The work/pension balance: issues with flexible retirement

Robert Tellwright

One issue which regularly comes up in meetings with both our employer and trustee clients is flexible retirement – should employees be allowed to take their pension while they continue to work in the group and earn further pension benefits?  This gives rise to a lot of discussion but not that many clients have taken action.  Recent employment law developments involving the removal of the default retirement age have brought this more sharply into focus.

Before April 2006, it was generally a requirement for a member to retire from employment before he could take his pension.  Since then, the new tax regime allows flexibility – members who have reached 55 are now able (if their scheme rules permit) to draw their pension in tranches, while they continue in employment.

Some employers have welcomed this flexibility, and have been keen to offer a flexible retirement option to their older employees.  One perceived advantage is that skilled and highly-valued workers are no longer compelled to retire before they can draw their pension.  So flexible retirement can be a useful retention tool.    

However, following the removal of the default retirement age in October 2011, some employers are viewing flexible retirement in a very different light.  It has become more difficult to retire workers at 65, so employers who offer a flexible retirement option may actually be removing one of the last remaining incentives for their employees to retire – the requirement to leave employment in order to take their pension and tax free cash.  Employers will therefore need to think carefully about how a flexible retirement option could affect the dynamics of the workforce. 

For those employers who conclude that the benefits of flexible retirement outweigh the drawbacks, the next decision is how to structure the flexible retirement offering.  This typically involves two key considerations – first, can the member draw his pension in a number of tranches, or must he begin to draw all of his pension at the same time?  (Tax-free cash and pension have to be taken simultaneously).  Secondly, will the member be able to earn further pension while his pension is being paid?    

Although these are mainly benefit design issues for the employer to consider, trustees have an interest in the decisions too.  It is, after all, the trustees who are ultimately responsible for administering the scheme – a task that could be made quite difficult if members (particularly in a defined benefit scheme) are allowed to draw their pension in tranches while continuing to accrue benefits. 

In our experience, trustees and employers try to keep things simple at this stage – members who are offered flexible retirement are often required to put their whole pension into payment at once, with any further benefit accrual typically provided on a money purchase basis in a separate arrangement.  

This kind of arrangement seems to strike a good balance between flexibility and administrative simplicity, but it will be interesting to see whether these arrangements will develop, as employers get to grips with the removal of the default retirement age. 

Robert Tellwright is an associate at Allen & Overy LLP.

Comments published on Pensions Talk do not necessarily reflect the views of Allen & Overy or its clients.

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