Bishop Michael Perham stood down from his role in August 2014 "for personal reasons" but it was announced the next day police had questioned him about allegations of historic indecent assault.
Police confirmed they had spoken to the 67-year-old man over allegations of offences in 1980 and 1981 relating to a child under 18 and a women over that age.
In October 2014 officers announced no further action would be taken against the bishop and he was never charged nor arrested.
The Church of England said it would review the matter in accordance with its national safeguarding policy.
The Church said that process was now complete and the bishop was free to return to ministry in his retirement.
In a statement Lambeth Palace said: "Following a police investigation concerning Bishop Michael Perham last year, which resulted in no further action, the matter was reviewed by the Church of England in accordance with its national safeguarding policy.
"With the full co-operation of the Bishop an independent risk assessment has been satisfactorily completed and as a result Bishop Michael will be able to take up Ministry in retirement, and the postponed farewells for him in Gloucester can now take place."
The Diocese of Gloucester also issued a statement: "The Diocese of Gloucester welcomes today's statement from Lambeth Palace concerning the Rt Revd Michael Perham.
"Following a police investigation last year, which resulted in no further action, the matter in relation to Bishop Michael was reviewed by the Church of England in accordance with its national safeguarding policy.
"We are gladdened by today's news from Lambeth Palace that following the completed review and independent risk assessment, Bishop Michael has been cleared to take up ministry in his retirement.
"We look forward to marking Bishop Michael's committed and dedicated ministry to this diocese, with a service of thanksgiving at Gloucester Cathedral on Saturday 13 June."