Retirement doesn’t have to mean stopping work entirely at a specific age—it can be shaped to suit your lifestyle. If stepping away from work all at once doesn’t feel right for you, flexible retirement could be an ideal option.
At a glance, flexible retirement is a gradual approach that lets you ease into this new phase of life at your own pace. But what exactly does flexible retirement involve, and could it suit your lifestyle? Let’s dive into the details, explore the benefits and challenges, and share some examples to help you decide if it’s the right choice.
What is flexible retirement?
Flexible retirement refers to gradually transitioning away from full-time work rather than stopping immediately. It can involve reducing working hours, shifting to part-time or taking up freelance roles, perhaps as a consultant. The overall goal is to maintain some level of financial independence while adapting to a slower pace of life.
In the UK, flexible retirement may involve using income drawdown or utilising a fixed term annuity (this is where you annuitise part of your pension pot for a set period (i.e. 5 years). This is where you can access part of your pension pot while keeping the rest invested. This strategy allows you to control how much income you take and when, offering greater flexibility than, for example, annuitising your entire retirement pot for a guaranteed income over your lifetime.
What are the advantages of flexible retirement?
1. Continued income
One of the most significant benefits of flexible retirement is maintaining a steady income stream. By combining earnings with pension withdrawals or a fixed term annuity, you can reduce the strain on your savings and maintain your desired standard of living. This is particularly valuable if your savings aren’t quite where you’d like them to be at the start of your retirement.
2. Gradual lifestyle adjustment
Retirement often brings significant changes; for some, an abrupt stop to working life can be difficult. Flexible retirement allows you to adjust gradually, giving you time to explore new routines and hobbies while still enjoying the structure and social interaction that work provides. For some people, this is an ideal opportunity to explore a career-change, without the pressure of having to earn the same salary as they did before. It can even be the start of a job that they love so much it might not even feel like “work”!
3. Tax efficiency
By managing your income sources strategically, you can reduce your tax liabilities. For instance, withdrawing smaller amounts from your pension pot or utilising a fixed term annuity, while earning a lower salary can help you stay within lower tax brackets. Additionally, this approach allows you to maximise personal allowances and tax-free benefits.
The challenges of flexible retirement
Unexpected expenses
Flexible retirement can be rewarding, but it also comes with challenges that need careful thought and planning. Have you considered how unexpected expenses—like family emergencies or home repairs—could impact your budget? If you’re already withdrawing from your pension, these costs can be particularly tricky to manage. Balancing reduced income with unpredictable expenses requires flexibility and a solid plan.
Money Purchase Annual Allowance (MPAA): A Hidden Restriction
For those seeking a flexible retirement, the Money Purchase Annual Allowance (MPAA) can present a significant challenge. Once you begin drawing income from your pension, the MPAA reduces the amount you can contribute tax-free to your pension each year from £60,000 to just £10,000 (2023/24 tax year). You need to be mindful of this restriction, especially if you’re still earning through part-time or freelance work and wish to continue building your savings. Exceeding the MPAA could result in unexpected tax charges, creating additional financial strain.
Pacing your savings
Having an income during flexible retirement provides peace of mind, but it’s important to stay aware of your spending. While it’s crucial to prevent overspending, which can risk depleting your savings too early, it’s equally important to consider the implications of leaving too much in your pension. Starting in April 2027, unused pension funds passed on after your death will become subject to Inheritance Tax (IHT) if you exceed the IHT allowance. This could therefore potentially reduce the amount left to your loved ones. As such, a sustainable withdrawal strategy could ensure that you have enough to enjoy a secure and fulfilling retirement without risking an unnecessary tax burden on your estate.
A robust plan is critical
Finally, flexible retirement involves navigating the complexities of financial planning. Managing multiple income streams, staying on top of tax obligations and protecting your long-term savings can feel overwhelming. That’s where Flying Colours can help. Our team of experienced advisers is here to guide you through the process, helping you create a clear, personalised plan that balances your current requirements with your future goals.
Three questions to help you decide if flexible retirement is right for you
Determining whether flexible retirement is the right path depends on your unique circumstances, including your financial situation, lifestyle goals and comfort with managing investments or using part of your pension pot to purchase a fixed term annuity. You can start by asking yourself these key questions:
- Do you have enough savings to support a phased withdrawal strategy?
- Are you confident in managing your investments and pension withdrawals independently or using part of your pension pot to purchase a fixed term annuity?
- Would you benefit from easing into retirement rather than stopping work abruptly?
If you’re feeling uncertain, it’s important to take the time to explore your options. Tools like the UK Government’s State Pension forecast can give you a clearer picture of your baseline income.
For personalised advice and guidance, speaking with a financial adviser is invaluable. At Flying Colours, our experts are here to help you understand your options and craft a plan that fits your unique situation.
How to plan your flexible retirement journey
As we’ve just explored, flexible retirement represents a modern and adaptable approach to life after work, offering a gradual transition and greater control. It allows you to stay financially secure while enjoying the flexibility to redefine your routine and priorities. However, making it work requires careful planning and a clear understanding of your goals and resources.
At Flying Colours, we specialise in helping people benefit from a flexible approach to retirement. Our expert advisers work with you to develop a personalised strategy tailored to your financial situation and lifestyle goals. Whether it’s creating a sustainable withdrawal plan, optimising tax efficiency or balancing multiple income streams, we’re here to support you every step of the way.
Flexible retirement isn’t a one-size-fits-all solution, but proper guidance can open the door to a more secure and enjoyable future. If you’re ready to explore your options, we’re here to help you create a retirement plan that works for you – get in touch today.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.