How to Use Phased Drawdown for a Gradual Retirement

If you are approaching retirement but would like a more gradual transition, phased drawdown could be a great option to consider. Not everyone is ready to completely down tools and go into full retirement straight away, and this might not be the best option for you and your family financially either. 

Should this be the case, phased drawdown offers a way for you to gradually wind down, taking enough money for you to live comfortably on while also continuing to contribute to your overall pot. 

Learn more about phased drawdown and how it works below. 

What is Phased Drawdown?

Phased drawdown is a method of gradually transitioning pension savings into income over a period of time, rather than all at once. A popular method of retiring is to gradually reduce your working hours and slowly replace your earrings with your pension income, and this will typically be done through phased income drawdown.

Read our guide to learn more about pension drawdown.

How Does Phased Drawdown Work?

With phased drawdown, individuals can choose to move portions of their pension into income drawdown at different times. This approach helps manage tax liabilities and provides flexibility in retirement income planning.


With Phased Drawdown, you can:

  • Spread tax liabilities over multiple tax years by gradually withdrawing funds, potentially staying within lower tax brackets.
  • Take advantage of personal allowances and tax thresholds each year.
  • Tailor income withdrawals to your specific financial needs, adjusting the amount as circumstances change.
  • Supplement other sources of income, such as part-time work or other investments.

Phased Retirement and Tax

When it comes to phased retirement, tax implications are important to consider. If you work part time and take an income from your pension plan as well as your job, both sets of income will count towards your tax bracket.

However, there are certain ways to withdraw your pension that could help you to gradually retire in a more tax-efficient way.

Phased drawdown can offer a way for you to use tax free cash as ‘income’ and, therefore, limit the amount of income tax you pay. This is possible by drawing an income from just a portion of your pension fund at a time, using the tax free cash sum available. 

Let’s explore an example scenario, for an early retiree with a defined benefit pension scheme: 

If someone retires before pension age but has a Defined Benefit (DB) pension of £8,000 per annum, they can take an income of £4,570 per year up to £12,570 – keeping them tax-free.

At the same time, they could take tax free cash each month from their tax free cash allowance (let’s say £1,000 per month) alongside their fully used personal allowance and achieve a tax free annual income of £24,570. This could keep them income tax free from 60-67. 

If you receive a PCLS from a defined benefit pension, you could also use this cash to supplement your income. 

This is just one example but every situation is unique, so if you are considering phased retirement consult with a professional pension advisor who will be able to provide tailored advice.

You can book a free 30 minute consultation call here:

Advantages 

Some of the advantages of Phased Income Drawdown include:

  • Ability to remain tax-free while accessing your pension over time 
  • Provides flexibility in managing your retirement income
  • May benefit from potentially better market conditions over time.

Disadvantages 

Though typically the recommended option, there may be issues that arise with phased income drawdown, such as:

  • Complexity in managing multiple drawdown phases.
  • Income and investment returns are subject to market fluctuations.

What’s the difference between phased drawdown and UFPLS?

Phased drawdown involves gradually moving pension savings into income drawdown over time. Uncrystallised Funds Pension lump sums (UFPLS), on the other hand, allow individuals to take lump sum withdrawals from their pension fund without first entering drawdown. 

UFPLS is taken in one go or as a series of lump sums, each of which is partially taxed. While in phased drawdown, taxation occurs as and when income is withdrawn. UFPLS and drawdown are similar but there are some key tax differences to keep in mind. 

One of the disadvantages of taking lump sums via UFPLs is that it triggers the MPAA (Money Purchase Annual Allowance) as soon as you take your first lump sum. This may result in more income tax being paid than taking income via monthly payments of tax free cash (phased drawdown).  

With drawdown, the MPAA is only triggered once you start to withdraw a taxable income; it won’t be triggered when you take your tax free cash (Pension Commencement Lump Sum or PCLS).  

Should I Choose Phased Drawdown?

If you’re considering retirement income options, phased drawdown could be a smart choice. Unlike traditional lump sum withdrawals, this strategy allows for gradual access to your pension savings over time, potentially reducing tax liabilities and offering flexibility in managing your retirement income. 
With the ability to tailor withdrawals to your financial needs and market conditions, phased drawdown, often implemented within a SIPP, provides a structured approach to retirement planning. To explore whether phased income drawdown is the right fit for your retirement goals and financial situation, get in touch with our pension advisors today for personalised guidance and support.