We explain what flexible retirement schemes involve, and why they deserve to find greater favour with both employers and employees.
Flexible retirement (sometimes called phased or partial retirement) involves reducing your paid employment in some way while taking a portion of your pension to supplement the fall in your salary. Rather than moving from becoming a full-time employee to a full-time pensioner in one cliff-top retirement jump, you progress to full retirement in a series of small incremental steps.
Instead of retiring completely at age 60, for example, you might embark on a decade of partial retirement, gradually reducing your work commitments while taking progressively more of your pension. Reducing your work obligations can mean working fewer hours or switching to a job that involves less responsibility.
Flexible retirement schemes have many advantages for both employers and employees. For employers, such schemes can help with staff retention, succession planning and planned staff reductions. Moreover, research shows that the introduction of these schemes can increase productivity and reduce sickness absence. For employees, such a scheme allows them to gradually adjust to retirement while maintaining a decent standard of living. It can also help them minimise stress in later life as full-time work becomes more physically and mentally challenging.
Are there any downsides? With some defined benefit pension schemes, taking your pension early may lead to an actuarial reduction (as you are getting your pension early) and/or a cost to the employer in terms of strain on its pension scheme. It is essential therefore that both employer and employee carry out a cost-benefit analysis to help reach a mutually beneficial decision on flexible retirement.
Some employers have formal flexible retirement schemes that employees can apply for once they reach age 55. These schemes have no statutory backing (unlike requests for flexible working), but employers are expected to reach their decisions to either grant or refuse applications from employees on the basis of a rational business case.
While flexible retirement might sound a good idea for babyboomers, it will soon become a necessity for millennials and even younger generations. The 20-somethings of today face having to wait for their state pension until they are 68 or 70. They also face the problem of building occupational or private pensions substantial enough to support early retirement, especially as their capacity to do so will be hampered by their having to repay university fees, trying to get on the property ladder and contending with low employer contributions to their mainly auto-enrolment based pension schemes.
Flexible retirement could allow them to semi-retire while they wait for their state pension to kick in. Even in the public sector, where employees enjoy superior defined benefit pension schemes, the normal pension age is being pushed up to the revised higher state pension age. Younger employees will not relish working fulltime until they are 68 or 70, so flexible retirement is likely to become an attractive option.
If flexible retirement offers a win-win outcome for employers and employees, what is preventing it being better known and more prevalent? First, flexible retirement is not a hot topic for either employers or trade unions. Other more pressing issues such as wages, productivity and staffing levels take precedence.
Added to this, human resources managers are generally (though mistakenly) terrified of talking to employees about their pension options, for fear of falling foul of financial services legislation. Further, line managers receive no training on flexible retirement schemes or how to deal with applications from employees.
This tends to ensure that flexible retirement policies, if they exist at all, remain ‘laminated’ (filed away, gathering dust) rather than ‘activated’. In the absence of training or guidance, line managers often prefer the status quo and dismiss applications for flexible retirement for non-specific and often inappropriate reasons (“I just don’t think it will work in this department”). Meanwhile, a general lack of support for employees means they often make late and weak applications for flexible retirement, making it easy for managers to turn them down.
There are other employment options for employees approaching retirement age, such as flexible working or ‘retire and return’, but both are problematic. Flexible working may allow employees to go part-time, but it does not give them access to their pensions. The ‘retire and return’ option enables people to access their pension, but there is no guarantee that a job will be available when they apply for one. Moreover, re-employed people lose their continuous employment rights on re-employment.
The process for delivering flexible retirement outcomes needs to be modified. First, employers should create and review flexible retirement policies, and recognise the business advantages of activating these policies. In addition, they need to train managers on how to implement policy, and ensure human resources departments understand that giving pension guidance to employees does not constitute giving independent financial advice.
Second, trade unions need to put flexible retirement on the negotiating table and ensure employers’ policies are fair and reasonable. Unions can also ensure that fair decisions are made and that appropriate representation is in place at appeals and grievance meetings.
Third, employees must ensure they make a business case for flexible retirement when they request it, and that they make strong and timely applications.
Finally, pension schemes need to be designed to ensure early and partial access to pensions is readily available. Flexible retirement is the future – and the future starts here.
10 tips for a workable wind-down
1) Begin the flexible retirement process 12 to 18 months in advance of your desired start date.
2) If your employer has a flexible retirement policy document, obtain a copy and study it.
3) Establish key elements of the procedure and identify the principal decision-makers in the process.
4) Invariably, at some point you will have to convince your line manager that your move into flexible retirement will not cause your employer problems, so before your plans get too far advanced, arrange an informal chat to outline your preferred retirement plan.
5) Try to anticipate your manager’s views on your plan and think of possible ways to allay their concerns.
6) Make a list of the benefits that your flexible retirement would bring to the business, such as:
- Continuity of employment and succession planning.
- Benefits such as increased flexibility and productivity, higher staff morale and decreased sickness absence that research shows can result from flexible retirement schemes.
If possible, make the case that your move will not entail costs for your employer.
7) Even if your employer has a flexible retirement policy, you will still need to sell the idea to your manager and employer. Create a cost benefit analysis and a business case for your application.
8) In your application, you will have to quantify the work reduction you want (downshifting down or winding down) and how much pension you would like to take. Your decision should be based on your income needs and tax liability. People typically draw down just enough pension to cover their salary loss. Note that a small reduction in work (and pay) combined with taking a high percentage of your accrued pension may take you into a higher tax band, something that you may be very keen to avoid.
9) A joint application by you and a work colleague may be more acceptable to your employer than a solo plan. Two people going half-time may allow an employer to bring in a younger and cheaper employee to fill the gap created, which helps with succession planning.
10) Flexible retirement applications may be more welcome when an employer is looking to reduce its workforce. Two people going half-time can save an employer the cost and trouble of making one person redundant.
Case study: phased retirement benefits
Susan is a modern languages teacher at a secondary school. She is 61 and after 30 years of teaching feels the need to reduce her workload.
She could retire fully but, for a number of reasons, she is not ready to stop working completely. Susan enjoys the teaching element of her job and would miss teaching if she left work, but the main factor stopping her from fully retiring is financial.
After 30 years of service, she would qualify for a final salary pension of just £14,250 a year plus a one-off tax-free lump sum of £42,750. This represents just 37% of her current salary of £38,000 a year, and she doesn’t think that this would be enough to live on. Susan wants to continue working in some capacity until she reaches her state pension age of 66, when her state pension will boost her income and allow her to retire fully.
She discusses flexible retirement (or phased retirement as it is known in teaching) with her head teacher. She explains how she wants to reduce her working week by one day and take 75% of her pension (this is the maximum allowed by the teachers’ pension fund). Susan explains how the work can be reorganised in the department and emphasises her willingness to be flexible. The head (after discussions with the rest of the staff) is happy with the move, as the department can cope with the changes without incurring extra costs, owing to falling student numbers. The change in Susan’s financial situation is as follows:
- Previous income Salary = £38,000
- New income £30,400 salary plus £10,687 pension = £41,087 plus a one-off tax-free lump sum of £32,062
Susan now has more annual income than before and still has the remaining 25% of her teacher’s pension to take. Moreover, she will build up another four years of defined pension benefit during her remaining five years of working. (With private sector defined contribution schemes, under the money purchase annual allowance rules, employees who start drawing down from their pension are only allowed to make further contributions of up to £4,000 a year.)