Phased Retirement: How to Draw Pension Income in Stages UK 2026

Retirement does not have to happen on a single day. An increasing number of people choose to wind down their working hours gradually -- moving from full-time employment to part-time work before eventually stopping work altogether. This approach, often called phased retirement, creates real opportunities to draw pension income in a tax-efficient way. But it also creates traps, most notably the money purchase annual allowance, which can curtail your ability to keep contributing to your pension while drawing from it. This guide covers the key options and pitfalls for 2026.

Why Phase Your Retirement?

The main reasons people choose phased retirement are:

• Tax efficiency. Drawing income in stages across multiple tax years allows you to use the personal allowance (GBP 12,570 in 2026/27) and the basic-rate band (up to GBP 50,270) each year, rather than taking a large lump sum in a single year and pushing income into higher bands.
• Continued pension contributions. If you are still earning, you can continue contributing to your pension and receiving employer contributions, building the pot further while drawing from another segment.
• Lifestyle. Many people want to keep working for purpose and social engagement but at reduced hours. Part-time work plus modest pension income can replace a full salary comfortably.

Flexi-Access Drawdown (FAD)

Flexi-access drawdown is the most common vehicle for phased retirement. Under FAD, your pension pot remains invested and you draw income as and when you choose. You can take 25% of the designated fund as a pension commencement lump sum (PCLS) -- commonly called tax-free cash -- and then draw the remainder as taxable income.

In a phased approach, you do not designate the entire pot at once. Instead, you designate small segments of the pot year by year. Each designation unlocks 25% of that segment as tax-free cash, with the balance entering drawdown. This spreads the tax-free cash across multiple years, which can be useful for topping up income to just below a tax threshold each year.

For example, if your pot is GBP 400,000 and you designate GBP 40,000 per year, you receive GBP 10,000 per year as tax-free cash plus whatever income you draw from the drawdown fund.

Uncrystallised Funds Pension Lump Sums (UFPLS)

An alternative to FAD is the UFPLS. Each UFPLS withdrawal is taken 25% tax-free and 75% taxable as income, all from the uncrystallised pot. No separate designation is required.

UFPLS can be useful for one-off withdrawals where you want simplicity, but the 75% taxable element means you need to plan withdrawals carefully to avoid pushing yourself into a higher tax band.

The Money Purchase Annual Allowance Trap

This is the critical warning for phased retirement planners. Once you access pension funds flexibly -- by taking income from a flexi-access drawdown arrangement (not just tax-free cash) or by taking a UFPLS -- you trigger the money purchase annual allowance (MPAA). In 2026/27, the MPAA is GBP 10,000.

From the date you trigger the MPAA, you can only contribute GBP 10,000 per year to defined contribution pensions. The normal annual allowance of GBP 60,000 no longer applies to money purchase contributions. If you are still working and your employer contributes to a workplace pension, those contributions count towards the MPAA too.

The MPAA cannot be avoided once triggered -- even if you stop drawing income from your pension. It applies for the rest of your life. This is why the sequencing of when and how you access your pension is so important.

If you want to keep making significant pension contributions -- say, you are earning GBP 50,000 and want to contribute GBP 20,000 per year -- do not trigger the MPAA until you are certain you no longer need to make large contributions.

Taking Tax-Free Cash Without Triggering the MPAA

Taking only the pension commencement lump sum (tax-free cash) without putting the remainder into drawdown does not trigger the MPAA. You can designate a segment, take the 25% tax-free cash and buy an annuity with the remaining 75% -- or simply leave the undrawn balance untouched in the uncrystallised pot -- without triggering the MPAA.

This means you can access tax-free cash in stages (through phased designation) while continuing to contribute up to the full GBP 60,000 annual allowance, provided you do not draw taxable income from a FAD arrangement.

The State Pension and Sequencing

The new State Pension pays GBP 241.30 per week (GBP 12,548 per year) for a full entitlement based on 35 qualifying NI years. This income is taxable and uses your personal allowance. For someone with the full State Pension and a personal allowance of GBP 12,570, there is effectively only GBP 22 of personal allowance remaining each year.

This means that once State Pension kicks in, almost all private pension income is taxable. Drawing down more private pension income before State Pension age -- while you still have a larger personal allowance available -- can be highly efficient for those who can afford to do so.

Deferring State Pension

You can defer taking your State Pension beyond State Pension age. Every nine weeks of deferral increases your weekly pension by 1%. Deferring for one full year adds approximately 5.8% to the weekly amount permanently. Whether deferral is worthwhile depends on your health, other income in the deferral period and how long you expect to live.

Carry Forward for Higher Contributions

If you have not fully used your annual allowance in the past three tax years and were a member of a registered pension scheme in those years, you can carry forward unused allowance in the current year. This allows contributions above GBP 60,000 in a year where, for example, you receive a large redundancy payment or a business sale proceeds.

Carry forward is not available once the MPAA has been triggered in respect of money purchase contributions.

Key Questions to Answer Before Drawing Down

Before taking any income from a defined contribution pension in phased retirement, consider:

• Do I still plan to make large pension contributions? If yes, protect the GBP 60,000 annual allowance by avoiding flexible income drawdown until contributions are complete.
• What is my marginal income tax rate in each year of phased drawdown?
• When will my State Pension start and how will it interact with private pension income?
• Have I maximised my ISA allowance (GBP 20,000 per year) as a tax-free savings buffer?

Use the CalcHub pension drawdown calculator to model different phased retirement income scenarios: https://calchub.uk/calculators/pension-drawdown