Some statistics from Edinburgh based pension provider Standard Life PLC:
“One in three 46-65 year olds want to keep working in new jobs- ‘on their own terms’ after the official retirement age”
“51% plan to travel more in their long-term future”
“By 2050 people will live for an average of 30 years on reaching age 65
The traditional approach to retirement amongst dentists may also be changing. Recent changes to the NHS Pension scheme point to concerns over future funding of what is an enormous liability for the cash strapped NHS. It is to be hoped that the new retirement age of 65 for new joiners (from April 2008) and a stepped increase to your contribution (now up to 8.5% for some practitioners) are sufficient to bring the scheme funding under control. Commentators often make the point that at the creation of the NHS in 1948, a pensioner’s life expectancy was significantly shorter than it is today.
However it is not all doom and gloom, as the NHS Pension scheme remains one of the best with an accrual rate topped only by the scheme available to Members of Parliament!
What is a fact is that individual dentists have little power to prevent changes to the NHS scheme benefits. Our experience of helping practitioners with their retirement planning reveals that the greatest threat to retirement income is a failure to plan ahead. Often this is a failure to take account of increasing private fee income and the resulting loss of valuable NHS Pension benefits.
The NHS practitioner:
Mr Brown is a practitioner retiring at 60 with 37 years of NHS service. He has enjoyed a long career treating NHS patients. He can expect to receive an index-linked pension of £50,000 pa and a lump sum of £150,000.
The Private practitioner:
Mr Cameron is a practitioner retiring at 60 with 20 years NHS Service. At age 43 he stopped NHS work and enjoyed the next 17 years treating patients on a private fee basis. His total net profits remained the same as Mr Brown until retirement at age 60. He can expect to receive an index-linked pension of £27,000 pa and a lump sum of £81,000.
*For this case study pension accrual is based on average ‘superannuable remuneration’ of £96,500 pa, which would require NHS funding of £220,000 pa)
The private practitioner receives a pension and lump sum which is 46% less than the NHS practitioner.
Taking account of private fee income
The need for dentists, who have an element of private fee income, to plan ahead is clearly demonstrated here. A good independent financial adviser (and one who understands the NHS Pension) should recommend suitable strategies to mitigate a reduced NHS pension. This may well involve personal pension contributions which still attract tax relief at your highest rate. Recent Treasury moves to reduce tax relief for high earners should be seen as a warning shot for those yet to take advantage of tax relief. Many higher-rate tax payers could continue to benefit as follows.
Tax relief example for higher-rate tax payer
Your pension contribution per month Tax relief added to your contribution Total gross pension contribution to your fund Tax relief reclaimed through self assessment Your net contribution after tax relief
£500 £125 £625 £125 £375
For dentists who employ their spouse an employer’s contribution is often advisable. This may also help to balance income tax liabilities for a couple in retirement.
There are annual allowances and lifetime limits on pension funding. A qualified independent financial adviser will be able to explain these limits and assess any potential liabilities. Your NHS pension needs to be considered in this assessment so make sure your adviser is suitably qualified to do this. Personal pensions do not provide a guaranteed return. Your adviser will be able to recommend a suitable risk strategy based on your objectives and timescale to retirement.
Our experience shows that dentists now demand a greater flexibility from their retirement plans. Many practitioners opt to sell their practice and continue working (and accruing NHS Pension). For dentists closer to retirement we regularly advise on a suitable exit strategy drawing together a trio of key elements:
• How to achieve the best price for your practice with exit terms that suit you
• Forecasting income requirements in retirement (or partial retirement)
• Forecasting income from NHS Pension, personal pensions and investments.
The need to have a fluid and flexible retirement strategy has never been greater. Plans need to be reviewed regularly and dentists should make sure their adviser keeps them up-to-date with the new and more flexible retirement options for the NHS Pension scheme.
The benefits of early planning are well documented. A failure to implement and review a retirement planning strategy early on in your career is perhaps more detrimental than any of the economic or political pressures we face.