During the heyday of the final salary pension scheme about 40 years ago, early retirement was a common phenomenon. Early retirement was typically triggered by redundancy. An employer would augment an employee’s pension entitlement, and paid employment would come to an abrupt, if not unwelcome, end from the age of 50 onwards.
Today, early retirement is less common. The shift to defined contribution (DC) pension provision and major changes to the tax rules have presented some major challenges to ending work early. However, there are several ways that employers can provide constructive support.
Firstly, it is important to note the age at which retirement can happen. The Finance Act 2004 raised the normal minimum pension age from 50 to 55 in 2010, and for most people, there will be a further increase to 57 from 2028.
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Those contemplating early retirement will need to know what their income levels will be. Employers can direct their staff to the government’s tracing service so that pension savings from previous employment can be considered alongside those from the current job. From 2023, the pensions dashboard will aggregate this information online.
Any defined benefit pension entitlements are likely to be subject to actuarial reduction to accommodate early retirement, and the formal consent of a scheme’s trustees may be required. In the case of DC savings, employers should refer employees to the Pension Wise service. This is available to anyone over the age of 50 who has accrued DC benefits and will provide extensive guidance, but not formal advice, on the different options for converting a pension pot into a retirement income.
Some employers may also wish to pay for bespoke financial advice for employees. While expensive, advice from a suitably regulated adviser is crucially important before making life-changing decisions. Some employers may consider this to be a suitable benefit to offer, particularly in the event of redundancy.
There are also consultancies which can advise on the non-financial consequences of retirement. Leaving employment will result in significant lifestyle changes. The newly retired will often benefit from guidance such as accommodation, health and making effective use of their time, and constructive guidance at the point of retirement is often greatly appreciated.
Employers seeking to help their staff plan for early retirement can do much. Apart from understanding all the options available from pension saving, HR departments should also ensure that any formal programme also considers how early retirement will affect an individual’s ongoing lifestyle. Proper preparation can do much to help individuals transition into a new and rewarding phase of their lives.
Tim Middleton is director of policy and external affairs at Pensions Management Institute