? In the past when it came to how the NHS paid your pension, it was very simple. You had a pension based on the number of years' service in the Scheme, your income, and whether you had purchased added years. You also received a tax free lump sum of three times that pension (although GMPs and GDPs have their pension entitlement calculated on a slightly different basis).
No thought was required when you reached retirement age. You simply signed the form to say you were retiring and waited for the pension payments to reach your bank account.
However, since April 2008 the NHS has given you new options:
1. Just take pension only
2. Take more in tax free cash and less pension
3. Take the maximum in tax free cash and even less pension
To calculate how much pension you would receive if you choose option 2 you need to apply a ratio.
The ratio is 12 to 1, and does not change whether you retire at age 60 or 65. So, that is for every £1 of pension you give up, you receive £12 in tax free cash. The limit in the amount of tax free cash is 25% of the Capital Value of your Pension Fund.
The remaining 75% provides your pension.
Having had two recent cases of clients coming up to retirement, these new rules give some interesting options. Lets look at an example, and in the interests of keeping things simple the figures are approximate.
A Hospital Consultant is retiring age 60 in April. With all debt paid off, the children in their 30s and working, he is really looking forward to spending more time in his boat and brushing up on his golf.
He has amassed around 36 years of NHS service, and with a few distinction points his salary that the pension would be based on is a little over £111,000 pa.
The next step was to visit the NHS Pensions website calculator and look at the most obvious options re points 1 and 2 above.
These are the figures:
1. £50,000 pa pension plus tax free lump sum £150,000
2. £40,000 pa pension plus tax free lump sum £270,000
So, as a married man in good health with a spouse 4 years younger than himself, what is his best option?
Well, the first thing to take into account is that he needs £2,600 after tax income per month to pay the bills and run a car etc. This is equivalent to about £37,500 gross pa. Any extra spending would be on holidays (and he and his wife certainly intend to have quite a few over the next 10 years). So they would need, say, an extra £10,000 pa for this.
Next, it is important to note that any income received above around £41,000 pa is taxed at the higher rate of 40%. So in effect, the real difference between options 1 and 2 is £500 per month inflation proofed income on the one hand, and £120,000 cash on the other.
Looking at it like this it would appear that it would take approximately 20 years for the pension option to catch up! Of course,we do not know what effect inflation will have over the next 20-30 years,nor what return he will get on his cash, depending on the risks he is prepared to take.
As you will know, we live in interesting times at the moment and interest rates are low on deposit accounts. It is reasonable to assume that he could get 2-3 % pa (gross) in a deposit account over the next 20 years, and pay less tax by putting the money in his wife's name as she is a lower rate tax payer.
But what would happen if he died soon after retiring?
Well, with the cash option it is 'in the bank'. But with the higher pension option you would assume that his wife would be slightly better off, as the benefits are based on 50% of the pension. The good news is that this is waived by the NHS in the event of his death, and the 50% is always based on the higher pension regardless of whether he took the maximum tax free cash or not.
Another factor here is that he will receive a State Pension of circa£5,000 pa at age 65 in 2014, and his wife will also benefit with her State Pension for a similar amount starting in 2015 at age 62.
So, even if he takes the maximum NHS tax free cash, his pensions by age 65 will mean he will be paying higher rate tax.
All this information was entered into his own retirement cash flow forecast (Sat Nav), and he could then make an informed choice confident that all factors had been covered.
So, bearing all this in mind, he is choosing to go for the maximum tax free cash, and lower pension.
The Financial Tips Bottom Line
Deciding whether to opt for more cash or more pension is a one-off decision. Therefore, make sure you do your homework before making the decision!
If you are approaching retirement, write down all your assets on the one hand, and your anticipated expenditure on the other. Have your adviser build you your own cash flow forecast to show the overall picture and the effects of inflation etc. This 'Sat Nav' will give you the context to make one of the most important financial decisions you will ever make - more pension or more cash?
|About Author Ray Prince :|
Ray Prince is an Independent Financial Planner with Rutherford Wilkinson plc, and helps UK Resident Doctors and Dentists get the best deals on mortgages, protection and investments, as well as helping them achieve their financial objectives. Just visit <a href="http://www.medicaldentalfs.com" target="_blank">http://www.medicaldentalfs.com</a> to get your free retirement planning guide. Rutherford Wilkinson plc is authorised and regulated by the Financial Services Authority.
Article Source: https://www.bharatbhasha.com
Article Url: https://www.bharatbhasha.com/finance-and-business.php/135024
Article Added on Wednesday, May 13, 2009
|Other Articles by Ray Prince|
Retirement Planning Should You Take Your Pension at 60
? This week we are discussing a scenario where an individual is about to reach 60 and are wondering whether they have to take their pensions at 60, or if they can delay this decision. And indeed, what are their overall options?
Some years ago, many in the pensions world advised investors not to touch their pension until it was absolutely necessary. The main reason for leaving pensions until the last minute was that they grew tax-free and the older you were the bigger pension you could buy....
NHS Pension Choices The Key Factors
If you are a member of the NHS pension scheme, you will soon be asked to make a very important decision.
That is, should you remain in the current version of the scheme (applies if you were a member pre-April 2008) or should you transfer to the new version (post-April 2008).
To help, the NHS have produced 'Your NHS Pension Choice' Guide. You will not receive individual advice in the guide, rather it's up to you to read it through and really understand whether you should stay as you are in...
Income Tax Rises 2010 Will You Be Affected
? Large rises in income tax are due to take effect from next April for people earning over £100,000.
New rates of tax were announced by the Government in the recent budget and they are going to hit many of our clients hard! This is because our clients tend to be higher earners, with many in the £150,000 to £350,000 pa bracket.
So, how are you going to be affected?
Well, let's look at different incomes and how they are taxed now, and compare the same incomes and how they will be taxed next...
Proposed Pension Changes How Will You Be Affected
? 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...
Entrepreneurs Relief Will You Actually Qualify
? Entrepreneurs' Relief was introduced following the abolition of the Capital Gains Tax taper relief scheme in April 2008.
At the time, the government was intent on imposing an 18% flat rate on all capital gains, whether business or non-business assets.
However, after a period of lobbying from business, the government backtracked (or actually listened?) on their original decision.
Quite rightly, business pointed out that the new 18% rate was an 80% increase over the old 10% rate that applied...
Your Retirement What Will You Actually Do
? When we start working with a new client who's, say, aged 50, it's always interesting to get down to what they want to aim for in life. After all, if life is not about thoroughly enjoying doing things you love most, what is it about?
So when the 'Retirement Reality' study from an insurance company came out the other day, it was something that we took notice of. It looked at what retired people actually did in the first year or two of their retirement.
Two decades ago, most people believed...
Retirement Planning How Much Is Enough
? 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...
Investing Company Money Cash Shares Pensions
? Investing company money that has built up within a business bank account poses a challenge to many company directors.
If you are a dentist that has decided to incorporate (or perhaps you've already done it), or a doctor with private earnings that has incorporated, one of the main differences you'll have noticed is that there is now another party in your business life.
The Limited company.
Beforehand, life appeared to be simple. You earned your net profits, your accountant prepared your...
Investing For Children Which Options Are Best
? With the potential costs of a university education spiralling, house prices still being relatively high and the cost of weddings increasing, it has never been more important to begin a programme of savings for children and grandchildren.
Added to this the effective demise of the Child Trust Fund has left a gaping hole in effective provision.
In part 1 of this 2-part series, let's examine some of the tax-efficient opportunities that remain.
Facts and Analysis
The economic downturn has...
Have You Clearly Defined Your Goals Living the Life You Want to Lead
Have You Clearly Defined Your Goals? - Living the Life You Want to Lead When we meet a new client or review the financial affairs of someone we have known for some time, the first thing we automatically concentrate on is what goals in life do they have?
For a new client - how can we as planners really encourage them to think about what they want to do with their lives?
For existing clients - we know their goals and so where are they on this journey? Are there any new factors to consider?...
|Click here to see More Articles by Ray Prince