The big dentist pension decision
It is often said you don’t know what you’ve got until it’s gone. And this can often be the case when going private once the initial euphoria of being free from UDAs (units of dental activity) forever has died down.
That is not to say it cannot work – it can be a profitable change for many, so long as you have taken all factors into account when you make the leap and so long as you manage the change sensibly.
In this article, we consider the superannuation scheme as a factor that ought to be considered when making the decision of whether to go private or not, but very often, gets forgotten.
Leaving the NHS
I wouldn’t say that this is the most important factor when deciding whether to go fully private or not, but it is the one that I find people seem to forget.
The NHS scheme is magnificent. It is linked to your NHS lifetime earnings, takes account of inflation and pays a guaranteed pension. This is one of a dying breed of pension – known as a defined benefit scheme.
Most private pensions are defined contribution schemes where the pension amount is not guaranteed and depends on the pension fund’s performance. If you are leaving the NHS and hence the NHS scheme, any benefits you have already clocked up will stay with you, but you will need to assess if you are on track for the required amount of future pension income and that may mean paying into a personal pension, which will inevitably cost you more. You should consult a financial planner who can help you assess what you will need in the future in today’s terms, and what you currently have towards that. Then, once you know what the shortfall is – we can help you find ways to address that shortfall, or if there is no shortfall – you treat yourself to a nice glass of wine and a pat on the back.
Choosing the right scheme
You can, of course, pay into private pensions even if you pay into the NHS pension scheme – many dentists do, particularly those who perhaps don’t do that much NHS dentistry.
Whatever scheme you go for – don’t forget that you get tax relief. If you pay into a personal pension, then generally you make the contribution net of basic rate tax and then, if you are a higher rate taxpayer, you get the balance of relief (making up your higher rate) through self-assessment.
So a 40% taxpayer, gets 20% tax relief immediately as you pay your pension contributions net of 20% tax and the remaining 20% on your tax return as a reduction of tax liabilities. With the superannuation scheme, however, you get all relief via your self-assessment tax return (you also enjoy a very generous state subsidy on top!).
When you actually come to retire, whether you have a private pension or an NHS pension (or both) you can usually take 25% as a lump sum, known as tax-free cash. As the name suggests, this is tax-free – or it would be a terribly inappropriate name, don’t you think?
The rest is generally used to pay your monthly pension (in the case of the NHS scheme) or generally purchase an annuity (in the case of a private pension). That pension income is taxable.
You should really factor in the cost of replacing the NHS pension when you set your fees, however this can be hard to do when you are also trying to stay competitive. Some experts suggest that a minimum of 20% of the private fees you earn to cover your pension but professional advice should always be sought with pensions, as they are a specialist area.
Mac Kotecha is a chartered accountant and chartered financial planner who deals exclusively with dentists and has been established for more than 27 years. His company offers accountancy, taxation and payroll services in addition to invaluable advice on practice management, buying/setting up a practice and other dental issues. Contact him on 020 8346 0391 or go to www.specialistdentalaccountants.co.uk to learn more.