Attitudes toward retirement have changed in recent years and the idea of a “hard-stop retirement”, where people move from full-time work to retiring altogether, is becoming less popular.
Indeed, according to Aviva, 44% of 55- to 64-year-olds said they planned to move into “semi-retirement” or “phased retirement” before they reach 65. This means they will continue working part-time while also drawing on their pension savings to supplement their income.
Some employees may sustain this arrangement indefinitely while others might eventually plan to stop working altogether.
As a business owner, you may have employees who want to explore a phased retirement and there are several ways you can make this easier for them.
Read on to learn why phased retirement is becoming more popular and how you can support your team members.
Recent changes to pension tax rules could make phased retirement more attractive
The increased interest in phased retirement may be partly due to changes to certain pension tax rules, particularly the Money Purchase Annual Allowance (MPAA).
Normally, your employees have a pension “Annual Allowance” of £60,000 which applies to total funding from all sources, employer included (tax-relievable personal contributions are also capped at 100% of their earnings) in the 2024/25 financial year. The Annual Allowance is the amount they can contribute to their pensions each year before triggering a tax charge.
You may have a reduced Annual Allowance if your earnings exceed certain thresholds or be eligible to increase it if carry forward is available.
However, if they move into phased retirement and start drawing from their pension, they may be affected by the MPAA, which reduces their Annual Allowance.
The MPAA is normally triggered when you:
- Take a lump sum from your pension (other than your tax-free cash sum)
- Transfer a defined contribution (DC) pension to drawdown and take an income
- Purchase an investment-linked or flexible annuity where your income could go down.
As a result, your employees may not be able to make as many tax-efficient contributions to their pensions as they could before they accessed their savings.
Fortunately, the MPAA increased from £4,000 to £10,000 on 6 April 2023, meaning it could be easier than it used to be for your employees to continue saving in their pension when they move into phased retirement.
Additionally, many people are concerned about the rising cost of living and whether they will be able to fund their lifestyle in retirement. Consequently, they might decide to continue working part-time to supplement the income from their pensions and other savings.
As a result, you may see more employees moving into phased retirement in the future.
5 ways you can support team members with a phased retirement
As phased retirements become more common, you may need to put measures in place to support your employees. There are several ways you could do this.
1. Create a phased retirement policy
Setting out guidelines in a phased retirement policy gives you and your employees a clear roadmap to follow.
Your policy may include:
- Rules about eligibility, including a minimum age and which job roles are suitable for phased retirement
- Certain conditions that phased retirees must fulfil, including minimum working hours and responsibilities
- A timeline for phased retirement, including how you will reduce the hours of the retiree and train their replacement.
Once you have your policy in place, you can ensure that an employee gradually retiring does not affect the operations of the business and all employees are treated fairly.
You can also advertise your phased retirement policy as a job perk when trying to attract new talent to the business.
2. Encourage open conversations about retirement
Knowing more about the retirement plans of your employees can help you prepare in advance and ensure a smooth transition for all. That is why it is important to encourage open conversations about retirement.
This also means that employees can ask questions about how their retirement might work so they feel more comfortable about their options.
You can encourage conversations by sharing the phased retirement policy with everybody in the business and discussing retirement options with older employees when you have annual performance reviews.
3. Offer flexible working practices
Your employees will reduce their hours when they move into phased retirement. You can potentially make this easier for them and less disruptive to the business if you offer flexible working practices.
This includes:
- Part-time work
- Remote and hybrid working
- Job sharing
- Seasonal work.
You may want to discuss working practices with the employee in question to determine which option is best suited to their retirement goals, as well as the daily operations of the business.
4. Encourage mentorship programmes
One of the benefits of phased retirement for the business is that you retain the skills of the retiree for longer before they finish working completely. This gives you an excellent opportunity to transfer those skills to younger employees.
Mentorship programmes may be an effective way to do this. If you have employees who are moving into a phased retirement, you could pair them up with some junior employees and have them share their knowledge and experience.
5. Provide financial advice and support
Phased retirement creates some unique financial planning challenges. For instance, your employee might not realise they have triggered the MPAA.
Additionally, they may need guidance about budgeting and knowing how much they need to draw from their pensions and other savings to supplement their income from working.
Providing access to financial advice and support for your employees could be very beneficial if they are planning a phased retirement. We can support you with this.
Get in touch
If you or your employees need guidance about phased retirement, then please do get in touch with us at DBL Asset Management.
Email enquiries@dbl-am.com or call 01625 529 499 to speak to us today.
Please note
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
