Most people assume it is one or the other. You either keep working, or you retire and start drawing your pension. You do not do both at once.

But that is not how retirement actually happens any more. More and more people wind down in stages: dropping to a three-day week in their late 50s or early 60s, then topping up the lost income from a pension pot they can already access from age 55.

The question is not whether you can work part-time and draw your pension. You can. The question is how to blend the two without paying more tax than you need to, or quietly closing down your ability to keep saving.

The three-day week is the new retirement

Full-stop retirement at 65 is increasingly rare. What is common is the glide path: reduce your hours, keep some salary coming in, and use your pension to bridge the shortfall until the State Pension arrives.

It is a genuinely smart way to retire. You keep earning, you stay connected to work you enjoy, and you take pressure off the pot so it lasts longer.

The catch is that the tax system treats your salary and your pension income as one combined figure. Get the blend wrong and a decision that felt sensible can cost you real money. Get it right and phased retirement becomes one of the most tax-efficient ways to stop working.

The mechanic that catches people out

Here is the rule that changes everything: taxable pension income stacks on top of your salary. It does not get its own fresh set of tax bands. It sits on top of what you already earn.

For 2026/27, the income tax bands in England, Wales and Northern Ireland look like this (rates and bands differ in Scotland):

• Personal Allowance: £0 to £12,570, taxed at 0%
• Basic rate: £12,571 to £50,270, taxed at 20%
• Higher rate: £50,271 to £125,140, taxed at 40%
• Additional rate: over £125,140, taxed at 45%

So if you earn a £30,000 part-time salary and draw £25,000 of taxable pension income on top, your total taxable income is £55,000. The slice above £50,270 is taxed at 40%, even though neither the salary nor the drawdown would have reached the higher rate on its own.

In most phased-retirement cases, the goal is simple: keep your combined taxable income inside the basic-rate band, so nothing spills into 40%.

Your three levers, and how each is taxed

When you are blending work and pension, you have three sources of income to play with. Each is taxed differently, and that difference is the whole game.

1. Part-time salary

Fully taxable as income. But it also keeps you in the pension system: you still get tax relief on your own contributions, and crucially, you usually keep your employer match. That match is free money, and it matters a great deal to what follows.

2. Taxable pension drawdown

This is flexi-access drawdown income, or the 75% taxable portion of an UFPLS (Uncrystallised Funds Pension Lump Sum). It is taxable, it stacks on your salary, and it does one more thing that is easy to miss.

The first time you take taxable income flexibly from a defined contribution pension, you trigger the Money Purchase Annual Allowance (MPAA). From that point on, the total you can contribute to money-purchase pensions each year with tax relief falls from £60,000 to just £10,000, permanently. We have written separately about the MPAA trap, because it deserves its own explanation, but the headline is this: taking taxable drawdown can slam the door on your future pension saving.

3. Tax-free cash

This is the clever lever. You can normally take 25% of your pension as a tax-free lump sum (the pension commencement lump sum, capped by the Lump Sum Allowance of £268,275 across all your pensions).

Tax-free cash is not taxable income. It does not stack on your salary. It does not push you towards the 40% band. And taking only your tax-free cash does not trigger the MPAA.

That combination is powerful. Tax-free cash can top up your income without raising your tax bill and without capping your future contributions. The trade-off: it is a finite, one-time entitlement. Every pound you spend now is a pound of tax-free cash you cannot use later.

A worked example: Ravi, 60, dropping to three days a week

Consider Ravi, 60, in Bristol. He has spent years on roughly £50,000 full-time. He wants to ease off, so he drops to a three-day week, which takes his salary to about £25,000. He would still like around £40,000 of income to live on, so he needs to find another £15,000 a year.

He has a SIPP (Self-Invested Personal Pension) worth £300,000, and his employer still matches contributions on his part-time salary. Here is the question that decides his tax bill: where should that £15,000 come from?

The figures below are illustrative, for 2026/27, and set National Insurance aside to keep the comparison clean (salary attracts it; pension income does not).

Look at the middle row versus the bottom row. Both give Ravi £40,000 to live on. But the taxable drawdown route costs him roughly £5,486 in income tax, while the tax-free cash route costs roughly £2,486. On these figures, that is about £3,000 less tax in a single year, simply because £15,000 of tax-free cash is not taxable, whereas £15,000 of drawdown is.

And that is not even the biggest difference. The taxable drawdown route triggers the MPAA, cutting Ravi's annual contribution limit to £10,000 for good. If his employer match relies on him contributing more than that, or if he wants to keep building the pot in his final working years, he has just quietly given that up. The tax-free cash route leaves his full contribution room, and his employer match, completely intact.

The insight most people miss

Here is the heart of it. The right blend depends on one question: are you still building your pension, or are you done?

If you are still working part-time and you still want to contribute (especially to keep an employer match), taking taxable drawdown can be an expensive mistake. It triggers the MPAA and caps you at £10,000 a year. Using tax-free cash to bridge the gap instead lets you top up your income now while preserving your full contribution allowance and that match.

But if you are genuinely finished contributing, the calculation flips. Taxable drawdown up to the top of the basic-rate band can be perfectly efficient. You are using your allowances, keeping everything at 20%, and preserving your finite tax-free cash for later. There is no MPAA downside if you were never going to contribute meaningfully again.

Neither approach is universally right. That is the point.

Three nuances before you act

A few things that quietly change the picture:

• Emergency tax. Your first taxable drawdown will usually be hit with emergency tax and taxed far too heavily, which you then have to reclaim from HMRC. We cover how that works, and how to get your money back, in a separate post.
• Tax-free cash spent now is gone. It is a one-time, finite entitlement. Using it to bridge income today means it is not available for a big one-off later, so it is a genuine trade-off, not a free lunch.
• The State Pension will stack on top later. Once your State Pension starts (around £12,548 a year at the full new rate in 2026/27), it fills up your Personal Allowance and pushes everything else higher. The blend that is efficient at 60 is not the blend that is efficient at 67. This is a multi-year optimisation, not a one-off decision.

Why this is a model, not a gut call

Working out, year by year, how much to draw and from which source, salary, tax-free cash, or taxable drawdown, to hit your income target at the lowest tax while protecting your contribution room and your employer match, is genuinely hard to do in your head. Every lever moves the others. Change your hours, and the answer changes. Start the State Pension, and it changes again.

This is exactly the sequencing Optiml UK is being built to model. The idea is that you set your income target, and the engine works out the blend of salary, tax-free cash and taxable drawdown across every year of your phased retirement, showing you the tax impact and flagging when a withdrawal would trip the MPAA before you make it.

Optiml is coming to the UK. It is not live yet, but you can join the waitlist to get launch news first and help shape what we build.

Investments can fall as well as rise, and the right blend is personal to your numbers. But the principle holds regardless of markets: phased retirement rewards deliberate sequencing.

The single biggest avoidable mistake is triggering the MPAA by taking taxable income when you still want to contribute. Fix that, and the rest is arithmetic.

Phased retirement is not about working less. It is about drawing smarter.