The new contracts have, in the main, changed many practitioners’ view of where they see themselves today, tomorrow and in the coming years. With this is in mind, dentists need to consider the knock-on effect these changes may have on their retirement plans.
If you are in a mainly NHS practice, your retirement is relatively well looked after by the NHS pension scheme. However, if you start to reduce the amount of NHS work you do without a contingency plan to replace ‘lost’ NHS pension benefits, you could suffer significant financial repercussions.
Following legislation changes to the pension regime in April 2006, you can now contribute more into your pension plan by way of regular payments and one-off lump-sum contributions. You are now entitled to make an annual contribution of 100% of your income or £215,000, whichever is the lower amount.
The important message is ‘review, review, review’. We see many people who ‘have a pension’ but when asked even the most basic question they are unsure of how much they pay in, where their money is invested, what the costs are and, most importantly, what it will give them when they retire.
Indexing of your contribution is a starting point. At least you know your contribution will go up but if this, for example, only increases in line with the Retail Price Index, then you are only retaining the buying power of your money. It is as important to review your contribution as it is to be interested in the investments.
While many of us are familiar with the investment options within our pension funds, we still fail to review the performance of our initial fund selection – not just periodically, but in many cases ever.
Investment risk plays a big part in where your monies are or should be invested, but you must bear in mind the time scales until you attain your desired retirement age.
Generally speaking, the nearer you are to retirement age, the less investment risk you should take. This can be difficult, especially at a time when the markets are seemingly ever growing, but who can tell when the market will fall? With a little planning and good quality advice, you can reduce or even remove the investment risk to which you are exposed as you approach retirement.
Another very significant aspect of retirement planning within the dental market place is a specific type of pension called a Self Invested Personal Pension, or SIPP for short. This can provide a very tax efficient way of purchasing the practice. Effectively the SIPP owns the practice buildings, and therefore this is the investment of your pension. The SIPP has to purchase the practice from the existing owner at market value. You, the principal, then has to pay a market comparable rent to the SIPP for use of the buildings.
Many people advocate this action as being the ’holy grail’ of pension planning, but I believe that tax efficiency alone, whilst certainly attractive, should not be taken as the reason for doing this.
So what happens when you reach retirement? You have a pension plan with a nice sum of money in it, and at your given retirement age the pension provider will write to you and offer you terms for taking an income from them in the form of an annuity. This will pay you an income for the rest of your life.
In addition to the income payments, you can also benefit from tax-free cash from the pension fund, if you wish. This will be 25% of the pension fund value and paid to you as a one-off lump sum, but will of course reduce the amount of income that you could receive from the annuity.
You need to be aware that you have the choice of an Open Market Option – this will provide you with the opportunity to shop around for the best annuity rate available to you for the provision of the income, and this figure can vary greatly between providers.
You can also choose how you take the income. Do you need it payable to a spouse after your death? Will your spouse need an equal amount or could they survive on a reduced pension? Do you need an income that will rise or have the potential to rise?
There are many different ways of taking your retirement benefits. These include traditional annuities that
provide a guaranteed set amount of income, and With Profits annuities that provide potential increase in income through investment performance of the fund. Indeed, ill health at retirement is possibly the only time in your life when you will benefit!
Impaired life annuities provide the opportunity of an increased amount of income throughout the remainder of your life when compared to a standard annuity. This unfortunately is due to the provider making a calculation of life expectancy taking into account the conditions that you are
A further option for those with a larger fund size is the opportunity to continue to benefit from investment returns whilst taking an income. This is known as Personal Pension Drawdown or Unsecured Pension Income. Essentially the amount of income can be kept to a minimum or increased within certain limits set by the Government Actuarial Department.
This can be especially effective where you need to access tax-free cash from the pension fund but not the income. You will need to have purchased an annuity by the time you reach the age of 75 should you exercise this option. High-quality independent advice is essential in an ever-changing and complex market place.
Daniel James is the sales and development officer at Lloyd & Whyte (Financial Services) Ltd. For further information call 01823 250750, fax 01823 352149 or email [email protected].