Updated 3 March 2022
Medical finance specialist Paul Samrah explains how to go about planning a smooth transition to retirement
Whether retirement is within reach or you are still building up your practice, there are some practical steps you can take to help the transition from full-time work to full-time leisure. Like a holiday, the goal is to enjoy it to the fullest, but not so fully that you run out of money.
1 Plan your monthly income needs
The first step in retirement planning is to have a clear picture of how much you will need each month to be comfortable. A good starting point is to look at what you’re spending now and deduct costs that you do not expect to bear in retirement, for example, mortgage payments and school fees. You should also factor in any lifestyle changes you intend to make – downsizing, buying a holiday home, boat or other significant expenses.
Inflation means that funding the same lifestyle in future will cost more in pounds, euros and dollars than it does today – even if successive governments manage to keep consumer price index inflation to the annual target of 2%, you would need £1,219 in 10 years’ time to buy what £1,000 buys today.
It is also worth considering the shape of your retirement spending – do you expect to spend more in the early years, should you set aside provision for funding care costs or start making gifts of your wealth to children and grandchildren.
2. Build up non-pension income for ‘extras’
The other side of the equation is to build up sufficient wealth and benefits to cover your outgoings and leave a little left over to meet contingencies. Aside from pensions, the main vehicles used to provide retirement income are ISAs, non-ISA wrapped investments, single premium investment bonds, and, of course, property.
3. Check your projected income
Your NHS pension is likely to represent a significant portion of your retirement income and you can obtain details of your projected benefits through the NHS Business Services Authority Total Reward Statement portal.
4. Work out any tax charges
There are two well publicised issues affecting higher-earning NHS scheme members – the Annual Allowance which determines how much you can contribute to pensions tax-efficiently and the Lifetime Allowance which determines whether you will pay additional tax on your pension.
These allowances have attracted much comment and the complexities are beyond the scope of this article, but if they are likely to impact you, you should consider taking appropriate financial advice on your personal options.
5. Review any other pension schemes
In addition to your main NHS pension, you may have contributed to the Additional Pension or be a member of another pension scheme through personal contributions or a former employment. These plans will all be available to generate additional income and you should review them to make sure that they are working hard for you.
There may be an advantage in amalgamating some or all of your personal pensions, especially if they have limited retirement options or high charges. However, care should be taken not to lose any valuable guarantees or protections and appropriate professional advice should be sought to avoid a costly mistake.
6. Consider contributing to a spouse’s pension
If you have available excess income or cash, it may be sensible to consider funding your spouse’s pension. Any tax relief will be at their marginal rate, but where your own pension pot cannot be increased this is an excellent way of building up further retirement savings.
7. Check your projected state pension
As part of your retirement planning health check, the Gov.UK website can provide details of your state retirement age and an estimate of how much your State Pension will be.
8. Top up with other tax-free savings
After pensions, ISAs are the most tax-efficient means of saving for retirement and you can draw a tax-free income to top up any shortfalls. The contribution limit is currently £20,000 per year per person and the investment options range from cash deposits, through investment funds to individual shares. You can self-manage a portfolio, if you have the time and interest, or outsource to a professional investment manager.
9. Consider other tax-efficient savings options
Non-ISA investments will typically be taxable but there are reliefs available such as the annual £2,000 dividend allowance and capital gains exemptions which – with careful planning – can increase your inflows without adding to the tax bill.
Single premium investment bonds are also an option for squirreling away lump sums. While not quite as tax-efficient as ISAs, if you have already maxed out your ISAs, they have the advantage of enabling you to build a diversified portfolio and in future extracting your capital as an income stream without paying tax on gains on an arising basis.
For those who prefer more tangible investments, buy-to-let property remains a popular option with the potential for regular rental income and the prospect of future capital gains. Understanding the market, costs and drawbacks is essential and it is hard to deny that recent legislation is hostile to the amateur property investor.
10. Make use of prediction tools
To bring both sides of the equation together, a cashflow modelling prediction tool such as Moneyscope, Voyant or CashCalc can help you make decisions and act as the foundation on which to build future planning. Your next vital step is to consult an expert who can help with retirement planning specific to your individual situation.
Paul Samrah is a partner at chartered accountants Moore Kingston Smith LLP
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