Lorraine Harper: Should employers encourage taking retirement sabbaticals?

Lorraine Harper

The cliff edge of retirement can have a dramatic effect on personal wellbeing and self-worth, so a gradual move is a good way to ease into a different lifestyle, probably on a lower income.

The concept of winding down to retirement is not new. Traditionally, this has taken the form of part-time working. Taking a block of time out of work close to retirement is much less common, but is it a good idea, and should employers encourage it?

Planning for extended absences can present practical problems and incur additional costs, such as temporary cover, but if employers are willing to offer sabbaticals it can give other staff the chance to spend fixed periods in higher grades as practice for promotion. It is also good for staff wellbeing, and for the image of the employer in a competitive market.

Retirement sabbaticals will enable employees to get a better understanding of how to spend retirement and the income required to fund it. With the increasing incidence of dementia, more and more employees may need to take time out to be with elderly relatives.

However, employees need to consider ways of mitigating the effect of a sabbatical on their benefits before and after the break, such as paying additional voluntary contributions, banking leave or extending working life on return to work.

Employers also need to be aware of the pitfalls. Paying lower defined contribution (DC) scheme contributions will directly affect the size of the eventual retirement pot, so the amount of time off in relation to the loss of investment must be considered.

Other considerations include checking defined benefit (DB) scheme rules, to ensure that a lower salary near retirement will not reduce benefits unexpectedly. DB final salary has tended to use a best pay formula over a number of years before retirement, but is not always guaranteed, so employees should contact the pensions administrator for assurance.

In addition, if the employee decides to take some pension benefits ahead of the sabbatical, the contributions they can pay on return to work may be limited to £4,000, and exceeding that limit will incur a high tax charge.

When all is said and done, our society is very different to what it was when our pensions industry was established. We have far more choice in the workplace, such as flexible working, shared parental leave, flexible benefits and much more choice of retirement ages and benefits. Employers and employees should make the most of these choices and work together to harness the advantages of 21st century working, to their mutual benefit.

Lorraine Harper is vice president of the Pensions Management Institute

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