Implications of early retirement law

Next year’s change to the early retirement age could have major implications, says Ceri Jones

If you read nothing else, read this…

  •  For employees to have the right to retire before age 55 after April 2010, an earlier normal retirement age must be written into their contract of employment. A collective consultation could be required to avoid potential unfair dismissal liabilities.
  •  Staff who will be over 50 by 5 April 2010 may wish to retire early or put their pension into payment while still working, to retain the flexibility to retire before 55.
  •  There are some exceptions to the rules around ill-health, redundancy and a few specified occupations.

The earliest age at which employees can take a pension is to jump from 50 to 55 next year. Under section 279(1) of the Finance Act 2004, this affects any pension not put into payment before 6 April 2010. The change will require careful HR management to avoid unfair dismissal liabilities.

Some staff will still have the right to retire before the age of 55 after April 2010 if a younger normal retirement age is written into their contract of employment. But such a provision cannot be added retrospectively. If a group of employees is affected, a collective consultation will be required, although each has to buy into the outcome.

Jonathan Maude, employment partner at law firm Hogan and Hartson, says: “If the normal retirement age is 50 and is specified contractually, the employer will need to consult with staff about the change. The action required will depend on the number of employees affected. If it involves a [large enough] number, there is need for a collective consultation. Once the change is agreed, it needs to be documented. There is a risk of not consulting properly, which could lead to future unfair dismissal liabilities, so awareness should be raised to deal with the issue sooner rather than later.”

Encouraging staff to retire

Some staff who are over 50 or will reach this age before 6 April 2010 may be keen to take their pension while they can. Employers might also want to encourage certain staff to retire before the change, instead of having to wait up to five years. In this case, the whole of their notice period should elapse before the deadline. Laith Khalaf, pensions analyst at adviser firm Hargreaves Lansdown, says: “Employers should start communicating the changes to give pension members time to take action if they wish. Communications should alert staff to the changes and the fact they have a window of opportunity in which to act, but it should draw attention to the downside of drawing their pension early, such as the risk of reduced income.”

One issue some schemes will need to address is how to deal with people who want to draw their benefits but continue working. Hamish Wilson, senior partner at pensions consultancy Hamish Wilson, says: “Those under 55 [and over 50] could take ‘retirement’ and then continue to work – for example, if they plan to retire in the next few years but do not wish to continue to 55 – providing the employer is willing to play ball.”

Tom McPhail, head of pensions research at Hargreaves Lansdown, adds: “Members of occupational pension schemes are allowed to take tax-free cash, to be ‘in retirement’ and to carry on working, provided the scheme rules have been updated to allow this [post- A day]. If the rules do not allow it, they might have to transfer to a drawdown plan. For roup personal pension plans, members could transfer to a drawdown arrangement to take benefits, but they might end up losing future employer contributions, so they should check this before taking action.”

Losing out on pension contributions

In most cases, there is no problem in staff continuing to work, but some schemes do not include the facility for such staff to rejoin the pension plan after drawing benefits, says Khalaf. “This could mean losing out on employer pension contributions. Employers, advisers and providers should get their heads together to decide what to do in these cases.”

Subject to medical evidence, anyone who is incapacitated due to ill-health may take a pension at any age, but the definition will be based on the member being incapable of carrying out his or her occupation, and ceasing to work in it, not just that employment. Some people, mainly sportspeople, can still take their pension early if their occupation is on HM Revenue and Customs’ pre-agreed list.

Ensuring they are aware of the changes and implications will be a key issue for employers over the coming months.

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