The new legislation, which is due to come into force in spring 2015, will allow older employees (those over the age of 55) to access defined-contribution retirement funds in any format they desire. It follows that employers could redirect salary payments for such employees directly into pension savings with both parties avoiding National Insurance (NI) liabilities and with the employee still having full immediate access to their funds as required.
It has been estimated that this remuneration option could cost HM Treasury up to £20bn* every year despite the proposal to limit this practice set out in the government’s response to the consultation in July 2014.
Jelf’s research among circa 200 employers asked if they would allow such flexibility. Thirty-five per cent of respondents indicated that they would offer this for all employees over the age of 55, with a further 15 per cent willing to consider this on a case-by-case basis. Only six per cent would not offer this option.
Commenting for Jelf Employee Benefits, Steve Herbert, head of benefits strategy, said: ‘Our research shows that the appetite for this remuneration option may well have been grossly underestimated by the legislators. It remains to be seen if the rules will be tightened to avoid this practice becoming widespread, and if so how this can be achieved without damaging the concept of freedom of access to pension funds.’
The research also found that the new pension freedoms are likely to appeal to older employees. The survey of employees who had recently retired found that 22 per cent would have used the greater access and flexibility regarding pension funds had it been available when they retired. Yet the number could be higher, with another nine per cent still able to utilise this flexibility and a further 30 per cent not sure.
The 2014 Jelf Employee Benefits Survey research also found that:
- 78 per cent of employers haven’t yet made their employees aware of the proposed changes to pensions fund access, although the majority (67 per cent) are gearing up to do so; and
- 69 per cent of employers don’t currently offer pre-retirement courses to their staff.
Jelf is concerned that this lack of communication and support from employers leaves employees potentially exposed to making poorly informed choices that could potentially devastate income options for employees’ retirement years.
Tony Clack, managing director for LaterLife Learning, said: ‘There has never been a time of greater change within pension legislation. Added to the removal of the default retirement age, this increases the complexity of decision making and consequently the need for greater retirement education to assist with both financial and lifestyle decisions. As a result, we are seeing unprecedented demand for our retirement courses, as more and more organisations recognise the necessity to assist their employees in preparing for retirement.’