If you have monies in pensions other than the NHS Pension Scheme, such as personal pensions, one day you will have to decide what to do with the funds in order to draw an income.

Major pension changes were implemented on 6 April 2011, with one of these being the new ‘flexible drawdown’ facility, which could be of use to those with guaranteed pension income in excess of £20,000 pa from elsewhere (such as the NHS).

However, this is only one option of many.

Let’s look at what you should be considering before you make any important decisions.

Background

For many people, retirement is no longer a one-step process. They do not go from working full time one week to not working at all the next, but may reduce their hours over a period of a few years.

During this period of partial retirement, their income may be made up of a mixture of salary/net profit and pension income.

It is also likely that they will be spending more than in later years as they remain in good health.

As individuals move into middle retirement age, their income needs become less. Those who reach their 90s are likely to face long-term care costs, leading to a sharp increase in their income requirements.

There are a number of options available when you are deciding what to do with the pension pot(s) you’ve accrued:

Income Drawdown

This is suitable for those who are looking to take income but either do not need the maximum possible amount, or who wish to be able to vary their pension income to suit their circumstances. This makes it ideal for the early years of retirement.

As it’s possible that you’ll spend 30 years or more in retirement, you may find it increasingly difficult to predict how your income needs will change over the years. Income drawdown allows you to choose, within limits, the amount of income you want to take each year, and to vary this amount when your circumstances change.

Because the pension fund is still invested, there is the opportunity to improve the income that can be taken, providing you are prepared to accept investment risk. Once again, this makes it more suitable for younger retirees.

Capped Drawdown

Capped drawdown is the 2011 equivalent of the income drawdown option. There is a maximum income limit, which is designed to stop individuals who do not have a guaranteed income of £20,000 to fall back on (see flexible drawdown below), from taking too much income and running down the value of their pension fund too quickly.

Capped drawdown is suited to providing ongoing income over the longer term, but with some flexibility to adjust income levels to suit your changing needs.

Flexible Drawdown

Since 6 April, it has been possible to access a form of drawdown that does not have an upper income limit, providing the minimum income requirement MIR) can be met. The MIR has been set at £20,000 and is designed to ensure individuals who withdraw large amounts from the pension plan have enough income left to live on without resorting to state support.

Flexible drawdown can be used to provide greater amounts of income during the years when expenditure is greatest, in the early days of retirement or when long-term care fees are needed.

The lack of any upper income limit means you can withdraw the entire pension fund. This freedom will have to be weighed up against the requirement to pay income tax on the non-pension commencement lump sum (PCLS) part of the fund (which is 75% of the fund).

Pension Lump Sum

For some, the first stage in retirement is not about income at all. Legislation allows you to access your PCLS from age 55 without having to take any income. You are then able to pay off debts and/or give financial support to your family if it is needed.

Delaying Annuity Purchase

Both flexible drawdown (assuming the whole fund is not withdrawn) and capped drawdown allow you to delay annuity purchase until a time when your income needs might be more predictable, for example, when you know whether to purchase a spouse’s pension or when you qualify for better or even enhanced annuity rates.

Annuities

If you think you will depend on receiving the maximum income possible, an annuity is more likely to be suitable than a drawdown plan.

Annuities are primarily designed to provide an income for life, and this safety and predictability is invaluable for many. The price of this predictability is that annuities are less able to evolve and adjust to changes during your retirement.

There are various types of annuity:

Conventional Annuities

Often perceived to be poor value, some investors prefer to avoid conventional annuities completely. It should be remembered annuities provide the security of an income for life, however long you live.

It can’t run out!

It has been suggested that annuities should be thought of more as insurance policies rather than investments. Once the decision to purchase the annuity has been made, the focus is no longer on how much money you can make, it is about knowing how much you have to live on and not worrying about outliving your assets.

The level of income and the shape of the annuity (whether you want the income paid to you level or with inflation-protection, or you want a pension paid to your spouse on your death etc) are set at outset and may not be changed, which is why it is often a choice that is easier to make in later life when you will also benefit from better age-related annuity rates.

Alternatively, a degree of flexibility may be built in using different annuity products.

Asset-Backed Annuities

These allow you to set a minimum floor of income and build in the opportunity to benefit from positive investment returns. These are suitable for those who would like to improve the level of income they receive over time, but do not want the risk of their income falling in value.

Temporary Annuities

These allow you to fix your income over a shorter period of time, while leaving the remainder of the fund invested for growth. They allow you to choose different annuity shapes as your circumstances change, which is ideal if you are unsure whether to purchase dependant’s benefits.

Enhanced Annuities

Enhanced (underwritten) annuities often provide significantly higher levels of income to individuals who are expected to have a shorter life span.

This gives much better value than a conventional annuity where it is available. Some financial planners suggest clients should avoid committing to an annuity until an enhanced rate is available to them.

Portfolio Approach

It’s possible to use a number of different retirement options over time to meet your changing income needs and tolerance for investment risk.

An alternative to the linear de-risking route is to use a blend of products to provide different income needs. In addition to the NHS pension, your basic income needs can be secured using a lifetime annuity (if required), with more flexible solutions providing top-up income for less fixed requirements and longer term requirements.

This approach reduces the amount of income exposed to investment risk. It also ensures that a combination of flexible income and a guaranteed underpin may be available to those who do not qualify for flexible drawdown.

Key Considerations:

Like most other areas of financial planning, the ‘at retirement’ stage of your life will present you with many options and possibilities.

It goes without saying that it’s crucial that you:

• explore all the options available (drawdown, annuities etc)
• ensure you have the choice of the whole marketplace when purchasing any products (for example, the annuity market changes constantly so you need to be aware of which provider(s) will secure you the highest income)

Failure to do this could cost you thousands of pounds over the longer
term.

Action Point

If you are close to having to make decisions on your retirement options, either contact your financial adviser/planner or get in contact with one if you want some advice, making certain that they are working for you and not any product providers (ask if they are ‘whole of market’).

If you are planning to do the research yourself, start by educating yourself about all the options and then search for an execution only company that will enable you to purchase any products.

I will warn you that making buying decisions in this area, such as deciding which the right annuity to purchase is, is much more complex than buying a product such as term assurance life cover. So make sure you tread carefully and take your time before you commit to anything.

Our thanks to Fiona Tait from Scottish Life for writing the bulk of this week’s article. Her article originally appeared on Citywire’s website on July 5, 2011.

Q. It seems that NHS / Private dentists can easily fall foul of the new annual pension allowance. It is interesting to know that if the £50,000 annual limit is breached we can use up unused allowance from the previous 3 years.

In the light of this, can you please advise if we can use up any of our unused allowance from the £255,000 pots from the last three years?

A. Unfortunately, the new rules for carrying forward unused allowances initially use a “notional” annual allowance for the years 2008/09, 2009/10 and 2010/11 of £50,000.

That is they assume that the new, reduced annual allowance has been in place for those years.

From these notional allowances are deducted the actual contributions in those years. In the case of defined benefit schemes, such as the NHS Pension Scheme, these are calculated using the new basis applying a factor of 16 to pension accrual over increases in CPI for the September prior to the year in question.

The relevant figures for each year are:

• 2008/09 1.9%
• 2009/10 5.2%
• 2010/11 1.1% 
• 2011/12 3.1%

You must use the current year first.

I hope this helps with your query.

Recently we’ve touched on the subject of happiness, and what is needed to be happy, click here.

We’ve also mentioned the fact that, generally, people can start to really think about living the life they love and want if they are financially secure, and feel in control of their lives.

After all, it’s difficult to plan for the next 20 years thinking lovely things if your daily life is all about struggle, worry and survival.

This is very relevant when discussing the new HMRC pension tax changes, and the NHS Pension Scheme rule changes that are to be announced soon.

Many doctors and dentists are very worried about the impact that all these changes will have on their finances. Having started to take into account these factors already, and with The Hutton Review yet to be fully announced, many clients are keen to assess what impact the changes may have on their personal plans.

This is particularly true since our clients typically earn (in the NHS) £100k-£150k pa or more, and usually have 20-30 years Service plus.

This is where the new rules on the Annual Allowance (how much you can contribute to your pensions) can become tricky.

If you add the fact that HMRC is reducing the amount you can have in your pension pots (the Lifetime Allowance) from £1.8m to £1.5m in April, there are a lot of calculations to make!

As ever, we want the client to have the funds to achieve their goals, and to do this as safely and as tax efficiently as possible. But these changes are a real threat to senior medics and dentists who earn high amounts and have paid into the scheme for many years and who are perhaps just a few years away from retirement.

Quite simply the government want their pound of flesh, and have targeted the higher earners in particular by introducing these new limits.

We are awaiting the full details of the changes, but the next year or so should prove interesting as we review all the planning for existing clients, and see what new clients bring to the table!

In fact, we have just agreed to work with a Consultant who has Mental Health Officer Status, meaning her 40 years’ service is completed by age 55!

From experience, we know that having a financial strategy is the surest way for you succeed in your aims, and since we have not touched on this for a while, what exactly is proper financial planning about?

We say ‘proper’, as there are some financial advisers who operate by simply selling a series of financial products and rely on the commission from this for their income.

No sale no income.

There’s nothing wrong as such with this proposition, it’s just that we believe there’s a more reliable way in which you can plan your future.

Planning is not about amassing wealth for the sake of it, it’s all about ensuring you have enough money to turn your dreams into reality.

Our clients will know this, but if you don’t currently deal with us, here are extracts from the material we give to new clients to help them create the life they want.

Goal Setting – What do you really want out of your life?

Our Mission Statement:

To empower you to achieve your goals by questioning and measuring your financial life planning.

The first step of any successful financial strategy is to decide what your objectives and life goals are. Get your goals right and everything falls into place.

Successful people have a clear vision of what they want and are working towards.

“The Harvard class of 1954 was asked who among them hadwritten down on paper the goals they hoped to accomplish in their lives. Only 2% had taken the time or had the inclination to specifically and clearly record their goals in writing.

Twenty years later, the same group was contacted. Those individuals who were in the 2%, those who had clearly defined, written goals, had amassed more wealth than the remaining 98% combined”.

Simple, yes.

But easy?

Probably not.

But we believe that you must have a clear vision of what you are working towards, in order to motivate yourself. Successful people are very clear about who they are and what they want.

Unsuccessful people are often confused and uncertain.

However, it is not easy to get your goals right.  If it was easy, everybody would be doing it.  Getting it right requires clear thought, some soul searching and, above all, honesty.

For many of our clients this is the most challenging and revealing part of their financial plan. Goals require a serious personal commitment. You cannot set a goal for anyone else.

It must belong to YOU.

How do you do it?

When people do have goals, they often define them in material terms — for example, a larger house, a better job, more money, a luxury car. Most of us are under the delusion that we act freely.

In truth, we are often enslaved to our egos and to ego-based aspects of our materialistic lifestyle. We can be held captive by our jobs, our mortgages, our clothes or our need to outdo others.

Although many of your concerns will be money orientated, self discovery often has little to do with attaining vast sums of money.

Success, we believe, is composed of four key ingredients:

• Health and Energy

• Loving Relationships

• Meaningful Work (a person’s need for meaning and purpose)

• Financial Independence (we need to have enough so that we do not worry)

Take the time now to write down on a piece of paper all the things that you honestly want for yourself, your dreams and aspirations. You can be as selfish as you like as they can concern only you.

These are likely to fall into a number of broad categories:

• Personal

• Relationships

• Work

• Physical / health

• Personal space / environment

• Educational / intellectual

• Hobbies / interests / passions

Don’t confuse what your real goals are with haphazard thoughts. Some of the ones we commonly hear are when clients say they want:

• A big pension

• Enough money

• Save some money for the family

• Pay off the mortgage

It’s fairly obvious to see that these thoughts will not help them build a robust financial plan.

So, once a client has focused on their real goals in life, we then look at timescale.

‘Dreams are just dreams if you don’t have a deadline’.

As an example of dreams becoming reality, a Consultant client recently decided to work part time from age 60, taking 24 hour retirement and taking his NHS Pension. After reviewing his situation, we confirmed that his finances were in good health and that this was a good option.

This freed up time to enjoy his hobby of boating amongst other things.

But instead of working, say 3 days a week, he made an arrangement with a colleague (who also wanted to go part time) for each of them to work one week on and one week off.

This really gives him the quality time he needs, and as a result he can go boating for a week at a time very easily.

Perfect!

Key Considerations

Planning is becoming even more important due to the radical changes in the NHS Pension Scheme with regards to The Hutton Report and recent HMRC announcements on tax.

Having a cohesive financial strategy allied to what you want to achieve in your life is vital.

Action Point

Do you have your own financial strategy based on your measured goals? Are you taking into account all the recent changes in pension taxation and will you be hit with an unexpected tax bill? What effect will The Hutton Report have on your finances?

Take professional advice from a fee based financial planner you can trust who will review your position and provide you with a comprehensive strategy for the longet term.

We also have some great thought provoking documents that will help – email us for your copy quoting ‘The Big Questions’.

These are even more challenging than those talked about above!

In the latest issue of our printed quarterly publication, On Track, we discuss changes in pension limits that further restrict the amounts you can shelter from tax, namely the Annual Allowance and the Lifetime Allowance.

Make no mistake, these changes will hit many doctors and dentists, all of whom have been simply trying to ensure they maximise their allowances and have a good lifestyle in retirement.

However, further changes have been announced recently to other areas of pension legislation, one of which is that from 6 April 2011 there will no longer be any specific date (eg 75th birthday) by which members of registered schemes must ‘annuitise’ or otherwise secure their benefits.

Indeed, there appears to be no requirement to take benefits at all, although a lifetime allowance test at 75 remains.

Let’s look at the main changes to retirement benefits, other than simply annuitising your pension pot (effective from 6 April 2011).

NOTE: The majority of the changes apply to personal pension funds that you have accrued, NOT the NHS Pension.

Capped Drawdown

It will be possible to continue capped drawdown (effectively an unsecured pension) beyond age 75. The capped maximum will be reduced to 100% of the ‘relevant annuity rate’ based on updated HMRC/GAD tables, which will be extended beyond age 75.

The maximum income will need to be reviewed every 3 years prior to age 75 (currently every 5) and annually thereafter.

There will be no requirement to take a minimum income before or after age 75.

The Government Actuary’s Department (GAD) has issued updated tables extending beyond age 75, and are based on a fund worth £100k.

Max GAD Existing          Max GAD New

55            £6,600                     £5,500

60            £7,200                     £6,600

70            £9,600                     £7,500

75            £8,730                     £9,000

80            £8,730                    £11,500

Unsecured Pension (USP)

All existing members in USP will become subject to the new capped drawdown rules. However, the new maximum withdrawal limit, and the new three yearly review applicable to capped drawdown, will only be applied in respect of the next review of the member’s USP benefits. In practice, this will be the earliest of the following events after 5 April 2011:

• The fifth anniversary of the most recent USP review;

• Following a 75th birthday: the first anniversary of the most recent review; or

• Following a transfer to another drawdown provider: the first anniversary of the most recent review.

Pension Commencement Lump Sums

You may know this as ‘tax free cash’, where you are permitted to take up to 25% from your pension as a tax free lump sum after age 55.

PCLS can be taken whenever benefits are crystallised (taken), even if this is after age 75. The PCLS can only be taken alongside a ‘relevant pension’ (ie a lifetime annuity, scheme pension or capped drawdown).

Flexible Drawdown

This is entirely new. There will be an option to take flexible (unlimited) withdrawals from your accrued pension fund; provided the member or dependant can meet the Minimum Income Requirement (MIR) of a secure pension income of at least £20,000 pa at the point flexible drawdown begins.

Benefit Testing

Benefits will be subject to lifetime allowance testing at age 75. These will be tested under revised rules in respect of uncrystallised (not taken) benefits and benefits in capped or flexible drawdown at age 75.

At this point it’s worth expanding on the new option – Flexible Drawdown.

So what are the rules?

An individual aged 55 or over can opt to move from capped drawdown to a flexible drawdown, if they wish to take a greater income than that available under capped drawdown.

Basically, capped drawdown limits the amount that you are permitted to withdraw from your pension pot, see the GAD tables above.

The member will then be able to draw down unlimited amounts, which is taxable as income, from their pension fund. This option is only available to members who can demonstrate that they have secured a sufficient pension income to meet the Minimum Income Requirement (MIR). The aim is to prevent a member from exhausting their savings and falling back on the state for support.

Dependants with capped drawdown benefits may also opt for dependant’s flexible drawdown provided they are able to satisfy the MIR.

To be eligible for flexible drawdown a scheme member must make a declaration to the scheme administrator that he/she meets the ‘flexible drawdown conditions’ (see below) and the scheme administrator must accept the declaration.

• The member must have a minimum pension income for the tax year concerned (ie the tax year in which the declaration is made or where a previous declaration was made, when the member first became eligible to receive flexible withdrawals) of at least £20,000 per annum (the initial MIR); and

• No contributions have been (or will be) made to any money purchase scheme during the tax year concerned; and

• The member must have ceased being an active member of any Defined Benefit or cash balance scheme by the time that he/she made the declaration.

The minimum income test will only take account of secured pension income, including dependant’s pensions and state pensions, in payment.

Income from purchased life annuities and unsecured pensions do not count for MIR purposes. There is no requirement for the pensions to escalate in payment, although the consultation paper had suggested that increases in line with the RPI/3% would be required.

Once the MIR has been satisfied and the declaration accepted, there is no retesting in subsequent years. The Treasury will review the required level of the minimum income at least every 5 years.

It should be noted that although the original consultation document considered setting a separate MIR for couples, this idea was rejected and the MIR will be always tested individually.

Death Benefits

Any lump sum death benefit will be subject to an automatic recovery charge of 55%. This will apply to any lump sum death benefit paid where a member is taking a capped/flexible drawdown benefit. This charge will apply irrespective of the age of the member at the time of death (eg whether above or below age 75).

Anti-Avoidance

There are two anti-avoidance provisions that will apply where a member is taking flexible withdrawals:

• Any new pension savings after a scheme has accepted an application for flexible drawdown will be subject to an annual allowance tax charge;

• An individual making a withdrawal from a flexible drawdown pension fund during a period when they are resident outside the UK for a period of less than five full tax years will be liable for UK income tax on that withdrawal for the tax year in which they become UK resident again. However, this will not apply where the individual was resident in the UK for less than four of the seven tax years immediately before his departure.

Inheritance Tax (IHT)

There will be no IHT charge on lump sum death benefits, irrespective of whether they are in respect of uncrystallised or crystallised benefits and whether the member died before or after age 75. This will be subject to meeting the other requirements for benefits to be paid IHT free (eg the need for the benefits to be paid at the discretion of the scheme administrator/trustees).

Ok, so much for the detail – but in reality what is the benefit of taking this route?

Well, the first thing to point out is that the vast majority of doctors and dentists should be eligible as their NHS Pension should be in excess of £20,000 pa. Perhaps an example would help here on how it could work.

Example

Let’s take a recently retired dentist age 60. Brian has allocated his lump sum to paying off some debt, with the remainder to an emergency cash fund. His NHS Pension is £45,000 pa; he also has a few Stocks & Shares ISAs (£50,000) and a personal pension fund of £100,000.

Brian’s priorities are to live life to the full for the next 10 years with extensive travel, as he’s not expecting to have the same energy levels at age 70 plus.

He also wants to help his 2 children with costs to buy a home over the next few years until their careers develop.

Having completed a detailed likely expenditure summary, Brian is confident that, including the extra £5,000 pa or so he will receive as a State Pension at age 65, he will have enough for his everyday needs.

He would prefer not to use up any more cash or use his tax efficient ISAs to fund his extra holidays and to gift to his children. So, presuming Brian decides to take the maximum tax free cash from his pension fund (£25K), he is faced with the choice of:

• taking normal drawdown (or an annuity) with a limit say of £4,425 pa gross, £2,655 pa net or

• use flexible drawdown to take what he needs for the next 5 years until the State Pension adds to his funds

Brian sits down to work out what he ideally needs and comes up with the answer of:

• £4,000 pa net for himself

• £5,000 pa net for the children between them on top of the lump sum

So he decides on this route, as it gives him what he needs bearing in mind his priorities. Clearly, over 5 years, ignoring fund growth, the gross amount would come to the whole fund value of £75,000, but Brian is aware of this and still thinks of it as his best option as it gives him the money now when he needs it, and he can also see his children benefiting.

Other possibilities as well as the above could well be to help with wedding costs for his daughter, and if planned properly gifting can be part of an Inheritance Tax mitigation strategy.

Summary

Flexible Drawdown is a welcome addition to the options that doctors and dentists have, and it looks like that in certain situations it could be very beneficial.

Please note that this is not a comprehensive list of changes to legislation, and various changes have been made to the taxation of death benefits. In addition, anyone who is contemplating drawdown from their retirement funds in the coming months could be well advised to act before 6 April if the old rules are beneficial to them.

You should always take financial advice before taking any action.

Key Considerations

Ever since ‘pension simplification’ rules were brought in 6 years ago, the complexity seems to have increased!

Make sure that you plan very carefully for your retirement, building in the new changes and any impact the Hutton Review may have on Public Pension Schemes due out this summer.

Action Point

Be very clear about how much income you will need in retirement.

Will you need more in early retirement and less later?

Then look at the assets you have to provide these levels of income.

For example have you obtained your NHS & State Pension projections?

If you have an adviser, bring these altogether by having them produce your own financial map – a computerised cash flow model.

From this you can see how your future looks and how much risk you need to take (or not).

Q. I am a 58 year old Consultant with a good NHS Pension Scheme ‘pot’, and as well as this have substantial personal pension funds.

My worry is hearing that the limit on how much you can have in pensions is to be reduced soon. Yet I recall that the previous limit had just been introduced in recent years.

What on earth is going on?

A.The limit you refer to is called the Lifetime Allowance (LTA). This was brought in as part of the ’pension simplification’ rules in 2006.

It stipulated how big a pot you could have in total, excluding State Pensions. If you exceed limits then there are penalties.

This pot limit was originally £1.5m, and grew to £1.8m this year and was to be frozen for several years.

However, as part of the overall “austerity plan”, the new government have changed things again!

The £1.8m limit will be reduced to £1.5m from April 2012, and the amount you can contribute each year to any pension scheme has been reduced to £50,000 pa.

The latter limit is more generous than was thought to be announced, and therefore the LTA limit was reduced rather than kept at £1.8m.

As part of the Government’s Finance Bill, they have introduced transitional measures allowing investors, who believe the value of their pension pot will rise to above this level through investment growth, to apply for a personalised LTA of £1.8m. However, anyone who does this must stop accruing benefits in all registered pension schemes before April 6, 2012 to qualify.

Rules were introduced by the NHS in 2006, called Primary & Enhanced Protection, as well as having rules to deal with accruing benefits. We presume similar rules will be necessary now.

It is vital you look at your position in detail, as well as taking into account probable changes in the NHS Pension Scheme with the Hutton Report due in 2011.

If you have an adviser, then we suggest you review matters as soon as possible.

To read an article we wrote on ‘A Day’, click here. 

No doubt you are aware that more proposed changes to pensions has been announced by the Government.

The good news is that the Coalition has attempted to simplify matters, which is very welcome after Labour’s legacy of the anti-forestalling legislation (how complicated does it need to be?).

Let’s take a look at the main changes that will affect doctors and dentists:

• There’s a new annual allowance (AA) of £50,000 a year (reduced from £255,000), including all individual and employer contributions. This will be frozen at £50,000 until 2016/17. Prior to the announcement it was expected the allowance would be limited to £30-40,000 so this higher amount is welcome.
• The anti-forestalling measures for higher earners will cease (cue round of applause…)
• Tax relief will still be available at an individual’s marginal rate (for example, a 50% taxpayer will get a pension fund of £50,000 for a net cost of £25,000).
• Any unused annual allowance in one tax year can be carried forward to the following three tax years. This is an unexpected bonus and will help smooth any spikes in accrual charges. Carry forward will be offset against any annual allowance tax charge, starting with the tax years 2008/09, 2009/10 and 2010/11 based on the assumed annual allowance of £50,000.
• Where an individual’s pension savings exceed the Annual Allowance and a tax charge is due (at their marginal rate) they will be responsible for notifying HMRC via their self assessment tax return.
• NHS Pension Scheme members will need to value the increase in their annual benefits by a factor of 16 (increased from the current 10). For example, if a 1995 GP/GDP scheme member has an average annual increase of £1,600 pa in pension benefits (which would be earned if the NHS pensionable income is £114,285 pa), this would amount to £13,200 pa Annual Allowance utilised. The member would have £36,800 allowance remaining. Note: this is an approximate estimate (the previous year’s pension income is increased by the Consumer Prices Index to arrive at the £13,200 sum).
• It appears that the Annual Allowance of £50,000 has come at a cost with the reduction in the Lifetime Allowance from £1.8 million to £1.5 million from April 2012. The Government will be consulting on this change later this year with a view to offering some form of protection to those individuals that may lose out.

It is planned that this legislation for the above changes will be incorporated into the Finance Bill 2011. Of course, do remember that there may be amendments to the details of these changes.

Our View

The one change that stands out is the ability to use carry forward of unused relief for 3 years. This provides a great planning opportunity, assuming pensions are the most appropriate vehicle into which you should be investing.

See this article on Pensions vs ISAs.

So, whilst the Annual Allowance has suffered an 80% reduction, it may be possible to contribute up to £150,000 in a pension scheme, less the amount that is being invested in other pensions, including the NHS Pension.

Key Considerations

Investing in pensions offers very attractive tax advantages, with up front tax relief at your marginal rate as well as tax efficient growth (for personal pension schemes).

It’s a relief to see the new Government sweep away some of the complexity that is prevalent in the current legislation, as this can only encourage individuals to take advantage of the benefits that pensions can potentially deliver. 

Action Point

This is a great opportunity to ascertain whether you could/should be investing in pensions. If you’ve been reading our prose for any length of time, you’ll know that we encourage all medics and dentists to take their overall position into consideration before making any important financial decisions.

Why not put this on your ‘to do’ list and aim to check your personal situation before the end of the year?

It is the subject that we get the most enquiries about from new clients, and the one that greatly concerns many doctors and dentists – retirement planning.

To ensure we are always up to date with the latest developments, and to keep up with our CPD, we read a huge amount on this subject. Recently, one article concerned the amount of time we spend as a proportion of our adult lives being retired.

The statistics looked like this:

• in 1950, the average man spent 18% of his adult life in retirement.
• in 2010, this percentage figure had grown to 33%.

Now, the publication we found this in was from a company promoting guess what?

Well yes, a pension!

However, it’s still a very interesting fact that over the last 60 years the amount of time spent not actually working was nearly double.

It is clear that it is vital to get this planning right, and to put a lot of thought into the fact that if you are not at work for 60 hours a week, what are you actually going to do?

Let’s look at another survey by a company promoting pensions (there is a theme developing here…). This one analysed the percentage of working adults aged over 55 who felt ready for the financial implications of retirement.

The shocking figure was JUST 5%!

A similar survey conducted in 2008 that asked the same question came up with 39%! It appears the recession has dented the confidence of many.

Another question asked what preparation had been done already by those approaching retirement.

Some of the main responses were:

• Built up a savings pot, 31%
• Sought independent advice, 15%
• Invested in property, 12%
• Spoken to a Bank/Building Society, 12%

It was interesting (and depressing) for us to note that almost as many people used a Bank or Building Society compared to taking independent financial planning advice.

Is this figure likely to be much different in our ‘niche’ doctor and dental market? The fact is we don’t know! We would certainly like to think so as many medics and dentists often take the time to research their options.

We would also guess that the proportion of people in the independent advice section who used a Fee Based Financial Planner as opposed to a commission based adviser was very small.

There is still a long way to go getting the message out there!

Looking at those that had built up a savings pot, it would be very interesting to see exactly how they had gone about this, including deciding on how much to invest versus enjoying life now.

This is something we go into in massive depth with new clients, as they have usually been saving with no idea how much they really need.

There are usually 2 main reasons for this:

• they are not sure how much income they will truly need in retirement
• other assets have not been built into their overall planning to give some context 

On the latter point, what we commonly find with clients approaching retirement is that they will have large amounts of capital due to be paid out from various sources. For example:

• NHS lump sum
• maturing investments
• sale of practice
• downsizing home (now or at a later date)
• sale of other property
• inheritances

In the majority of cases it means that we can develop a strategy that results in the client taking low to medium risk with their investments, and still have enough to fully enjoy life and not run out of money before they die.

So we find that some new clients we agree to work with, say in their late 50s, have more than enough, as they have invested really well throughout their lives (even though they may not have needed to invest as much as they were).

We feel the real issue here is that they may well have wanted to spend more money on holidays or on their children, but felt that they could not ‘just in case’ they did not have enough.

This is why we firmly believe in cash flow forecasting – your own financial Sat Nav if you like.

Here’s an article that covered this 2 years ago.

One result of this a couple of years ago was that a new client that was investing a lot of money every month decided instead to invest future money into their dream holiday home now as they could clearly afford it (in fact they’d been ‘hanging back’ from making this purchase as they were unsure whether they could afford it now).

Of course having more than enough is never a terrible problem on the face of it, but it can play havoc with Inheritance Tax Planning!

Key Considerations:

Take truly independent and impartial advice from a Fee Based Financial Planner who will work for you and not the product provider.

One of the key things they will do for you is to measure your assets versus your needs, and come up with your very own strategy to get you from where you are to where you want to be, and with the minimum risk.

Action Point

It is vital you have a strategy you have confidence in.

Do you even have a strategy?

Is your planning simply a collection of policies and the NHS Pension Scheme?

Does your adviser use cash flow forecasts that demonstrate where you are in relation to your goals in life? If not, why not?

If you are unsure how to proceed, read the links above, and ask your adviser their views.  If you would like another impartial opinion contact us. 

Q. Whilst I already find the UK pensions system complicated enough, I’ve heard that more changes may be forthcoming!

Can you enlighten me?

A. You’re correct with your view of the pensions system. It is very complicated. This situation has developed over many years and wasn’t helped by the last Government introducing the anti-forestalling legislation for higher earners.

In July this year the new Government announced that it was intending to go ahead with plans to replace existing measures for the restriction of pensions tax relief with a drastically reduced Annual Allowance.  It published a discussion document as part of its informal consultation throughout the summer.  It intends to confirm its intended approach by the end of September, following further consultation.

Ultimately, the Government aims to raise the same amount of revenue as it would have done via the previous regime. 

We know that the Government is proposing:

• the Annual Allowance (AA) will be reduced from £255,000 to somewhere in the range of £30,000 to £45,000
• it is considering what the appropriate level of the Lifetime Allowance should be in the context of a reduced AA.  The only possible figure mentioned for a new LTA is £1.5m (compared with the present £1.8m), but it has not factored this into its revenue estimates and is looking for input from interested parties.  If it were reduced there would be further transitional protection.
• the changes will come into force from April 2011.  We will see confirmation of the intended approach by the end of September, and draft legislation before the end of this year, but the final measures will be included in Finance Act 2011 – i.e. there will be an element of retrospection.

As ever, we’ll keep you posted when the details are announced, and what action you can take with your own planning.

Q. I know that there is going to be a review of all public sector pensions, including the NHS scheme that I am a member of, but have I heard it right that the government have already announced that any pension inflation increases are going to be linked to a different index than the Retail Price Index?

A. You are quite correct.

From next April, RPI will be replaced for the indexation of pensions. From then, the consumer price index (CPI)will be used, and this index does not include housing and heating costs, which has caused some concern.

This is because if we look at the year to May, while the CPI rose by 3.4%, RPI increased by 5.1%. If thisoccurs over many years, it will have a serious impact on the buying power of a typical pension.

We will be taking a keen interest in the whole public sector pension review, and will report back here when matters become clear.

Q. I have 2 personal pension plans and am thinking of taking the benefits from these in the near future. I’m 52 now and have read that the age that I can use the proceeds from these plans will change in April 2010. Can you tell me more?

A. Yes, you’re right, the rules will change at the start of the next tax year. At the time of writing (January 2010) you are able to take the benefits of your personal pensions from age 50. On April 6 2010 this will change to age 55.

So, if you think that you’ll need to utilise the proceeds prior to your 55th birthday, you’ll need to take action now. And by now, I mean immediately, as you’ll need to submit all the necessary paperwork to your pension provider asap – they’ll need sufficient time to process all the paperwork prior to April. Also, don’t forget that if you are purchasing a pension annuity you can shop around all providers for the best rate by using the Open Market option (OMO). 

One alternative to an annuity is to utilise Unsecured Pension (often referred to as Drawdown). This is where you can take your entitlement to the 25% tax free cash lump sum, with the remainder of the fund continuing to be invested (preferrably with the right amount of risk for your comfort zone). You can elect to receive an income from this fund subject to Government limits. 

The good news is that the lower limit is zero so you don’t actually have to take an income. Do bear in mind though that Unsecured Pension should only be used by those with a minimum pension fund value of 100k.