A phase you could be going through.

Retirement is a lifechanging move so it can often prove to be a challenging decision as to when and how this is done as it not only affects the person retiring themselves but also their families. Retirement can also be, in some cases, irreversible. However, this decision doesn’t have to be binary. You can gradually move from working to not working over a tailored period of time to suit your own lifestyle requirements. This approach can be assisted by a strategy known as phased retirement. 

Phased retirement is where pension funds are taken in tranches to provide or subsidise your income. It is not normally available through occupational schemes; however, most personal pension schemes are set up with multiple arrangements which could enable the payment of benefits to be staggered. This is used to allow a pension holder to gradually cut back on their working hours and replace the associated loss in income by partially crystallising their pension funds (the process of obtaining access to your pension savings).

Historically, the preferred method used the Pension Commencement Lump Sum (PCLS – tax free cash) and the balancing pot to fund the majority of the required income. However, with pension freedom legislation (April 2015) available, this has given the potential for people to exercise far more flexibility with their retirement options.

The Strategy

The objective of phasing is to provide the optimal withdrawal method to match your income requirements, in a tax efficient manner. This can be achieved by using taxable withdrawals where there is a remaining personal income tax allowance available (and perhaps the basic rate tax threshold in the case of higher value withdrawals) and part tax-free withdrawals such as PCLS to provide any excess that would otherwise be taxable. Over time this could also result in funds being built up within the drawdown environment – the balancing pot (these funds usually remain tax free on death prior to age 75).

Various combinations of withdrawal methods can therefore be used to achieve the required goal of phased retirement. It is important to consider which strategy suits the individual and which may be influenced by additional issues such as simplicity, risk, the lifetime allowance and estate planning. This strategy also has the flexibility to be adjusted over time as your lifestyle changes.

Strategies do tend to evolve over time and so do your options. Taking advice and being aware of what’s available can provide peace of mind and therefore make all the difference.