How to retire gradually

These days, there is no set retirement age. You can carry on working for as long as you like, and can also access your pension at any age from 55 onwards – in a variety of different ways.

This flexibility also means that you don’t have to retire on one particular day, but can do so in stages if you prefer. This is often called ‘phased retirement’. Equally, you may decide to quit your old career and try something completely new, like starting your own business. If you’re keen to keep busy and productive at least in the earlier stages of retirement, here are the main things to think about.

Do I want to leave my job fully, or gradually?

Many employers offer reduced hours to help you ease into retirement, and there are plenty of businesses that offer part-time roles. By reducing your hours, you can gradually adjust to a new routine, take more time to enjoy life outside of work, and still receive an income. If necessary, you can supplement this part-time working income by drawing from your pension pot. And because you’ll be drawing less money, your pension should last longer this way.

Can I draw my pension and earn at the same time?

If you are earning and also drawing some pension, one thing to be aware of is tax. You will still be subject to income tax like anyone else, so all your income above the personal allowance will be taxable. This may mean losing more of your pension in tax than you otherwise would.

Another possible drawback is a reduced annual allowance. If you have started to draw on your pension, but want to continue making contributions into it, then the amount you can pay in each year will be much smaller. You may also want to check you don’t exceed the lifetime allowance.

Talk to your financial adviser about your best options for accessing your pension if you plan to continue working in some form.

Could I try something new in retirement?

Being able to access your pension can offer a new lease of life – because you now have a source of income that doesn’t depend on you working. Perhaps over the years you have been tempted to try other kinds of work, whether it’s running a café, writing a book, turning your hobby into a business, or pursuing that old dream you gave up on when you were younger with responsibilities. With the safety net of a pension, now might be the time to give it a go.

If you can make your new venture pay, then you can limit the amount you have to draw from your pension (note that the same rules apply about tax and allowances – see above). And if it’s not a financial success, then you still have your pension to live on.

Many promising businesses get started this way. To improve your chances of success, don’t treat yours like a hobby, or as just a way to pass your retirement. Take a look at our guide to starting a business, and talk to an accountant about your plans.

Other benefits of phased retirement

As well as making financial sense, easing into retirement can be better for your health and mental wellbeing. Sudden lifestyle changes are usually stressful, even when they involve being under less pressure, and many people in early retirement miss the structure and purpose that working brings.

What’s more, working full-time doesn’t give you much time to think about retirement, or any real sense of what it might be like. So entering a partial retirement first may give you not only a valuable taste of what’s to come, but also the time and knowledge you need to plan ahead for the real thing.

You may not realise it, but your financial adviser can also help a lot with the practical and personal sides of preparing for retirement.

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