion to recover before rebalancing.

Monitoring and Adjusting

Phased retirement is not a one-time plan — it is a dynamic process that requires annual review. Each year, consider:

• What is your expected income from employment this year?
• How much do you need from the pension to meet your lifestyle needs?
• What is the current tax position — how much room is there in the basic rate band?
• Has the MPAA been triggered? If so, are contributions within the £10,000 limit?
• How is the drawdown fund performing relative to the withdrawal rate?
• Are you on track for full retirement at your target age?

An annual pension planning review — particularly one that integrates employment income, investment income, pension drawdown, and tax planning — is the appropriate cadence for phased retirees.

How Global Investments Can Help

Phased retirement is one of the areas where structured financial planning adds the most value. The interplay of employment income, pension withdrawals, tax bands, the MPAA, segmented crystallisation, and the state pension step-change creates genuine complexity — and genuine opportunity to optimise outcomes.

Our advisers help clients model phased retirement scenarios, design drawdown strategies that minimise tax across the transition period, ensure contributions stay on the right side of the MPAA, and coordinate pension withdrawals with other income sources. We also help internationally mobile clients navigate the additional layer of non-residence tax rules that apply when drawdown income is received from abroad.

The guidance in this article is general in nature. Pension and tax rules are complex and change frequently; individual circumstances vary significantly. This article does not constitute regulated financial advice. We recommend taking professional, regulated advice before making any decisions about accessing your pension.