Flexible Retirement: what is it and how does it work


Published  24 July 2023
   4 min read

Flexible retirement has become an increasingly attractive concept for people aged 55 and over, especially as the age for receiving a state pension creeps up. But, is this a realistic way to approach your retirement finances?

Here, we take a closer look at what flexible retirement is and whether it’s a good idea.

What is flexible retirement?

Flexible retirement shouldn't be confused with 'flexible access' or 'pension drawdown' which is a way of accessing your pension savings.

Flexible retirement is an agreement between you and your employer to change the nature or pattern of your work in the lead up to retirement. It might be that you decide to reduce the number of hours you work in order to give you more spare time to pursue hobbies, or perhaps retrain to do something completely different in your later years.

Choosing to reduce your working hours is likely to reduce your income. However, if you're over 55 (increasing to 57 from 6 April 2028), you could use your pension savings to make up some of these reduced earnings. This could give you more flexibility around your pattern of work as you lead up to full retirement.

How can my pension fund a flexible retirement?

If you decide to take a flexible retirement, you'll probably need to think about how you'll make up your reduced earnings.

Flexible access (sometimes called pension drawdown) lets you access your pension savings as you need them - so you can take more money when you need it, and less when you don't. Any money left in your plan continues to be invested and you can use this money to explore other options further down the line. You would normally take 25% tax free cash in connection with your pensions drawdown.

You might also choose to take some of your pension savings as one, or more, cash lump sums. Again, allowing for flexibility as your working patterns change up to your full retirement. The first 25% of your pension savings can again usually be paid tax free, while the rest will be taxed as income at your normal rate. Again, any money left in your plan continues to be invested and can be used later to explore other options.

Once you start to withdraw money from your pension savings, you might want to consider where you leave your money invested. Generally speaking, your pension savings have to last you until the end of your life and, as with all investments, the value can go down as well as up. You might now have a different attitude to risk compared to when you first started to invest your pension savings, so it's a good idea to look at your investment options.

Perhaps flexible access, or a cash lump sum doesn't suit your needs. Instead, you could consider turning your pension savings into a regular income that'll keep going as long as you do. This is called 'buying an annuity' or a 'secure income'. However, it's worth noting that this option might not offer the amount of flexibility you could need if you decide to take a flexible retirement.

As with all financial decisions, you should assess all your options carefully, picking investments and funds that tie in with your risk tolerance and plans for future withdrawals.

Because there's a lot to consider when choosing where to invest your money, we strongly recommend speaking to a financial adviser before making any decisions. A financial adviser may charge you for their services but they should agree any charges with you upfront.

Is flexible retirement a good idea?

Flexible retirement is a lifestyle choice that allows you to slow down a little in your current job before stopping work completely. Perhaps it will make more space for you to spend time with family and loved ones, or to learn new skills that could help with the transition into full retirement. And having access to your pension may give you financial options that allow this to happen.

Flexible retirement is a big decision and not one that should be entered into lightly. It's often best to seek professional advice before making changes to your pension because financial decisions often need careful management. The value of your savings can go up and down, and if you take out too much money, live longer than expected, or if your investments don't perform as well as you'd hoped, you could run out of money before you die.

What are the pros and cons of flexible retirement?

As with anything, flexible retirement has pros and cons that you should consider before making any decisions.

The pros of flexible retirement

  • Flexible retirement could give you the opportunity to take life slightly easier, without giving up the structure and companionship of employment.
  • If you reduce your hours or switch to a lower paid job, you can continue earning a salary, and any gap in your earnings could be filled by drawing on one or more of your pensions.
  • Reducing the hours you work, topped up by an income from your pension, might allow you to adjust to retirement while maintaining a decent standard of living.
  • A flexible retirement might allow you to extend your working life. By reducing your hours, and topping it up with your pension, you might be able to work until you're much older.


The cons of flexible retirement

  • Some people won’t have enough pension savings to make flexible retirement practical.
  • You may not have enough saved in your pension plan to be able to top up your income with it.
  • Taking a flexible retirement too early, or without careful planning, might force you back into work if you run out of money sooner than you anticipate.
  • Taking money from your pension at the same time as earning money through employment could affect the rate you pay income tax at by moving you into a higher tax band.

Find out more about retirement options from Royal London