Planning ahead for your happiest retirement

Published: 29/9/2020
By Denplan & Chase de Vere

Dentists with substantial private pension savings outside of the NHS Pension Scheme need to think carefully about how to cash these in. Chase de Vere Dental is our expert partner in financial advice, specialising in the NHS Pension and advice to healthcare professionals. They’re here to help you get to grips with your retirement planning and help you make it a success.

Gathering all your resources

Dentists starting to think about retiring have more choice than ever before about how they’ll organise their finances. Chase de Vere Dental says, “Whether you’re planning to retire fully or to stop working gradually, there are many different ways to secure an income for you and your family in retirement. The NHS Pension Scheme may not be your only source of income – many dentists have built up substantial savings and investments outside of this scheme, including private pension arrangements, particularly if they’ve worked mainly in private practice.”

Chase de Vere Dental continues, “If so, it’s important to plan carefully to identify the best way to access your private pension savings. These savings will almost certainly be in a money purchase or defined contribution scheme such as a personal pension. Your income isn’t guaranteed – it will depend on factors such as investment returns – but from age 55 onwards you have complete freedom about how to access your pot of savings.”

The crucial part

You need to be confident your savings will last. Your retirement will hopefully continue for many decades, so it’s crucial that you’ll have enough income to last you throughout.

Chase de Vere Dental advises, “Start by thinking about your financial needs. Make a realistic assessment of your likely spending in retirement, bearing in mind what will change once you’ve retired, and how much income you’ll need to maintain your standard of living.” Think about ongoing commitments – are you still repaying a mortgage or supporting children in education? Do you have any large one-off plans like a holiday home? And, don’t forget the effects of inflation. If your income does not increase at least in line with inflation each year, your standard of living will decline in real terms.” 

A realistic budget for your retirement years will give you a better understanding of the income you’ll need. This will help you decide both how and when to access your private pensions – bearing in mind that pension income is taxable.

Dipping into your pension

Chase de Vere Dental: “Once you’re ready to access your pension savings, you can usually take up to 25% of your pot as tax-free cash, known as a pension commencement lump sum (PCLS) in the industry jargon. You can then draw a regular income or take irregular lump sums from the rest of your savings, but this money will be taxable – how much you pay depends on your total income for the year.

“You don’t have to take your entire PCLS in one go. One option is to take a series of lump sums from your pension – 25% of each one will be tax-free while the rest of the money will be taxable.

“Either way, if the taxable cash you take pushes you into a higher tax band – taking you above the basic-rate threshold into higher-rate tax, you’ll pay the higher tax rate on the income that falls into that band.

“There’s one other important issue to consider too, the ‘lifetime allowance’. “If your total pension savings are above a set sum - £1,073,100 in the 2020-21 financial year, you’ll need to pay a tax charge on the excess, unless you have previously agreed protection from this charge with HM Revenue & Customs”, says Chase de Vere Dental. “This makes it essential to think carefully about the order in which you access different pots of pension cash, particularly if you have NHS Pension Scheme benefits, since each one is assessed against the lifetime allowance in the order taken.”

Annuities versus drawdown

Chase de Vere Dental explains annuities: “The fundamental choice when accessing money purchase pension savings is whether to buy a lifetime annuity or to begin an income drawdown plan.

“With an annuity, you use your pension savings – in full, or after your PCLS – to buy a regular income for life, paid by a provider such as an insurance company. It guarantees to keep paying for as long as you live. In an income drawdown plan, by contrast, you take income or lump sums directly from your pension fund, which you can continue to invest. This approach can be more flexible and has advantages such as making it easy to pass on unused savings to your heirs – but there’s no guaranteed income and you’ll need to manage the money carefully.

Lifetime annuities

“These come in different forms and it’s worth taking independent financial advice on the best type of plan for you – and on which provider offers the best rate, since this may not be your current pension provider.

“Basic lifetime annuities offer a range of different income options, while investment-linked annuities pay an income linked to the performance of underlying investment funds - so can rise or fall. Flexible annuities offer greater choice over income payments, investment options and death benefits.

Annuities features

“You’ll also need to consider the various features available with annuities. How do you want payments to increase each year – by a fixed percentage or in line with inflation, for example? Do you need to provide a partner with income if you die before them? Do you want a guaranteed period, which will mean your income is paid for a minimum amount of time, even if you die sooner? Do you need value protection, designed to pay a nominated beneficiary the value of your savings less income already paid out when you die? Each choice you make will affect the annuity rate you are offered.

The low-down on drawdown

Chase de Vere Dental tells us: “If you’re considering income drawdown, known as ‘flexi-access drawdown’ in the jargon, you’ll also want to shop around for the best plan – and your current pension provider may not even offer drawdown. It’s crucial that you take independent financial advice before transferring your pension savings to a new provider since your existing plan may come with valuable guarantees that will be lost when you move the money.”

“With income drawdown, your pension savings remain invested and you can make withdrawals as they suit you – you choose how much income or lump sum to take. But you must accept investment risk – if the value of your savings fall, you may need to adjust your plans for withdrawals.

Prefer a mixture?

“Importantly, the choice between income drawdown and annuity doesn’t have to be final or complete. You could use some of your savings to buy an annuity to provide a certain level of guaranteed pension, but leave the rest invested. Or you could opt for income drawdown initially and then buy an annuity later in retirement.”

Plan well to manage risk

Planning ahead is essential, says Chase de Vere Dental: “If you do opt for drawdown, your attitude to investment risk is vital and you need to plan ahead – the idea is to ensure your pension savings are ‘retirement ready’. As this year’s stock market volatility has demonstrated, the value of investments can change quickly. If you have time on your side, you may want to begin de-risking your savings ahead of retirement, focusing particularly on the assets you’ll withdraw first.

“For example, if you’re planning on taking the full 25% PCLS when you retire, it could be worth transferring this money into a cash fund within your pension, so there’s no chance of it being hit by a sudden market downturn just before you take it. You could do the same with the cash you will anticipate needing in the first two years of retirement for example.”

These are personal decisions though – good financial advice will help you assess your attitude to risk and take action accordingly.

“Bear in mind too that some pension investments may be easier to cash in than others. In particular, if you have property or property funds in your pension portfolio, you’ll need to plan carefully for realising these ‘illiquid’ investments.”

Seeing the bigger picture

There are other issues to consider as you start to make pension choices. You’ll need to think about how your private pensions fit into your broader savings, including other pension pots. You should also consider any assets you expect to receive in the future – are you selling property, or anticipating an inheritance? And don’t forget to take state pension benefits into account in your planning.

Don’t forget your health

Early on in your retirement, when you’re fitter and healthier, you may spend more, on things like travel. But you’ll also need to consider the potential cost of any care you may need later on in your retirement years.

Think about inheritance too

For example, if you die before reaching age 75, your heirs have two years to claim a tax-free lump sum from your pension or move those funds into beneficiary drawdown and draw on them tax-free indefinitely; after two years, if these actions haven’t been taken, any lump sums or income your beneficiaries take will be added to their income and taxed accordingly, but won’t be tested against your lifetime allowance. If you die aged 75 or over, your heirs don’t have any right to a tax-free lump sum as all lump sums and income withdrawn are taxable on the beneficiary at their own tax rate(s).

The bottom line

Everyone’s circumstances are different. Think carefully about your personal position, based on the facts such as your savings and investments, as well as on your plans, ambitions and attitude to risk. There are plenty of options and you’ll often be able to mix and match. The right combination will depend on factors including:

• When you stop or reduce your work
• Your income objectives and attitude to risk
• Your age and health
• The size of your pension pot and other savings
• Any pension or other savings your spouse or partner has
• Whether you have any financial dependants
• Whether your circumstances are likely to change in the future.

Don’t go it alone, pick up the phone

Good quality independent financial advice will help you weigh up all these factors and secure the retirement you’re hoping for. Call Chase de Vere Dental on 0345 300 6256.

If you’d like to find out more or need any further information, please contact Chase de Vere Dental here.

Please note:

Information is based on Chase de Vere’s current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from, taxation are subject to change.

The value of investments and income from them may go down. You may not get back the original amount invested.

Past performance is not a reliable indicator of future performance.

About Chase de Vere

Andrea Sproates has worked in Financial Services for 36 years. 21 years ago Andrea moved to BMA Services providing independent financial advice to both doctors and dentists before progressing to a Management position. She then spent several months managing a team at a specialist healthcare accountancy practice before returning as Head of BMA Services at Chase de Vere twelve years ago. Andrea now heads up both Chase de Vere Medical and Chase de Vere Dental and is widely recognised in the financial services arena as an expert on the NHS pension scheme and pension taxation legislation. 

Phil Bower has worked in management roles within Financial Services for over 25 years and has been a specialist in providing Financial Advice to Doctors and Dentists since 2004. Phil is a level 4 qualified Financial Adviser and has a passion for providing a high level of service, technical knowledge and financial advice to the Dental and Medical Profession. This passion led him to join Chase de Vere in early 2016 to work in partnership with the BMA as their Business Development Manager.