Redundancy: Facing up to 'threat' of early retirement — agediscrimination.info

Workers being made redundant in their fifties and early sixties face the prospect of unwanted early retirement as Scotland stands on the brink of a new surge in unemployment.

Many of those with several years to retirement but struggling to secure new full-time work will now have to find a way of bridging the income gap as their savings and pension plans are thrown into disarray.A number of Scotland’s biggest firms are in the process of shedding jobs, with financial services hit especially hard. Edinburgh-based firms RBS, Standard Life and Aegon UK are all in the process of reducing headcounts and while Tesco Bank and Virgin Money are doing their best to reverse the trend, more jobs are being lost than made.That picture may prove positively rosy compared with the public sector outlook for the coming months, as Scottish councils face up to swingeing spending cuts that will see thousands of jobs culled.For some people redundancy is an opportunity to take early retirement and consider other options, but few can afford the loss of income that comes with ending their full-time working lives earlier than previously hoped.What’s more, many people who use redundancy to take early retirement underestimate the funds they need to make their income last, according to Paul Lothian, chartered financial planner at Verus Financial Planning in Dundee. “The reality is few people can afford the drop in income that early retirement brings about,” he said.The costTake the example of a 55-year-old man with earnings of £50,000 a year comprised of a £40,000 salary, which is pensionable, and a £10,000 bonus, which is not.He was made redundant and pensioned off early after 25 years’ service, in a generous final-salary scheme with a normal retirement age of 65 and is entitled to a tax-free redundancy lump sum of at least £10,260. Provided he is allowed to take his pension benefits early, and with no actuarial reduction for early retirement, his pension would amount to £16,667 a year in retirement, compared with the £50,000 a year earned while working.”That’s a 60 per cent drop from a net £3,000 a month to £1,200 a month, ignoring any pension contributions he would have been making from pay,” said Lothian. “Unless he was previously saving a large part of his salary, such a drastic change in income would be a huge challenge for anyone.”And that’s before you consider the earnings lost due to retiring ten years before the default retirement age.”Had he worked until 65, and ignoring any pay rises, he would have earned a further £360,000 and boosted his retirement pension to £23,300 a year. So, early retirement can be hugely costly if the income and benefits accrual are not replaced,” Lothian said.

This generous example underlines the challenge facing someone who earns more than twice the average wage.