Paul Barnfather shares how the removal of the lifetime allowance might present a time-limited financial opportunity for dentists upon retirement.
A key area of financial planning for dentists will be the ever-evolving considerations for life after hanging up the loupes and how to maximise your retirement provisions.
What’s changed?
In the 2023 Autumn Statement, the former chancellor of the exchequer Jeremy Hunt announced the removal of the lifetime allowance (LTA) – the maximum amount of pension savings an individual could have without incurring a tax charge.
This change has made pensions even more attractive for dentists saving for retirement. You can take full advantage of the perks that come with pension saving, particularly the tax relief you get on contributions. For example, for every pound you save into a private pension, the government adds 20%. If you are a higher or additional rate taxpayer, you can claim back extra through your self-assessment tax return.
The removal of the LTA presents the opportunity to claim significant sums of savings that may have been lost before in tax, which can potentially be added back into your pension. There is also an opportunity to secure pension benefits while retaining your NHS contract via retire and return.
Plus, pensions have the potential to be passed on free from inheritance tax (IHT) when you pass away. IHT and estate planning can get convoluted, so you might benefit from discussing your goals and assessing your options with a financial adviser.
What do dentists need to be wary of?
With Labour in power, the real question is how permanent the decision to abolish the LTA will be – before the election, Labour officials were vocal about reversing this decision should they come into power. This may make any financial opportunities concerning the LTA time-limited, particularly with the Autumn Statement looming on the horizon.
Another consideration is that although there are significant benefits to take advantage of with the removal of the LTA, there are still rules on pension contributions with the annual allowance and tax limitations on how much you can access when you retire.
From 6 April 2024, the LTA was replaced by two new allowances: the ‘lump sum allowance’ (LSA) and the ‘lump sum and death benefit allowance’ (LSDBA).
The LSA limits the tax-free amount that can be taken in the form of a pension commencement lump sum or the tax-free component of an uncrystallised lump sum during a person’s lifetime. On the other hand, the LSDBA restricts the tax-free amount available on death and is inclusive of any tax-free amount taken while alive.
The standard LSA and LSDBA are £268,275 and £1,073,100, respectively.
Seek advice from specialists
In essence, what these opportunities and resulting challenges mean is that you still need to consider your options while saving or taking retirement provisions carefully to maximise this area of your financial planning. Speaking to a specialist financial adviser in this area could be crucial.
In regard to accessing your NHS pension and then returning to work, there are many routes available depending on various factors of how you practise, such as what contract you have, the legal structure you operate under (sole trader, limited company, partnership etc) and your CQC registration details, to name a few.
It’s a complex process where you may benefit from legal advice from a specialist dental solicitor who is experienced in dealing with retire and return for practice owners.
Tax treatment depends on individual circumstances and may be subject to change in future. Please note The Financial Conduct Authority does not regulate inheritance tax planning and trusts.
For further support and guidance to plan for the financial year ahead, speak to a dental specialist financial adviser at Wesleyan Financial Services by booking a no-obligation financial review or calling 0800 316 3784.
This article is sponsored by Wesleyan Financial Services.