This article was last updated on 05/02/2025
Just like in yoga, finding the right balance requires a little flexibility. When it’s time to start drawing an income from your pension, having options is essential. Fortunately, savers now have much more choice than they used to. Pension legislation offers a flexible ‘pick and mix’ method for withdrawing funds from defined contribution pensions.
You don’t even have to stop working! Flexible retirement, or ‘phased retirement’, lets employees and the self-employed draw from their pension while continuing to work.
There are various ways you could do this. For example, you could reduce your hours with your current employer, moving from full-time to part-time. Or, you might move into freelance or consultancy work, giving you control over exactly how much work you do, and when.
You could even switch to an entirely new career that better suits the lifestyle you want.
Whatever you choose to do, this approach could allow you to:
- earn extra income alongside your regular salary;
- supplement your income while reducing your hours;
- continue contributing to your pension while you work; and
- defer your State Pension, increasing its payout for later.
Is flexible retirement a good idea? Keep reading to find out about your withdrawal options, tax implications of each, and the questions you should ask yourself.
Before you begin: what type of pension do you have?
This blog focuses on defined contribution pensions. In this type of pension, the value is determined by what’s paid in, including:
- your own contributions;
- employer and any third-party contributions;
- tax relief; and
- any investment returns generated.
Most modern workplace schemes are this type, as are the majority of private and personal pensions.
Alternatively, you may have a defined benefit pension. These provide a guaranteed income for life, with the amount you receive determined by factors such as:
- your salary while working for your employer, often at the end of your service or as an average throughout your career;
- your length of service;
- how much you pay in; and
- a calculation called the ‘accrual rate’.
Defined benefit pensions are now far rarer in private companies. That said, many civil service and local government schemes are this type.
Visit our pension types page to help you work out what kind of pension you have.
How can I take money from my pension?
The introduction of ‘pension freedoms’ reforms
In the past, if you retired with a defined contribution pension, you usually had two options to take an income. You could use it to buy a pension annuity - a product that guarantees you an income for the rest of your life. Or, you could put it into ‘capped drawdown’ where the annual income amounts were capped at a set level.
Since the introduction of the ‘pension freedoms‘ in 2015, savers aged 55 and over (rising to 57 from 2028) have more choice on how to take an income from their defined contribution pension.
From this point, you could access your fund in various ways - more on this later!
One of the biggest changes is the ability to access the first 25% of your fund tax-free from this age. You can now take the first 25% of your savings (totalled across all your pensions) without paying tax. You can draw this:
- as a single lump sum;
- as multiple lump sums taken over time; or
- gradually, with each withdrawal being 25% tax-free and 75% taxable.
This 25% is also capped by the lump sum allowance. In 2025/26, this is up to £268,275. The remaining 75% of your fund is taxable, with the rate depending on your total taxable income in that tax year.
Defined benefit pensions already provide an income based on your salary and length of service. So, the pension freedoms aren’t designed for savers in these schemes. In fact, if you have a defined benefit pension that’s worth over £30,000, you must consult with an Independent Financial Adviser (IFA) before trying to move it.
That’s because you need to understand the special or safeguarded benefits you might be giving up, such as a protected retirement age.
Your withdrawal options under pension freedoms
If you have a defined contribution pension, you have several options for accessing your savings when you reach 55 (57 from 2028). Let’s explore the three main ways you can withdraw your money.
1. Flexi-access drawdown
Flexi-access drawdown lets you access your pension savings whenever you need to. Meanwhile, your remaining funds stay invested in a way that’s specially designed to provide an ongoing retirement income.
Additionally, you can place funds into drawdown in phases, allowing you to flexibly manage your retirement income.
2. Annuities
A pension annuity is a financial product that pays you a guaranteed income for a fixed period or for the rest of your life. When you retire, you can choose to use some or all of your pension savings to buy an annuity.
3. Lump sum payment
A lump sum payment is a withdrawal from your pension. You can take lump sums of any size up to the value of your pension. Bear in mind that they may count towards your taxable income, and so taking large lump sums could incur a notable Income Tax bill.
As referenced above, the first 25% of your pension can be withdrawn tax-free, but you’ll need to pay tax on any further withdrawals.
You could pay less tax if you use your 25% tax-free sum on regular withdrawals throughout retirement, instead of taking it as a single lump sum.
What do I need to check before withdrawing?
Pension providers all have slightly different rules about accessing your pension. Depending on your provider, this could affect your flexible retirement options.
Check your pension policy to find out:
- the pension drawdown options they offer;
- the age you can start drawing down from your pension;
- whether you need to have paid into the pension for a qualifying number of years;
- if there’s a minimum or maximum amount you can withdraw while working; and
- whether there’s a limit to the number of times you can change your flexible working arrangements while withdrawing from your pension.
There can be penalties for breaking the terms of your pension arrangement. It’s worth checking your options with your provider first.
Has my employer agreed to my reduced hours?
If you plan on reducing your working hours and making up the difference with pension income, your employer will need to approve this first. They may need to adjust their own plans to accommodate your new schedule.
If you work for a larger company, they’re likely more familiar with such requests. It’s a good idea to check your firm’s flexible working policy and speak to the HR team for advice before talking to your manager.
Remember, any employee has the right to request flexible working from the first day of employment.
If you work at a smaller company, consider discussing your plans with a trusted friend, family member, or colleague first. They could help you to refine your approach and address any concerns.
Can I afford to flexibly retire?
When thinking about the kind of retirement lifestyle you’d like, you’ll need to make sure your pension pot is big enough to last. Retirement may be a lifestyle choice, but financing it is more of a maths equation.
It’s hard to predict how much you’ll need in your pension to enjoy a comfortable retirement since everyone’s circumstances are different. The average 65-year-old can expect to live for another 20 years, according to the latest government data, but many people live much longer.
In June 2025, Pensions UK released an update to its Retirement Living Standards. These standards illustrate what kind of lifestyle we can expect at retirement at three different income levels.
This shows that single retirees would need:
- £13,400 a year for a minimum lifestyle;
- £31,700 a year for a moderate lifestyle; and
- £43,900 a year for a comfortable lifestyle.
Note: these figures assume you own your home with no mortgage. They don’t account for mortgage, rent, or care costs.
You might not have enough in your pension to fully retire from age 65. But you may be tempted to draw down smaller amounts earlier to enjoy a flexible retirement. However, by choosing to flexibly withdraw at an earlier age, you may need to postpone the age at which you fully retire.
To give you an idea, imagine that you:
- are 65;
- have pension savings of £250,000 and took 25% tax-free at 55;
- receive the full new State Pension; and
- plan to take an annual income of £23,000 from your pot.
Source: Figures calculated using the PensionBee Pension Calculator.
In this case, your savings will last around 19 years. But, you might choose to save or invest your income during your flexible retirement instead of spending it.
Keep in mind that inflation can erode the real value of your savings over time, and the investment returns on your pension may differ from those of non-pension investments. You could also continue contributing to your pension - but you’ll need to be careful of any tax implications. More on this later!
Tax implications of taking your pension
How much tax will I pay?
When you reach 55 (57 from 2028) and start to withdraw from your pension, you can take the first 25% tax-free (whether as a lump sum or in stages). However, the remaining amount will be taxed as income, which could push you into a higher tax bracket.
Example 1 (before adding pension income)
- you earn £30,000 from your job;
- your total earnings are £30,000;
- this classes you as a basic rate taxpayer; and
- you’d pay £3,486 in Income Tax.
Example 2 (after adding pension income)
- you earn £30,000 from your job;
- you draw down £30,000 from the taxable portion of your pension;
- your total earnings are £60,000;
- this classes you as a higher rate taxpayer; and
- you’d pay £11,432 in Income Tax.
Source: Figures calculated using the MoneySavingExpert Income Tax Calculator. Please note that the net tax you’ll pay depends on your personal tax code, which can differ from one person to another.
You might find it useful to withdraw a smaller amount now and save the rest for later when you’re fully retired. This way, you can manage your tax liability more effectively.
However, be cautious about taking a larger lump sum all at once, as this could result in more tax than you expect. Providers will apply an emergency tax rate to your first income withdrawal, which may lead to a higher tax charge than you’ve prepared for.
Tax risks of contributing and withdrawing
Each tax year, you can tax-efficiently save up to a certain threshold (known as your ‘annual allowance‘) into your pension. In 2025/26, the standard annual allowance for most people is £60,000.
All contributions count towards your annual allowance. This includes personal contributions and those from your employer or another third party.
It also includes tax relief on personal and third-party (excluding employer) contributions. You can receive tax relief on the higher of £3,600 or 100% of your relevant UK earnings each tax year.
For the highest earners the annual allowance may be less depending on your adjusted income. This is known as the ‘tapered annual allowance‘.
If you exceed the limit, you may have to pay tax on any amount over the contribution limit. This is called an ‘annual allowance charge’, and it’d need to be reported on your Self-Assessment tax return. It’ll be payable at your highest rate of Income Tax, and added to your overall tax liability due when tax is calculated.
Alternatively, you may be able to ask your pension provider to pay the charge from your pension benefits. This is known as Scheme Pays, and you’d need to discuss it with your provider as soon as possible, as there can be strict deadlines. In some situations, you may be able to reduce the charge by bringing forward some of your annual allowance from previous years.
You can carry forward unused annual allowances from the three previous tax years, starting with the earliest tax year. You’ll need to have been a member of a pension for the previous tax years and your carry forward can’t exceed your gross earnings for the tax year in which the contributions over the annual allowance have been paid.
Why does this matter if I’m withdrawing money?
Another bit of legislation from the pension freedoms was the money purchase annual allowance (MPAA). Once you begin accessing the taxable portion of your defined contribution pension starting from 55 (57 from 2028), your annual allowance is permanently reduced to £10,000 a year (2025/26).
The MPAA is designed to help prevent ‘tax recycling’, where a saver could take their tax-free cash and put it back into their pension - receiving further tax relief.
Example: If you’re contributing £1,000 a month to your pension, then flexibly retire in May, you’ll need to reduce your monthly pension contributions for that tax year (and ongoing tax years) to ensure you don’t incur a tax charge.
You could reduce your risk of triggering the MPAA by:
- only taking a tax-free cash payment from your pension after 55 (57 from 2028); or
- taking income from a long-term annuity which doesn’t reduce.
Is it worth consolidating my pensions?
Consolidating your pensions can make managing your retirement savings simpler and more efficient. By combining your pots into one, you’ll:
- have a clearer view of your total savings, which can help with planning and decision-making;
- potentially save money if you’re paying fees across different providers; and
- reduce paperwork and have fewer statements to manage.
How to consolidate your pensions
PensionBee makes this straightforward by handling the transfers for you, even if you don’t have all the details of your old pensions to hand. Plus, once you sign up, your online account (the ‘BeeHive’) allows you to easily track and manage your savings in one place.
However, before consolidating, it’s important to check if any of your pensions come with valuable benefits or guarantees that you would lose by transferring. If you’re unsure, consider getting advice from a qualified IFA.
Feeling unsure? Book a free Pension Wise appointment
Finally, if you still feel uncertain about your retirement plans, consider booking a free appointment with Pension Wise. Provided by MoneyHelper, this government service is designed to help you understand your options with a defined contribution pension as you approach retirement.
The best part? The appointment is completely free and impartial, giving you the chance to ask any questions you may have without any pressure. You can also find more useful information related to pensions and broader financial matters on the MoneyHelper website.
You can usually only arrange a Pension Wise appointment if you’re under 50, although you may be able to over 50 in certain circumstances.
Summary
Planning for retirement can feel overwhelming. But with the right information and a clear understanding of your options, you can make confident decisions about your future. Whether you’re considering flexible retirement, exploring your withdrawal options from 55 (57 from 2028), or thinking about consolidating your pensions, it’s important to weigh the financial and tax implications carefully.
Remember, retirement isn’t just about numbers - it’s about creating the lifestyle you want while being sure your pension can support you for the years ahead. If you’re unsure about your next steps, don’t hesitate to speak to a professional for guidance. A free Pension Wise appointment or resources from MoneyHelper can provide valuable, impartial advice to help you navigate your retirement journey with ease.
Risk warning
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.
