Settlement Agreement & Pensions: Questions and Answers
What is a settlement agreement?
A settlement agreement is a legal document through which an employer and an employee who are in dispute agree the terms on which the dispute will be settled. In the majority of cases, it will be agreed that the employee’s employment will terminate. The employee will promise not to bring any claims against the employer and the employer will pay an agreed sum of money to the employee in return.
For a settlement agreement to be a valid legal document, the employee must obtain independent legal advice on the terms and effect of the agreement, and particularly on their ability to bring claims in relation to their employment after it has been signed.
Does signing a settlement agreement mean that I will waive my pension rights?
The general legal position is that it is not possible for an employee to waive their accrued pension rights, except in limited circumstances.
Furthermore, many rights in connection with an occupational pension are usually owed to the employee by the trustees of the pension scheme, who are not the employer, and would not be bound by the terms of the settlement agreement unless they were a party to it.
Most settlement agreements expressly exclude claims in relation to accrued pension rights from the waiver of claims. If this statement is not included in your settlement agreement, or if pension rights are expressly included in the waiver, your independent adviser should spot this. They may recommend that you seek specialist pensions advice before deciding whether to sign the settlement agreement.
What will happen to my pension when my employment terminates?
Subject to any special arrangements agreed in advance, when your employment terminates, any payments made by your employer (either from them or on your behalf through payroll) will stop. You or your employer should notify the pensions company that your employment has ended, and ask that they confirm your options in relation to your pension fund, in writing.
Can I take early retirement benefits if my employment ends by way of a settlement agreement?
Sometimes, the right to take early retirement pension benefits will depend upon the way in which your employment ended. If this is the case, it will be set out in your pension scheme ‘Scheme Rules’.
In the worst case scenario, you could be prevented from taking benefits early if your employment terminates by way of a settlement agreement. It is absolutely crucial that you check this out if you are considering terminating your employment by settlement agreement and wish to take early retirement benefits after termination. You can request a copy of the Scheme Rules from your pension scheme administrator, and can obtain specialised pensions advice from an IFA.
Sometimes, the level of benefit you receive is determined by the way in which your employment ends. For instance, some pension schemes will pay reduced benefits to individuals who are dismissed for gross misconduct. Again, you should look into this carefully before signing any settlement agreement, to ensure that your financial planning moving forward is accurate.
IMPORTANT: The contents of this page are for guidance only and do not constitute legal advice. You should consult a solicitor without delay if you require legal advice on a particular employment matter.