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Retirement planning: A financial planning case study

Anil is struggling to bring in enough income to meet his family’s needs and is working long hours so does not see his family as much as he would like and is finding it increasingly difficult to balance the high level of patient care he wants to give with NHS targets and politics. He has decided to give up his NHS post to focus on his much more lucrative private practice.

This article will examine the financial factors which Anil should take into account when considering how to replace his NHS benefits and plan his retirement.

Personal background

Family

Anil is married to Anita who is a senior nurse, they have two teenage children, Charlie 16 and Anna 14 and live in a modest home in a well to do area.

Financial

The tax changes over the years to the tax system have hit him hard and overall he has realised that as a family they are eating into savings.

Goals

  • Anil and Anita recognise the advantages of private education which they both benefited from and they feel it is essential for their children to be able to follow them into medicine if they wish. This would potentially involve seven years of higher education. University costs are currently up to £9,000 per annum for tuition, and they have estimated that a further £8,000 per annum for living costs for each of their children.
  • They would both like to retire at age 60, settle on the south coast and buy a yacht as it has been their dream to sail around Europe.
  • They would also like a bolt hole in London to be close to culture and their children.
  • Anita has a high pressure job in the NHS and works with elderly patients. She is concerned at the rate at which the population in the UK is ageing, and the increasing strain on the health care sector. She is petrified of not being able to afford the right level of care and the consequences for independence and dignity in old age.
  • To protect the family’s future if either of them are sick and cannot work for an extended period of time or if one of them dies prematurely.

Financial considerations

These are the things which Anita and Anil should consider when he leaves the NHS and starts working in his private practice full time:

Benefits which Anil would be giving up under his NHS Pension Scheme:

  • Retirement: NHS Pension accrual
  • If he gets sick and can no longer work: Ill health pension, and attractive sickness benefits.
  • If he dies in service: a lump sum which could help Anita reduce the mortgage, a pension to help her bring up their children and ensure she doesn’t suffer financially in retirement without Anil, a children’s pension ample to cover the costs of university and private schooling to ensure that their children’s prospects and education don’t get sacrificed.

These benefits are explained below:

Pension

As a member of the 1995 scheme Anil will receive 1/80 and a pension commencement lump sum (currently tax free) of 3/80 of his pensionable pay which would start from age 60 and this income is currently index linked[1] to help keep pace with increases in the cost of living. Assuming no further pay increases, by giving up NHS work he will lose out on:

Additional pension of £30,000 index linked
(20 years of service /80 x Pensionable pay £120,000 = £30,000 per annum index linked)

plus a lump sum of 3 x his annual pension, £90,000.

Ill Health Benefits

Initially he would be entitled to sick pay at 100% of normal salary for six months?, reduced by half for the next six months.

After this if he qualified for ill health early retirement then as a member of the 1995 scheme he would be potentially entitled to enhanced pension benefits of 2/3 of his pension accrual to date[2], ie. £50,000 per annum if he is unable to carry out regular employment of like duration due to permanent ill health.

(20 years service x 1 and 2/3 ) /80 x Final pensionable pay £120,000)

Plus a lump sum of 3 x annual pension benefit = £150,000

Death benefits before retirement

Spouse’s pension based on 50% of his ill health pension = £25,000 per annum

25% children’s pension until age 23 if in full time education = £12,500 per annum

Retirement income

Anil’s financial adviser has performed a cashflow analysis which has identified that he will need additional retirement income of £20,000 net of tax in real terms in retirement to meet his cost of living and lifestyle ambitions. He has also identified that for people in retirement the cost of living rises faster than the general population. This is known as Silver RPI and is measured by Age Concern and defined as the average increase in living costs for those over age 55. Between 2008 and 2012 Silver RPI was 18% and it has grown more than 5% faster than the published RPI for the general population as measured by the Office for National Statistics. The cost of residential care is increasing faster than RPI.

Therefore Anil must fund some other sources of income to supplement his pension. Anil has discounted large cash savings for the following reasons:

  • With returns of near 0%, cash savings are likely to lose value in real terms due to the level of inflation.
  • Subject to 40% inheritance tax.
  • Possibility of a bank failure. Under the Financial Services Compensation Scheme, only the first £85,000 of deposits are protected per individual per banking group. This would involve a significant administration head ache and there are now only a limited number of banking groups in the UK so there is the possibility that some of his money will be unprotected.

It is possible to construct a portfolio to provide a highly tax efficient and flexible source of retirement income appropriate to their appetite for risk by using a variety of different types of investment and pension taking advantage of the different taxation features. Anil and Anita should consider fully utilising their personal tax allowances:

  • Pension annual allowance currently £50,000 each per annum reducing to £40,000 from 2014 enabling them to get tax relief on contributions.
  • ISA allowance £11,520 each from 6th April 2013.
  • Capital gains tax allowance £10,600 each per annum in 2012-13 rising to £10,900 in 2013-14.

Personal Pension

One popular method of building up a fund to provide retirement income is a pension and these are the things which Anil should consider:

Pension legislation

From April 2014 the annual pension allowance limit on which pension contributions attract tax relief will be reduced to £40,000 and the lifetime allowance limit will reduce from £1.5 million to £1.25 million. When Anil takes his retirement benefits he will have to pay a one off tax charge on any pension benefits that exceed the lifetime allowance ( either 25% if the excess is taken as income or 55% if taken as a lump sum). In order to purchase an annuity to produce a gross income of £22,500 and pension commencement lump sum of £67,500 Anil would need to accumulate a lump sum of £969,424[3] based on annuity rates currently available. He may require considerably more in the future.

Any contributions over the annual allowance will receive no tax relief but the benefits will potentially be taxed, so in effect his income is taxed once when he earns it and then again when he draws it in retirement.

Any pension fund accumulated above the lifetime allowance will attract a tax charge of either 25% or 55% as described above.

Carry forward

Anil can carry forward any unused annual allowance from the previous three tax years and potentially pay his allowance for the next tax year early to make a large one off contribution, but these need to be calculated carefully by a professional to avoid a potential tax liability.

Risk

The NHS benefits all have built in guarantees and for potentially the first time Anil will have to take risks with a significant proportion of his assets. If they are not invested in the right way there is a strong possibility that he could lose some or all of his investments.

His financial adviser has advised a risk profiling and asset allocation process to limit this risk to an acceptable level. In order to ensure that their assets are always allocated in the right way Anil and Anita have asked their financial adviser to conduct regular reviews to focus on:

  • Changes in their personal circumstances.
  • Investment performance.
  • Investment volatility (the rate of any increases or decreases over time).
  • Tax changes.
  • New opportunities.
  • Rebalancing the investment and pension portfolio.

Some other considerations which are beyond the scope of this article:

  • Inheritance tax 40%.
  • Options to protect his family in the event of death or ill health.
  • Ensuring his practice has the financial resources to survive if he is unable to work for an extended period due to illness and that his patients can still receive the level of care they need.
  • Replace lost death and ill health benefits to protect his family’s future.

Conclusion

It is impossible to underestimate the potential impact of not having the right long term financial arrangements place, monitored regularly on your independence and dignity in retirement or illness, and you children’s future. Due care needs to be taken to manage risks and mitigate tax and ensure that the money is there when you need it.

As a medical professional, your patients place their health in your hands, have you considered what might happen to your and your family’s financial health without the right professional care?

 


 

[1]For more details about ill health retirement please see the SD Guide on the NHSBSA website http://www.nhsbsa.nhs.uk/Documents/Pensions/SD_Guide_-_Online_V9_11.2012.pdf

[2] For more details about ill health retirement please go to Page 28 of the SD Guide http://www.nhsbsa.nhs.uk/Documents/Pensions/SD_Guide_-_Online_V9_11.2012.pdf

[3]  Annuity quotation on 21/3/13 from Saga based on a male aged 60. Income of £22,500pa index linked to RPI  payable monthly in arrears with 50% spouse’s pension for a female also aged 60. No guarantee period.  Includes pension commencement lump sum of £67,500. 

Author profile: Michael Ross

Michael Ross is a Senior Financial Planner at Burlington Associates, a Central London firm of Independent Financial Advisers. Over the last 9 years Michael has become a specialist helping consultants to organise their financial affairs to secure their family’s future and make sure that their money outlives them. He is married with two small children and lives in Hertfordshire.

He can be contacted at michael.ross@burlingtonfs.com.

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