23 Sep 2022

Phased retirement is a win-win – but here's 7 things to consider

With many people unaware of the value of their pension savings, and the risks to health of suddenly quitting work, a phased approached can be good for both employer and employee

Seismic factors – including the Russia-Ukraine war, the Covid-19 pandemic, Brexit and now a cost of living crisis – have pushed retirement to the bottom of the list of priorities for many older employees.

In fact, nearly one in five (19%) workers aged between 65-74 and 14% of those aged 55-64 have delayed their retirement as a result of the pandemic, according to a Close Brothers’ report published last year.

The ‘Expecting the Unexpected’ survey of 2,000 UK-based employees carried out in January 2021 showed how significantly the Covid-19 crisis has affected the financial plans of employees across the country.

Around one-quarter of workers admitted that they don’t know the value of their pension savings. Worryingly, this figure was higher among older workers, with one-third (33%) of those aged 55+ and 30% aged 65+ saying they didn’t know much about the value of their pension scheme or savings.

For people who wish to retire early, but don’t have enough in their pension pot, phased retirement could be the answer. But what do employers and employees need to think about when discussing phased retirement? How does it work and how can employers talk to employees about it?

1. The benefits of slowing down

There is a wealth of research that shows that suddenly stopping full-time work can be bad for health and wellbeing.

There are even studies that indicate that early retirement can, tragically, lead to an early death. A 2016 study by Cornell University and the University of Melbourne showed that increasing numbers of men were dying at the age of 62, when they are legally allowed to start drawing a social security allowance, because they had left the workforce or found themselves unable to find work.

Highlighting the benefits of winding down gradually could have significant benefits to your employees’ health and wellbeing and even their life expectancy. Phased retirement can help reduce anxiety and stress, promote a better work/life balance and help prepare older workers for the next stage of their lives.

2. Be flexible and accommodating

When the UK standard retirement age of 65 was scrapped in April 2011, it enabled many older employees to continue working for as long as they liked. However, some older employees may wish to retire but not have the means to do so. Giving them the flexibility to continue working on a part-time basis through a phased retirement scheme could be the solution. This means they can continue to enjoy a proportion of guaranteed income while winding down from full-time employment.

3. It’s a win-win for employers too

While the employee gets to continue earning, potentially extend the longevity of their savings/pension fund and work towards gaining better financial freedom and comfort in full retirement, employers get to retain the skills and knowledge of some of their most experienced employees. So phased retirement is, put simply, a win-win.

4. Fail to prepare, prepare to fail

The old adage is especially true when it comes to retirement. One of the key advantages of a phased retirement is that it allows for ongoing succession planning on both sides. The employer can gradually reduce its outgoings and costs (salary, national insurance, pension contributions, and so on) while the employee weighs up the financial implications on a longer-term basis.

5. Don’t forget potential pitfalls

There are several issues for the employer to consider when it comes to supporting employees with a phased retirement plan. Earning a salary and enjoying income from a pension at the same time has tax implications. It is also important that the employee does not underestimate their financial needs over their phased retirement period. This could lead to them using up more of their savings/pension over this time, leaving them without the means to fund their full retirement.

6. Put a policy in place

Remember that employers don’t have any sort of legal obligation to provide a phased retirement plan for workers – but, as outlined above, there are advantages and benefits. Having a clear policy in place to outline how it works, including the percentage of their salary they will continue to earn (usually around 50%), and expected timescale, will help clarify things for employees and managers.

7. A financial adviser can help

Don’t forget that employees who wish to continue working for longer into older age are protected by law from being forced into retirement under the Equalities Act 2010.

Financial wellbeing advisers can provide guidance on phased retirement planning, offering practical support and minimising potential risks involved for employers and employees alike.