What is phased retirement? Employee benefit explained Offering a flexible retirement benefit is a win-win for employees and their employers. We explain how it works, and what the advantages are for business owners. Written by Helena Young Updated on 2 August 2023 Our experts We are a team of writers, experimenters and researchers providing you with the best advice with zero bias or partiality. Written and reviewed by: Helena Young Lead Writer Phased retirement (also known as flexible retirement) is an increasingly popular employee perk. Through it, staff can ease into part-time employment while supplementing their income with retirement benefits.It might be a niche concept now, but not for long. The state pension age is set to reach 67 by 2028. As it becomes harder for older workers to hang up their hats, phased retirement is poised to become one of the most sought-after bonuses for UK employees.Employers can prepare for the wave of early retirement seekers with a phased retirement policy. This is also a great way to retain the talents of older workers amid mounting labour shortages. But there are some key considerations – both legal and financial – to be aware of.In the below guide, we’ll share some practical tips on how to implement phased retirement in your business, and explain the advantages it can bring. This article will cover: How does phased retirement work? How to design a phased retirement policy Legal obligations for employers Benefits and considerations of phased retirement for employers Conclusion Phased retirement FAQs How does phased retirement work?Phased retirement is an HR tool where an eligible employee is allowed early access to some of their retirement benefits (like a pension or a lump sum), even though their employment continues.Phased retirement plans can be a formal or informal process. It’s important to note that what the policy looks like will differ from organisation-to-organisation, or even person-to-person.However, the common thread is that the employee reduces their work hours or changes their work schedule, supplementing their income with their pension to avoid a dramatic pay reduction.Savvy business owners will often use this time to work with the retiree to ensure that their valuable knowledge is transferred to coworkers. This ensures the company will not suddenly lose access to a key team member’s skill set when the worker fully retires. How to design a phased retirement policyAny business that decides to offer phased retirement to employees should lay the groundwork with a clear and legally compliant retirement policy.This should specify the rules on phased retirement and inform employees about the options available to them, so they can decide whether or not to apply for the benefit. Guidelines should communicate:Rules on eligibility, including age requirementsWithdrawal options for those seeking early accessFlexible working policies for phased retireesConditions phasing employees must fulfilTimeline for phased retirementBelow, we’ll go into each of these areas in more detail so you know exactly what each section of the policy should include.1. Eligibility criteria and age requirementsThe employee must reach a certain age before they can start dipping into their workplace pension. The minimum age required will depend on the pension scheme, but most providers only allow money to be taken out after an employee reaches 55.However, because phased retirement is an informal policy, businesses can set their own rules for eligibility. For example, you might choose to offer the perk to individuals who have worked at your company for at least 10 years. Nonetheless, it’s best to be flexible here and work with people on a case by case basis if needed.After all, if a valued employee with five years’ experience at the company requests a phased retirement, it would probably be smarter to accept and hold onto their expertise than potentially cause them to resign.Can an employee start phased retirement earlier than 55?In some cases, such as if the employee is retiring early due to ill health, the employee may be able to take a phased retirement before the age of 55. Their employer should contact the pension scheme to clarify their policy on early withdrawals.2. Flexible working policiesUsually the transition from fully employed to fully retired is spread over a number of months or years. In that time, the employee may change roles or adopt a new flexible working arrangement. For example, they may move to:1. Part-time employment. This is loosely defined as the employee dropping down hours (usually so they are working less than 35 hours or more each week)2. Job-sharing. This is where two (or more) part-time employees divide the responsibilities of a role between them to cover one full-time position3. Working on a seasonal basis. This is a type of temporary employment in which the person works during certain times of the yearBusiness owners are free to set their own specifications on who qualifies for phased retirement. However, under new laws introduced by the Flexible Working Bill, all employees have the legal right to request flexible working hours at least twice a year, regardless of their length of service.If the employer refuses a request for phased retirement, they must provide proper reasoning for why they made the decision.The bill also means that all employees are entitled to appeal a rejected request for flexible working or phased retirement. This is why it’s a smart idea to have a prepared policy in place explaining the company’s stance on the perk.3. Pension withdrawal options in the UKThere are four main ways that an employee might withdraw the money in a workplace pension (also known as a personal pension). These are: Take a lump sum: retirees can take up to 25% as a tax-free lump sum. This is an attractive option if the worker is planning to splurge on a big retirement celebration, like a holiday abroad. Purchase an annuity: most pension providers permit an employee to exchange some or all of their savings for an annuity to guarantee a set income for the rest of their life. Use income drawdown: the employee leaves their pension funds invested and takes a regular income direct from the fund. This is a gamble compared to taking an annuity as the value of the income is tied to the success of the investments.Draw from state pension: employees can start receiving their state pension at 65, regardless of whether or not they stop working. If they decide they don’t need their state pension yet, the employee can also just defer it for an increased pension later on.Your phased retirement policy should lay out the above choices for employees, so they can make an informed judgement on the strengths and weaknesses of each option.4. Expectations for phasing employeesOne of the key benefits of phased retirement for employers is you can hold onto key talent for longer. This means you can put the individual’s skills to good use during the interim between their phased and full retirement.As with any change to a person’s role responsibilities, any new demands should be clearly communicated in the employee handbook. For example, you might specify that phasing employees must host a monthly training workshop to mentor less-experienced colleagues.5. Timeline for phased retirementThe final thing to consider is for how long the employee will be phasing their retirement. The length of time could depend on the employees’ job role, their skill set, and the organisation’s objectives.Any information included in the policy should be kept broad, so you can iron out the specifics one-to-one with the employee.Whatever is decided, it’s crucial you cement these dates early on and agree on a timeline that both you and the employee are happy with. That way, you’ll have plenty of notice when the phasing employee decides they want to fully retire. Legal obligations for employersThe choice to retire is a personal one that can carry a lot of emotional weight for the employee. Companies should educate themselves on the laws surrounding retirement to ensure they cannot be accused of unlawful discrimination.Under the Equality Act 2010, employers must not:Ask employees direct questions about if they are planning to retireRaise or prompt any discussion about when an employee might retirePut pressure on the employee to retire at a certain dateYou can make sure an employee is aware of the options available to them, however. For example, during an appraisal, the employer might ask open-ended questions, such as ‘where do you see yourself in two years?’, to learn about the person’s future work plans.If the employee initiates a discussion about their medium or long-term plans, including phased retirement, an employer can then bring up the subject of leaving dates and any work arrangements leading up to retirement.Protections for part-time employeesIt’s important to note that there are protections in place for part-time employees, to prevent them from being treated less favourably than equivalent full-time workers. A phasing retiree who has reduced their hours should still get:Sick pay (including paternity and adoption leave and pay)Access to training and development opportunitiesHoliday entitlementSelection for promotion and transfer, or for redundancy Benefits and considerations of phased retirement for employersPhased retirement has plenty of benefits for the employer, as well as the employee. Here are the top three:1. Boosted employee morale and retentionGiving older workers the option to switch to a part-time position can have a dramatic impact on employee engagement. Working flexibly improves work-life balance for staff, which will help them to feel more motivated (and therefore productive) at work.On top of this, they will work for an employee who is committed to building a diversified, flexible workplace.2. Addressing talent shortagesParticularly in today’s harsh jobs landscape, an employee’s sudden retirement creates gaps in the workforce. Holding onto talented older coworkers will give hiring managers more breathing room, and also prove more cost-effective than recruiting new employees.This will also provide you with a suitable opportunity to outline your general plan for the future of the business and gather vital information for succession planning.3. Transferring skills to younger workersBeing able to hold onto experienced talent for longer will give firms more time to prepare for their full retirement a few years down the line.In the interim, many bosses will ask retirees to adopt a coaching leadership style to pass on the skills and knowledge they’ve accumulated to younger colleagues; a great way to upskill less experienced staff.What are the challenges of a flexible retirement benefit?1. Balancing workload and transition period Naturally, if an employee chooses to reduce their working hours or role responsibility as part of a phased retirement plan, productivity will drop. While not as dramatic as an employee leaving the workforce, employers will need to take some steps to prepare for the transition.In some cases, the employee might have been particularly crucial to operations, and a replacement part-time hire might need to be made to fill the gaps.2. Ageism in the workplaceEmployees have a right to decide when to retire. But stereotypes, such as assumptions about older colleagues’ ability to learn new skills, can make some employees feel compelled to retire before they want to.Companies that offer a phased retirement plan should demonstrate that they value an older worker’s experience, and encourage their career advancement, to ascertain they are not discriminating against a worker due to their age.It is also a good idea to offer training and guidance to managers and other employees on the topic of ageism. This will ensure that you create a positive and non-discriminatory organisational culture where older workers feel welcomed and supported.3. Financial implications for employeesCashing in a pension early means that the employee has fewer years to save, heightening their risk of hitting a pension shortfall and having to return to full or part-time work down the line.Another concern is if the employee triggers the Money Purchase Annual Allowance (MPAA). If this happens, the amount of tax-free money that a phasing employee can contribute to their pension pot per year will reduce from £60,000, to £10,000 a year.Employers should encourage the phasing employee to use a pension calculator to work out their retirement income and establish how realistic phased retirement is for them. ConclusionWith the state pension age set to rise in just four years’ time, phased retirement is gaining popularity as an appealing option for employees. It allows for a gradual transition from full-time work to retirement without turning the taps off on their income stream.More small businesses are recognising the potential benefits of this perk, especially within the background of today’s labour shortages. Phased retirement boosts morale, productivity, work-life balance, and addresses talent shortages by transferring skills to younger colleagues.However, navigating the legal and financial aspects is crucial. A well-planned approach that considers both the business impact, and the effect on the employee, means the business can capitalise on the trend and its potential growth benefits. Phased retirement FAQs What are the eligibility rules for phased retirement? Employees must be over the age of 55 to begin withdrawing money from their pension pot. Only in exceptional circumstances (usually in the case of ill health) can the worker apply to withdraw their money earlier. What are the benefits of phased retirement for employers? Phased retirement means that a business can retain key talent while replacements are trained or recruited, easing the pressure on hiring and supporting a more carefully considered succession plan. Workers preparing to retire will also feel more motivated and supported, improving their wellbeing. Can I refuse an employee's request for phased retirement? Yes, the employer does not have to agree to an employee’s request for phased retirement if they think it will have a negative impact on the business. However, you must deal with the request in a reasonable manner and provide proper documented reasoning for the decision. Share this post facebook twitter linkedin Tags News and Features Written by: Helena Young Lead Writer Helena is Lead Writer at Startups. As resident people and premises expert, she's an authority on topics such as business energy, office and coworking spaces, and project management software. With a background in PR and marketing, Helena also manages the Startups 100 Index and is passionate about giving early-stage startups a platform to boost their brands. From interviewing Wetherspoon's boss Tim Martin to spotting data-led working from home trends, her insight has been featured by major trade publications including the ICAEW, and news outlets like the BBC, ITV News, Daily Express, and HuffPost UK.