Jelf is seeing a growing trend of employees taking their pension benefits years before they intend to stop working, simply to access the lump sum.

If you’ve been around for at least 55 years, it is not difficult to think of a way to spend a big chunk of money, which many might see as life changing. Whether it’s clearing the burden of a large debt or giving the kids a deposit to get on the property ladder, there are things we could all do with money to make us happier in the short term, regardless of longer term consequences. There is an argument that these people are grown ups, it’s their money, so why shouldn’t they do what they want with it?

Let’s assume a 55 year old has a pension pot of £80,000. This employee could take their benefits, they could continue saving or they could do both. Assuming this employee earns £30,000 pa and 10% of salary is paid in pension contributions between them and their employer, I’ve had a look at some standard projections and the impact on the size of benefits depending on when those benefits are taken can be quite dramatic.

Age        Pension Fund    Lump sum           Level residual pension

55           £80,000                 £20,000                 £2,763

60           £114,380              £28,595                 £4,548

65           £157,922              £39,480                 £6,970

Accessing pension benefits early can have unforeseen consequences for employees, particularly:

1)      Necessitating working for years past their desired retirement age before they can afford to retire

2)      Engendering a negative view of the benefit provided if the residual pension is very small

3)      Selecting an inappropriate choice of retirement income because their focus has been on securing the lump sum

4)      Having a long wait before their State Pension arrives to supplement any existing income

Nevertheless, employees focussed on getting their hands on a sizeable amount of cash can be adamant this is the right thing to do, and will often happily suggest colleagues do the same.

From a HR perspective, we must remember that the main purpose behind pension saving is to replace salary for an employee when they stop working; the lump sum is really there as a bonus to give retirement a positive kick start. If this main purpose is not being fulfilled, there are a number of actions employers can take to ensure employees who do utilise the lump sump option before retiring do so with open eyes:

–        Pension providers are mixed in their ability to make employees aware of the impact of such a decision. Be clear on what process your pension provider or adviser adopts.  

–        Wherever possible, reinforce the message that the sooner pension benefits are taken the longer they have to last and the less time there is to save and for those savings to grow.

–        Reinforce the message that pension benefits are intended to provide regular income for when each employee stops working or reduces their hours.

–        Notify employees who are taking their benefits early that they should not advise colleagues to do the same. Financial advice should only be given by suitably qualified and regulated people.

–        Make sure employees who have taken their benefits do carry on saving – automatic enrolment will help here, but employees may still opt out thinking they can no longer join the pension scheme.

–        Best practice would dictate career long education on retirement and financial planning, matched to the specific needs of employees at each stage of life.

–        As employees are approaching what historically would have been normal retirement age, education needs to focus as much on the lifestyle changes retirement will bring.

www.jelfgroup.com/page/business-services/employee-benefits