Many people, even if they really love their job, understandably look forward to a life of leisure after retiring – and the sooner they can get there, the better.
Simon Cosgrove, Specialist Financial Adviser at Wesleyan Financial Services, shares his advice on achieving the retirement that you want, when you want it…
If you’ve thought about how you can have the kind of retirement that you want earlier rather than later, the key is to plan, plan and plan some more and doing the groundwork early on will stand you in good stead.
For example, knowing what you’re entitled to as a pension and if that’s enough for what you want to do, whether that’s travelling the world or pottering in the garden with grandchildren, will help you understand how to reach that goal as quickly as you want to.
When deciding how you’re going to fund the lifestyle you want, it’s vital to look at what sources of income and capital that you have for your retirement, whilst not forgetting the impact of inflation over the years too.
One of the obvious places to start is your pension.
If you worked in the NHS but have since gone private or increased your private income over the years and paid into a private pension, you may have more flexibility over retirement options than someone who has worked in the NHS for their entire career.
That’s because the NHS pension provides a regular income that’s guaranteed for life and, possibly, a tax-free lump sum. With a private pension, you can choose a wider variety of options, and when you decide to access it, supposing you do want to access it.
A key figure to look at when it comes to your NHS and private pensions, is the Lifetime Allowance, which is the most that you’re allowed to hold in pensions without facing a tax charge at retirement.
Many dentists who’ve spent their whole career in the NHS could exceed this allowance and have their pension reduced when they retire as a result.
Taking an increased tax-free lump sum out of your NHS pension can reduce your measurement against the Lifetime Allowance, although there are different rules depending on which part of the scheme that you’re a member of.
Members of the 1995 scheme get a tax-free lump sum automatically and can also choose to increase how much that is worth, although doing this will reduce the pension that they’re entitled to. If you’re in the 2008 or 2015 scheme the lump sum is not automatic, however, and you need to choose to have a tax-free lump sum and a reduced pension.
Knowing how much income that you need to live on is essential in this decision, so you don’t leave yourself short if you choose a larger lump sum over a higher guaranteed income for life.
If you’re a practice owner, selling the business can also be a way to fund retirement and minimise, or eliminate, the need to dip into your pension.
Selling a practice can take time, though, especially if you need to take action first to achieve the price you want. If you intend to fund your retirement this way, start putting plans in place a few years before you intend to retire.
Your practice sale can be a great way to fund your retirement, although you need to identify if there are taxation implications. This isn’t the case for pensions, which are extremely tax efficient.
That’s largely because you automatically get 20% uplift on any contribution that you make into a private pension scheme through tax relief, and if you’re a higher rate taxpayer, you can claim back an additional 20% from HMRC. When you access your pension, you're allowed to take 25% of your fund tax-free, although the remainder is subject to income tax.
While pension pots also tend to sit outside of your estate for Inheritance Tax purposes, the proceeds from selling your dental practice can be subject to a 40% inheritance tax charge in the event of your death.Deciding how to balance paying into a pension and having a lump sum from a practice sale, as well as deciding how to create income from the sale proceeds, is all part of the planning and preparation for retirement. Doing that work early on can give you the best chance to enjoy the retired life you want, potentially at an earlier date than you thought possible.
Of course, it’s impossible to predict the future, but the more you plan the better prepared you will be.
Retirement could only last a short time, or you could be retired for 30 years or more. After all your hard work, you want to enjoy the fruits of your labour, however long it lasts.
Spending some time early on to think about what you want to do in retirement, what your expenses will be and the best way to fund it will give you peace of mind that your retired life will be everything you want it to be.
Talking to a financial adviser now can help you to understand the level of income you need, carry out a cash flow analysis and discuss the different options available to you.
You can book a no-obligation financial review with us by visiting www.wesleyan.co.uk/dental or calling 0800 316 3784.
Please bear in mind that advice in relation to Inheritance Tax planning is not regulated by the Financial Conduct Authority. Tax treatment depends on the individual circumstances and may be subject to change in future.