Sometimes in games a PC gets retired but not because they're dead or the game is over. Sometimes the character gets retired because, for some reason or another, they are no good for being a PC anymore. Perhaps they have finished their personal plot line. Perhaps they no longer wish to adventure. Perhaps they've simply grown old and the game has shifted focus to new blood. The thing is, these old PCs can be great NPCs for your game for a variety of reasons. That said, they do have some problems and questions that come along with them.
An NPC With Some Depth
One of the best parts about an old PC becoming an NPC is that, usually anyhow, the NPC already has some depth. A player has played them so you know how they react to threats and challenges, you have some idea of what they value, and you know what the character values - especially if they retired because they didn't want to go on more adventures. even better, provided that the player who ran the character isn't involved in the scene you have access to a great resource for playing the character in new situations for that extra bit of authenticity. Do this properly and you can effectively have 2 scenes going at the same time as the former player RPs the NPC with one group while you GM another scene with other players.
A Legacy That Lasts
Perhaps the coolest aspect of having the former PC be an NPC though is that it gives the player a sense of a legacy and gives the game a bit of that sense as well. Quite frankly it is awesome when the world changes because of the players. It makes the players feel powerful and important. Little nods to past actions of players can be key moments, or crowning achievements, for your group. This is especially true when some of the big NPCs involved in something used to be players. Those already developed relationships kick in for the PCs and the players, and the player whose old character is being used gets to see their legacy at work.
A Question of Ownership
It's not all sun and roses though. For one thing, the NPC represents that player's legacy, right? Well, that also means that that player likely still feels like it is their character. So now you have a character that is owned by two people. On the one hand, the NPC belongs to the old player because they are the one who made - and played - the character when they were introduced to the game. On the other hand, the player retired the character and the character became an NPC. As a NPC the character is supposed to be the property of the GM. In general this doesn't cause problems...that is until the GM does something to the NPC that the player doesn't like.
For example, if the player made the character to be the best sword duelist ever, a plot line where the NPC gets defeated - badly - in a duel could lead to a stung feeling for the player. Without a healthy amount of trust the player could wonder if the GM is just ignoring the character's accomplishments or if the GM is getting revenge on the character now that the player can't directly interfere. One of the last thoughts - sadly - will be that the GM is trying to set up a cool encounter where a current PC gets to avenge and surpass that old character by defeating the person who killed them, or that the GM is trying to hook people into a plot.
Moderation is Key
That is only one negative, but it is a major negative. There is also the fact that certain old PCs may show up more than others which can cause feelings of favoritism to pop up and otherwise cause issues at the table. Because of this moderation in use is often the key. You want to restrict these NPCs to guest appearances that happen sporadically, and you want to keep the focus on the current PCs rather than the old ones. Sure, they can have their awesome/bad ass moments as NPCs too, but keep the focus where it belongs. On the players.