How to make flexible retirement arrangements

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• Organisations that operate flexible retirement arrangements need to be aware of age discrimination laws.

• Employers may need to amend their pension scheme rules before adopting a flexible retirement policy.

• Employees will require independent financial advice to ensure they make decisions in their best interests.

Employers that are looking to implement flexible retirement arrangements for older staff must be sure to comply with all the relevant legislation, says Nicola Sullivan

The removal of the default retirement age from 1 October 2011 means more employers will be looking to offer older workers flexibility when taking their pension benefits. For example, a scheme member may want to reduce their working hours or job grade after becoming eligible to receive pension benefits.

In such instances, staff may want to take a proportion of their pension to make up for a reduction in salary or defer receipt of some or all of the pension accrued while they were working full time. They may also want to continue contributing to their pension.

Ian Mahoney, operations director of workplace savings at Legal and General, says: “The industry has been ready for the move away from a cliff-edge approach to retirement for some time. Phased retirement on personal pensions has been possible since 1988 and income drawdown, rather than taking an annuity, has been possible since 1994.”

But employers operating flexible retirement arrangements must be aware of age discrimination laws that prevent them reducing the value of employees’ pension benefits after they reach the age of 65, for example, by stopping pensionable service after 65 for members of defined benefit (DB) schemes and instead offering access to a defined contribution (DC) plan that is available to new staff. Robin Simmons, a partner at law firm Sackers, says: “If an employer employs anybody over age 65, it must not kick them out of their existing pension arrangements or move them to something else.”

Employers may also need to amend their pension scheme rules before adopting a flexible retirement policy. This is because before 2006, HM Revenue and Customs prohibited staff from drawing a pension while in service. Simmons adds: “Lots of scheme rules will specifically say [staff] cannot draw their benefit while they continue in service.”

Trust-based and contract-based DC schemes

Mahoney explains there is a slight difference between trust-based and contract-based DC schemes, because contract-based plans are usually flexible enough to accommodate the move away from a fixed retirement date. “For a trust-based pension, the employer needs to check whether the rules permit this level of flexibility,” he says. “If not, changes may be needed.”

John Lawson, head of pensions policy at Standard Life, says a DB pension may prove inflexible. “The scheme may allow the employee to defer benefits or take them early, but they must take the whole lot at once. If that comes into payment, it is counted as taxable income, whereas if they transfer it into a personal pension, they can take their tax-free lump sum but not draw any income.”

Staff may need independent financial advice to ensure they make decisions that are in their best interests, says Lawson.

Employees should also be made aware of the impact that taking a proportion of their pension and a reduced salary will have on death-in-service and life assurance payouts.

Also, older staff who choose to defer all or part of their pension while continuing to work can expect it to increase, says Lawson.

Flexible retirement can be a useful way to manage the working patterns of older workers, but employers must ensure their policies are fair and non-discriminatory, as well as fully understood.

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