Over the £1,000,000 threshold
As doctors and dentists you are fortunate to be able to use your excess income towards retirement planning, which, if managed correctly, can leave you in a very comfortable position in the years following work. Recent changes to pension legislation means that those with pension pots over £1million will incur extra taxes. But is tax a reason to stop growing your retirement fund?
This does not constitute advice. Guidelines may vary depending on personal circumstances. Formal financial advice should be taken in all cases.
The Lifetime Allowance is now £1 million
The Lifetime Allowance (LTA) has recently been reduced from £1.25 million to £1 million. The LTA refers to the amount your pension pot can grow to, over your lifetime, without tax implications.
Doctors and dentists are likely to find their pension funds growing to over this new lower limit for tax.
For NHS Pensions this is partly due to the way the NHS pension is valued against the LTA, and the issue is most likely to affect those professionals that join the 2015 NHS Pension at an early stage in their career, and whom work through to the standard retirement age, or beyond.
With private pensions there is also a high probability that with regular, structured savings into a pension fund, the LTA will be exceeded. Remember, just because your pension isn’t at the £1 million mark now, it could well be by the time you come to draw the pension.
Paying some tax for a greater pension fund
Whilst nobody likes to pay tax, when it comes to your pension there are several reasons why you would not want to hinder the growth of your pension pot due to tax implications.
First and foremost, would you really want to cap your retirement income due to paying across “some” of it in taxes?
Here are 3 other reasons why you can allow your pension to exceed the LTA:
(1) Use the NHS “Scheme Pay” to cover your tax bill when it arrives.
This NHS scheme is set-up as a method to loan you the money to cover the additional tax bill, incurred from exceeding the LTA. When you retire your pension income will be reduced by the NHS recouping their loan to you, and the resulting penalties reduce your pension pot to a level under the LTA.
(2) You want to retire before the retirement age
The retirement age is currently 67 and the NHS pension is linked to this. Drawing your pension before this age incurs hefty penalties. The excess pension pot will be useful in helping to pay the penalties from early retirement, so the bigger the pension, in this case, the better. Alternatively, setting up a private pension alongside your NHS pension will enable you to wait to draw from the NHS and still retire early.
(3) Maximise your tax free lump sum
On retirement, NHS members can sacrifice some of their pension income in exchange for an increased tax-free lump sum. By increasing the tax-free amount you reduce your pension income, and subsequently the size of the pot for the LTA calculations is also reduced.
There are ways and ways – and planning is key
Pension planning is key to ensuring you are continuing to grow your pension fund in the most tax effective way.
It doesn’t necessarily mean you won’t pay any tax, but tax will be taken into account to give you the best outcome and most return for your investment.
Working with a professional financial planner that specialises in helping doctors and dentists to maximise their retirement fund, can help minimise your tax too.
Pension planning looks at:
- How you intend to take your pension benefits
- Your desired retirement age
- How you plan to pay any tax generated
Planning your retirement? Speak to Darren
Dental & Medical Financial Services are specialists in retirement planning for doctors and dentists. Contact Darren for a free, no obligation appraisal and to see how he can help you meet your financial goals.
Tel: 01403 780 770