Semi-Retirement: How to Make a Phased Exit Work

Semi-Retirement: How to Make a Phased Exit Work

More UK professionals are choosing to wind down slowly instead of stopping work on a single date. They drop to three days a week, move into consultancy, or pick up a handful of smaller roles. The idea’s appealing, but the money side gets complicated fast, and getting the order of things wrong can cost you thousands. Let’s take a closer look at how to make the numbers work in your favour.

Why Variable Income Changes Everything

When you go part-time or freelance, your earnings stop being a fixed monthly figure. That has a knock-on effect on how much you can pay into a pension and still get tax relief.

Most people can pay in up to £60,000 a year, or 100% of their earnings if that’s lower, and still get tax relief in the 2025/26 tax year. Drop your hours and your earnings ceiling drops with them. On top of that, employer pension matching often shrinks once you move off a full-time contract, and any contributions above the auto-enrolment minimum tend to be the first thing to go, so you can lose a chunk of free money without always noticing.

There’s a bigger trap waiting if you start drawing from a pension to top up lower earnings. The moment you flexibly access a defined contribution pension, you trigger the money purchase annual allowance, which caps future contributions at £10,000 a year. Once it’s triggered, it’s permanent, so the sequencing of when you start drawing income really matters.

Taking your 25% tax-free lump sum on its own doesn’t trigger the MPAA, nor does buying an annuity. It’s the flexible income withdrawals, such as drawdown or UFPLS payments, that set it off.

How to Decide Which Pot to Draw From First

Say you’re earning £30,000 part-time, drawing £15,000 from a pension and holding some ISA savings on the side. The tax you pay depends heavily on how you pull those pieces together.

Pension income is taxable and counts towards your income for the year. ISA withdrawals don’t, so they’re a useful way to top up without pushing yourself into a higher tax band. Your sources usually break down into:

• Reduced salary, taxed as normal earnings
• Pension drawdown or UFPLS withdrawals, which are taxable beyond the 25% tax-free portion
• ISA income, which is tax-free and doesn’t affect your allowances
• State pension, once you reach the qualifying age

This is the sort of moving picture that a service like Rathbones retirement planning is built to handle and can model for you, since the order you draw from these pots can be modelled and adjusted as your circumstances shift. A plan that looks neat on day one rarely survives contact with a year of variable income.

Keeping Pension Growth Going on Lower Earnings

Cutting your hours doesn’t mean your pension has to stop growing. You can keep contributing, just within the limits that now apply to you.

If you haven’t triggered the money purchase annual allowance, you’ve still got room to pay in up to your earnings for the year. Spousal contributions and carry-forward from the three previous tax years can help too, so it’s worth checking what unused allowance you’re sitting on before you assume the door is shut. If your earnings drop below £3,600 in a tax year, you can still pay in up to £3,600 gross and get basic-rate tax relief, which is a useful floor for anyone scaling right back.

Deferring your state pension is another lever. Under the current rules, holding off adds just under 5.8% to your weekly payment for every full year you delay, which can suit someone still earning a part-time wage and not wanting the extra taxable income yet. 

Bear in mind that deferral only pays off if you live long enough to recoup the income you gave up. The break-even point is roughly 17 years after your State Pension age, so it suits people in good health who expect a long retirement. The trick is treating these decisions as connected, because a change in one almost always nudges the others.

In Conclusion: Keep the Moving Parts in Sync

A phased exit gives you breathing room, but it also turns a simple financial plan into a moving target. The figures that mattered when you worked full-time shift every time your income does.

Review your plan each year, watch the order you draw your income in, and keep an eye on the allowances that change once you start taking money out. Get those moving parts working together and semi-retirement can be the gentle wind-down it’s meant to be.

The value of your investments and the income from them may go down as well as up, and you could get back less than you invested. Past performance should not be seen as an indication of future performance.

Guest Article.