Tax treatment depends on your circumstances and is subject to change
Retirement isn’t what it used to be. The old idea of finishing work on a Friday and starting retired life on Monday is fading. Today, more people in their 50s and 60s are easing gradually into retirement through working part-time, freelancing, or combining earned income with flexible pension withdrawals.
According to the Financial Conduct Authority’s (FCA) Retirement Income Market Data 2024/25, the number of people accessing their pensions for the first time rose to 961,575, an 8.6 percent increase on the previous year. Of these, 349,992 entered drawdown (up 25.5 percent).
When reading this article, please bear in mind that tax treatment depends on your circumstances and is subject to change.
The trend is being driven by both choice and necessity. Many people in their 50s and 60s may feel they don’t want, or can’t afford, to stop work entirely. Some want to stay active or enjoy the social benefits of work, others face higher living costs and frozen tax thresholds.
Combining part-time earnings with pension income can be an excellent way to smooth the path into retirement, but it also introduces tax complexity.
For example, Jane, aged 61, earns £35,000 from part-time consulting and draws £10,000 a year from her pension. Because her total taxable income is £35,000, all pension income above her 25 percent tax-free cash is taxed at 20 percent. If she withdrew an extra £5,000, part of it could fall into the higher-rate band once PAYE coding and frozen thresholds are applied.
The FCA notes that fewer than one in three people accessing their pensions do so after receiving regulated financial advice meaning many face avoidable tax bills or restrict future saving potential.
Those who take taxable pension income while still working can trigger the Money Purchase Annual Allowance (MPAA), reducing future tax-relieved contributions from £60,000 (or your gross annual salary, whichever is lower) to £10,000 per year. It’s designed to prevent people taking money out and reinvesting it for further tax relief but often catches those who simply want to keep working.
If Jane’s employer contributes £8,000 a year, she has only £2,000 of MPAA headroom for personal contributions. Once triggered, the restriction is permanent. Taking only the 25 percent tax-free lump sum or buying an annuity does not trigger the MPAA.
For many still working, deferring the State Pension can be tax efficient. Each full year of deferral increases payments by around 5.8 percent. Someone entitled to the full new State Pension of £221.20 per week (2025/26 rate) would gain roughly £1,330 per year for life after a two-year deferral. For higher-rate taxpayers still earning, this can reduce tax now and boost guaranteed income later.
Working and drawing pensions simultaneously means managing overlapping tax rules. Pension income is added to salary under PAYE; National Insurance stops at State Pension age; and the £12,570 Personal Allowance remains frozen until April 2028. With fiscal drag pushing more older workers into higher bands, reviewing income strategy annually is crucial.
Partial retirement isn’t only about numbers. For many, continuing to work provides structure, community and purpose. Flexible work arrangements such as consultancy or three-day weeks can also reduce reliance on early pension withdrawals, preserving savings for later life.
To make partial retirement work effectively, it helps to plan in stages:
Interpreting both the FCA’s Retirement Income Market Data (2024/25) and ONS data1 highlights that retirement is becoming a process, not an event. The ONS projects that the average person will spend around 22 years in retirement, with many of those years spent in part-time or flexible work. That means income planning now needs to account for transition as much as destination, balancing today’s flexibility with tomorrow’s stability.
Partial retirement offers choice and control, but also new complexity. FCA data shows that many are drawing pensions while still earning. Done well, it can create a smoother, more enjoyable retirement. Done poorly, it can trigger unnecessary tax or limit future saving.
If you’re planning to scale back work rather than stop completely, build a plan first, ideally with professional advice. The right balance between earnings, withdrawals, and tax can make your next chapter both flexible and secure.
We can help you to make the best possible decisions when it comes to your pension.
Taking pension money early is not right for everyone as it will leave you worse off in retirement. Also, tax treatment depends on your circumstances and is subject to change. That’s why it makes sense to get help from a regulated specialist.
