Legal Q and A

Legal Q and A by KLegal

Q In the recently published Pensions Green Paper, Simplicity, Security
and Choice, the Government has suggested abolition of compulsory retirement.
Will employers now be forced to keep on workers beyond the age of 65?

A These proposals, which are likely to become law in December 2006,
are the Government’s reaction to the UK’s ageing population and an EU directive
to stop age discrimination.

Once in force, employers will not be able to discriminate on the grounds of
age. Staff will then be able to continue working after 65 unless compulsory
retirement can be objectively justified. Unfair dismissal rights will apply to
all employees.

By 2010, early retirement will not be permitted before age 55 (the current
minimum age is 50). A simplified tax regime will mean the maximum early
retirement pension will be restricted to around £49,000 per year.

No changes are proposed to state pension ages although those still working
will be encouraged to defer taking their pension until they retire.

Q Keeping on employees over the age of 65 will be new territory for my
company. What are the key issues, particularly with respect to performance, so
we can manage them fairly and will not be open to claims of discrimination?

A Employers will need to adopt age-neutral performance management and
appraisal systems and adhere to them to objectively justify their treatment of
older workers. In addition, employers will need to review pay structures,
non-pay benefits, redundancy rules and recruitment policies. Indeed, ageist
jokes could amount to harassment.

Q One of the main headaches in providing a pension is the complicated
system of taxation. How does the Government intend to simplify the system?

A The Government is rightly concerned about the number of employers
terminating their occupational pension schemes and wants to make administration
of these schemes easier. Currently, there are eight different tax regimes
depending on the type of scheme and the date of joining. By 2004, a single,
simplified regime will apply to all tax-approved pension schemes and will
impose an individual lifetime funding limit on all tax-approved retirement
savings of £1.4m, of which up to 25 per cent may be taken as a tax-free lump
sum from age 55. Where savings exceed the lifetime limit, the excess will be
subject to tax at 33 per cent. Current limits on contributions will also be
replaced with a £200,000 annual limit.

Transitional rules will apply so that retirement benefits accrued before the
new tax rules are introduced will be respected. However, the value of these
benefits may restrict the ability to save towards further pension benefits in a
tax-efficient manner.

The Government has also announced that it wants to work with the insurance
industry to develop more flexible annuities including value-protected annuities
that allow unused capital to pass on to dependents where the pensioner dies
before the age of 75.

Q Is it true employees will be able to draw a pension while continuing to

A Yes. Employees may start to receive their pensions after age 55,
while continuing in employment. This is already the position for personal
pension plans, and the the existing rules governing occupational pension
schemes will be relaxed. The intention is to encourage employees to keep

Compiled by Duncan Buchanan, Partner, KLegal People Services

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