The pension shake-up – five things all dentists need to know
In April this year, changes were introduced to not only the NHS Pension Scheme, but also personal pensions.
It is the biggest pensions shake-up in history and the specialist financial advisers at Wesleyan have been working hard to ensure dentists across the country are aware of how the changes will impact them.
Arguably the largest and most heavily publicised is the greater flexibility now afforded to pension pots, with people now able to take taxable lump sums direct from their pension pots.
People close to retirement also need to be aware of new tax implications and different arrangements among pension providers that pension savers should be aware of.
1) Do not assume taking a lump sum from your personal pension is the best, or easiest, option
The cash option may sound remarkably simple, and tempting, compared to shopping around for an annuity. But while the new pension rules give people more freedom in retirement, this freedom comes with greater choice, which has its own complications.
One option could be to reinvest the cash you withdraw. But deciding exactly when, where and how much money to invest can be complicated by the wide variety of options open to investors and the need to balance risk and reward.
As your pension pot only contains a finite amount, which could be quickly depleted if you make regular sizeable withdrawals from it, you will need to ensure any plans you make will provide you with enough money to live on for the rest of your life. Seek out professional advice to ensure you make the right decision for your own personal circumstances.
2) Not every private pension provider will offer the new flexibilities
It is not mandatory for pension providers to adopt the new flexibilities, so it is essential that savers check as they may have to switch to another company if they want to take up these new options.
Changing pension providers can be a lengthy process, so if you are approaching retirement and feel you might want to take advantage of the new pension arrangements, the sooner you take action the better.
3) Taking a pension pot as cash could affect the amount of tax payable
Under the new pension rules, if someone opts to take their entire pension as cash, a quarter of this can usually be withdrawn tax-free. However, the rest is treated as income and is taxed at marginal rates.
So depending on the size of your pension pot, you could actually find yourself pushed into a higher tax band at retirement.
4) An annuity could actually still be the best option
Despite some criticism around their value, annuities will still provide security of a regular income over a lifetime that cannot be guaranteed by taking a cash lump sum or investing the money yourself.
If you have a medical condition, you might consider an enhanced annuity. These take into account the fact you may have a shorter life expectancy than someone in good health, with the annuity companies providing you with a higher income than normal on the assumption they will be paying out for a shorter amount of time.
5) If you have an NHS Pension, it may not provide enough income if your private pension funds run out
Because only NHS earnings contribute to an NHS pension, those dentists who carry out a lot of private work may want to make additional savings for retirement. This can be done by buying additional benefits in the NHS pension scheme, contributing to an additional voluntary contribution plan or taking out a personal pension.
In some cases it’s conceivable the private pension could outweigh any NHS pension. However, if you take out a sizeable lump sum, or make regular withdrawals from your private pension, these funds could soon be depleted, meaning you will be relying on your NHS Pension, which might not be enough for your ongoing needs.
There is no doubt the pension reforms that come into effect this year will bring more choice, which is to be welcomed. But in order to ensure retirement funds last as long as needed, it is vital to decide what lifestyle you would like to have in retirement and how much you will need to live on, then plan accordingly.
Therefore, it is advised that you discuss all the available options with a qualified financial adviser who understands pensions and the dental profession.
The above information does not constitute financial advice. For more information on Wesleyan visit www.wesleyan.co.uk.