Can I afford to retire?
We are all aware that many people are affected by a ‘cost of living crisis’. Several years of inflation outpacing wage increases has, for many of the population, resulted in a vanishing amount of disposable income. Whilst this is much talked about in the press and in political circles it is unlikely to affect you whilst you are working in a comparatively well-paid profession. Ask yourself: how careful are you about your spending?
Fast forward to retirement and the difference between income and expenditure suddenly comes into sharper focus. If you are approaching retirement (within the next 5 years) or you are starting to think about retirement (less than 15 years) it is never too early to put some numbers to both the amount you will need and the amount you will have available.
What do I need?
Whilst this is a common question, there is no quick answer. A scientific approach is to forensically go through your bank statements and work out essential expenditure to arrive at a base level of required income. This type of expenditure probably won’t vary too much in retirement (e.g. utilities, council tax, insurance, etc). Whilst obvious things like commuting and mortgage repayments may drop off in retirement, overall, I would avoid thinking that retirement means you spend less on ‘lifestyle’ expenditure! The scale of this will clearly depend on your existing spending habits – is a holiday for you a couple of weeks in Spain, or are you travelling business class to Barbados?
From experience, a base level is probably £4,000 per month of net income. Build in a £20k holiday budget, children still under the age of 25 and you soon get to an £8k per month target.
How do I know if I have enough?
Again, a scientific approach is best adopted here. Almost all dentists will have some form of NHS pension, either active contributions or deferred service. It is surprising how few dentists know the value of this pension when approaching retirement. This is relatively easy to get hold of: Search for NHS Total Reward Statement and you should be able to access a recent statement showing the likely retirement income at ‘normal’ retirement age.
‘Normal’ retirement age varies between age 60 and state retirement age depending on which NHS scheme you have membership of. This will be one of the 1995, 2008 or 2015 NHS schemes or a combination of these. The formulaic nature of pension accrual means we can usually forecast the future pension even if you have a few years until retirement and you are an active member.
If you intend to take your pension before the normal retirement age, then an ‘actuarial’ reduction will apply. The reduction is based on published government figures, so it should be possible to forecast this in line with your planned timing. Working out how much you can expect from your NHS pension is important as it will give you an indication of what you need from alternative sources.
Forecasting income from alternative sources is also important. If you have a personal pension (either SIPP or otherwise), ISA/investment portfolios, rental property and/or other assets getting an up-to-date valuation is the first step to forecasting their income potential. It is important to consider the variables that impact on these calculations. For example, assuming a growth rate of 7% on your investment portfolio may be acceptable where you have 10 or more years to retirement but less so 2 years before retirement. Re-examining investment risk is worthwhile depending on your financial objectives and time to retirement.
Investing for income
Many dentists sell their practice either before or at retirement, releasing a significant amount of capital. ISA and pension limits are relatively modest and probably won’t begin to accommodate the proceeds. A suitably qualified adviser will help you exploring these and other tax advantaged savings vehicles such as investment bonds, which may supply tax efficient income in retirement.
What about inheritance tax (IHT)?
Business assets enjoy some IHT protection, so releasing significant capital from selling a practice will probably increase your IHT liability. To mitigate this Trust planning may become more of a priority. Proposed changes to IHT rules on pensions (effective from April 2027) will also require some careful consideration.
Other points to mention
- The state pension age is generally age 67, although this could be pushed back in future years.
- It is important to consider income tax rates in retirement as not all income streams are taxed equally.
- Legislation on pensions and investments changes regularly.
Seeking advice from a suitably qualified adviser on all of the above is likely to improve your chances of a financially secure retirement.
