Phasing into retirement: 5 essential financial considerations
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While phasing into retirement can offer you greater flexibility, it may make your finances more complex. Read on to find out more about five key considerations.
1. Calculate if you’ll need to supplement your income
While you might still earn a salary as you phase into retirement, if you’ve chosen to reduce your working hours or switch roles, it might not be enough to maintain your lifestyle.
If this is the case, you may opt to supplement your salary with income from other sources. For example, you might start to take an income from your pension or deplete your cash savings.
A financial plan can help you assess what income you need and whether there’s a gap to close.
Remember, money taken from your pension will usually be added to your other income when calculating your Income Tax liability. As a result, it’s important to keep track of your different income sources so you don’t face an unexpected bill.
If you’re using assets to support your lifestyle as you phase into retirement, it’s also important to consider longevity and the effect of triggering the Money Purchase Annual Allowance (MPAA) if you access your pension. Both points are covered in greater detail below.
2. Decide if you’ll continue to contribute to your pension
Contributing to your pension as you phase into retirement could mean you’re able to afford a more comfortable lifestyle when you give up work. A financial planner can help you assess how your contributions will add up and whether contributing is advisable for you.
If you’ll be supplementing your income, you should be aware of the MPAA and how much you can add to your pension each tax year.
In 2025/26, the maximum amount that can be paid into your pension before paying an extra tax charge is £60,000. This is known as the Annual Allowance. However, if you withdraw a flexible income from your pension, you may trigger the MPAA, which would reduce the amount to £10,000.
According to a Wealthify survey (17.09.2025), just 3% of pension holders understood what “MPAA” meant. Yet, this little-known allowance could limit your future pension contributions and affect the income you receive later in life.
3. Determine when to claim your State Pension
The current State Pension age is 66, and it will rise gradually to 68 by 2046.
When you reach State Pension Age, you won’t automatically start receiving payments. You must claim it. This means, if you choose to, you can defer claiming your State Pension until you stop working completely.
The money you receive from the State Pension is added to your other sources of income when calculating Income Tax liability. Deferring your State Pension might reduce your overall tax bill as a result.
In addition, for every nine weeks you defer the State Pension, the income you’ll receive from it when you do claim it will rise by 1%.
4. Assess how your pension and other assets are invested
Your pension is typically invested, and you might have other investments that are earmarked for retirement. If your plans have changed to include a period of phasing into retirement, you may benefit from assessing how your money is invested.
Often, your pension will be moved to investments that are more stable as your retirement age approaches. If your money will now remain invested for longer, this may not be the most appropriate option for you.
5. Establish your long-term income needs
It can be difficult to understand how the value of your pension and other assets will change during your retirement, particularly if your income needs will shift.
Setting out your income needs at each phase of your retirement and using a cashflow model could help you visualise how your pension and other assets could change. This can help you see if your assets will provide you with security for the rest of your life or if there’s a shortfall.
A cashflow model will make certain assumptions, such as the average annual return of your pension or the rate of inflation. The outcomes aren’t guaranteed, but they can provide a useful insight into your long-term finances and the effect of your decisions.
A financial plan can identify retirement considerations that are important to you
Alongside these five considerations, you might have other important questions to weigh up when you’re retiring, including whether to phase into the next chapter of your life. A tailored financial plan can help you understand your finances now and how they might change as you gradually give up work and eventually stop completely.
Please get in touch if you’d like to talk to us about your retirement plan.
Please note: This blog is for general information only and does not constitute financial advice, which should be based on your individual circumstances. The information is aimed at retail clients only.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
The Financial Conduct Authority does not regulate tax planning or cashflow modelling.