Retirement does not have to mean working full-time on Friday and stopping completely on Monday.

For many self-employed people, the more natural route is to ease back. That might mean working fewer days, choosing only the most enjoyable clients, handing responsibilities to somebody else or gradually winding down a business.

A pension can sometimes help bridge the income gap during this transition. Instead of taking the whole tax-free lump sum or moving the entire pension into drawdown at once, benefits may be taken in stages.

This is often called phased or partial drawdown. It can offer flexibility, but the tax, investment and contribution rules need careful thought—particularly when the person is still earning and paying into a pension for self-employed retirement.

What does phased retirement actually mean?

Phased retirement describes a gradual move from work into retirement rather than a single finishing date. The working pattern and pension decisions do not have to change at exactly the same time.

Someone might reduce their working week from five days to three and use a modest pension withdrawal to replace some lost income. Later, they could reduce their hours again, take further benefits and eventually stop working.

This can be particularly suitable for self-employed people because they often have more control over their workload. It may also allow time to complete existing projects, transfer client relationships, train a successor or sell parts of the business in an orderly way.

The pension arrangement supporting this transition is usually a defined contribution pension, where the retirement fund has a value that can be accessed in different ways. Defined benefit schemes work differently and have their own rules.

How phased or partial drawdown works

With phased drawdown, only part of a pension pot is moved into drawdown at a time. The remaining amount stays uncrystallised and invested until it is needed later.

Each time a portion is moved into drawdown, up to 25% of that portion can usually be taken as tax-free cash, subject to the individual’s available lump sum allowance. The balance remains invested in the drawdown fund and can provide taxable income when required.

For example, somebody with a £300,000 pension might decide to designate £20,000 rather than the entire pot. They could normally take up to £5,000 of that portion as tax-free cash and leave £15,000 invested in drawdown. The other £280,000 would remain untouched at that stage.

This is only an illustration. Charges, investment performance, tax allowances and scheme rules can change the outcome.

Another flexible method is taking a series of lump sums directly from uncrystallised funds, often known as UFPLS. Usually 25% of each payment is tax-free and the remaining 75% is taxable. Although the two methods may appear similar, they can have different consequences for future contributions and cash-flow planning.

Why gradual withdrawals may suit the self-employed

Self-employed income is rarely as neat as a monthly salary. A consultant may have a strong final quarter, a tradesperson may reduce physically demanding work, or a business owner may continue receiving income from contracts long after day-to-day involvement has reduced.

Phased retirement can allow pension income to be adjusted around that pattern. A smaller withdrawal might be taken in a profitable year, with more support used during a quieter period.

It can also reduce pressure to extract every penny from the business immediately. Instead of relying on one uncertain sale date, retirement income can be built from several sources: reduced earnings, pension withdrawals, cash savings, investments and eventually the State Pension.

However, flexibility does not mean withdrawals should be improvised. Business income, pension income and tax need to be forecast together. Otherwise, a withdrawal intended to cover a shortfall could create an unexpected tax bill or leave too little invested for later life.

Spreading withdrawals may help manage Income Tax

Tax-free cash is only one part of the decision. Most pension income above the tax-free element is added to other taxable income for that tax year.

A self-employed person may therefore pay tax on a combination of business profits, pension withdrawals, rental income and the State Pension. Taking a large taxable withdrawal in a busy trading year could move more income into a higher tax band.

Spreading pension withdrawals across several tax years may help use available allowances and tax bands more efficiently. It may also allow withdrawals to rise or fall as earned income changes.

The first flexible pension payment can sometimes be taxed using a temporary or emergency tax code. This may result in too much tax being deducted initially. Any payment should be checked, and a refund can be claimed from HMRC where appropriate.

Tax planning should not be allowed to override the wider retirement plan. Taking less tax today is not automatically beneficial if the remaining investments no longer match future spending needs or the withdrawal method creates other restrictions.

Be careful of the Money Purchase Annual Allowance

This is one of the most important points for anybody who intends to keep working and contributing.

Taking taxable income flexibly from a defined contribution pension will normally trigger the Money Purchase Annual Allowance, known as the MPAA. In the 2026/27 tax year, this generally limits future tax-relieved defined contribution pension savings to £10,000 a year.

That is much lower than the standard annual allowance of £60,000 for most people. Once triggered, unused MPAA cannot normally be carried forward from earlier tax years.

Taking tax-free cash without taxable income does not always trigger the MPAA, but the method matters. An UFPLS payment normally includes taxable income and is usually a trigger, even when the main aim was to access cash.

This can be especially significant when business profits remain strong or a limited company is still making employer pension contributions. Before the first withdrawal, check whether further contributions are planned and whether the chosen method will restrict them.

Your pension remains exposed to investment risk

Money left in a pension drawdown arrangement remains invested. Its value can rise or fall, and income is not guaranteed.

Market falls can be particularly damaging during the early years of retirement if withdrawals continue at the same level. Units may have to be sold when prices are low, leaving less invested to benefit from a later recovery. This is sometimes called sequencing risk.

A sensible phased-retirement plan should consider how much money is needed soon, how much can remain invested for longer and whether an accessible cash reserve is available. The investment strategy may need to change as the balance between working income and pension income shifts.

Charges also matter. Some providers charge for drawdown, regular payments or one-off withdrawals. Not every existing pension offers phased drawdown, and transferring simply to obtain the feature could mean giving up valuable guarantees or protected benefits.

Do not treat tax-free cash as free income

Most people can usually take up to 25% of their pension benefits tax-free, subject to their available lump sum allowance. For most people, the standard lump sum allowance is £268,275 across their pensions.

Taking the full amount at the first opportunity is not compulsory. With phased drawdown, tax-free cash can be released gradually, which may help support the transition while leaving more of the pension invested.

Yet tax-free does not mean consequence-free. Money removed from the pension may be spent, held in low-interest cash or become part of the estate. It will no longer benefit from the pension’s investment environment, and the retirement fund available for later income will be lower.

Start with a clear purpose. Tax-free cash might help clear an expensive debt, create a suitable emergency reserve or fund a planned purchase. Taking it simply because it is available is not a retirement strategy.

Fit the State Pension and business exit into the same plan

The State Pension may eventually provide a dependable foundation beneath flexible withdrawals, but the amount depends on the National Insurance record.

Self-employed people should check their State Pension forecast and NI history rather than assuming every year of trading has produced a qualifying year. Gaps may sometimes be filled, although paying voluntary contributions is not automatically worthwhile for everybody.

It is also important to be realistic about the value of the business. A retirement plan that depends on selling it for a particular price can be vulnerable if a buyer is not found, key clients leave or the business relies heavily on the owner personally.

Phased retirement can create time to make the business less dependent on its owner, prepare reliable accounts and plan a handover. Pension withdrawals should complement that exit plan, not disguise the fact that one has not yet been made.

When can you start?

Most people can currently access private pension benefits from age 55. The normal minimum pension age is due to rise to 57 on 6 April 2028, although some schemes may provide a protected pension age and ill-health rules can also apply.

Being old enough to access a pension does not necessarily mean it is the right time. Starting early means the fund may need to support income for longer, while delaying could allow further contributions and investment growth.

There is no requirement to take a private pension when the State Pension begins, nor to claim the State Pension as soon as State Pension age is reached. Deferral may increase later payments, but the decision depends on health, cash flow, tax, benefits and how long it would take to recover the income given up.

Questions to answer before taking the first payment

A useful plan should answer more than “How much can I withdraw?” Consider:

• How much will business income reduce, and when?
• Which spending is essential and which can vary?
• What cash reserve is available outside the pension?
• Will taxable withdrawals trigger the MPAA before further contributions are made?
• How will withdrawals affect Income Tax in each tax year?
• Does the current provider offer suitable partial drawdown?
• Are any guarantees or protected benefits attached to the pension?
• How would the plan cope with weak investment returns?
• When will the State Pension and any other secure income begin?
• Should part of the fund provide guaranteed income later?

Cash-flow modelling can help show how different working patterns, investment returns and withdrawal levels might affect the fund over time. It cannot predict the future, but it can expose where a plan relies on optimistic assumptions.

A flexible route needs a disciplined plan

Phased retirement can give self-employed people something a fixed retirement date cannot: room to adjust.

It may allow work to reduce gradually, taxable income to be managed across different years and tax-free cash to be released only when there is a reason to use it. The remaining pension can stay invested and an annuity or other secure income can still be considered later.

The trade-off is that more decisions remain with the individual. Withdrawals, investment risk, tax and business income must be reviewed regularly. Taking too much too soon—or accidentally restricting future contributions—can weaken the flexibility the strategy was meant to provide.

Westfield Financial Solutions can help bring your wider financial position into focus as retirement approaches. For pension, investment and retirement advice, Westfield refers clients to Lakeside FS Ltd. You may also find our guides to the five-year retirement countdown, pension tax-free cash and retiring with a £250,000 pension pot useful.

To discuss your wider financial planning, call 01274 036 888, email info@westfieldfs.co.uk or contact Westfield Financial Solutions.

Important information: This article is for general information only and does not constitute personalised pension, investment, financial or tax advice. Pension and tax rules can change and their effect depends on individual circumstances. The value of investments and any income from them can fall as well as rise, and you may get back less than you invest. Pension benefits are normally inaccessible until the applicable minimum pension age.

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