Pharmacists - Plan Your Retirement Before The Door Shuts...For Up To 5 Years!!
Time may be possibly running out for those pharmacists that wish to retire early.
At present, anybody aged 50 or over can crystallise benefits from their accumulated pension fund. Up to 25% of the fund can be taken in the form of a tax-free cash lump sum (also known as pension commencement lump sum). The remainder is available to provide a pension income.
With effect from 6th April 2010, the minimum age from which an individual may take benefits from a pension fund increases to 55.
Pharmacists who are aged between 50 & 54 or who will be 50 before 6th April 2010 with plans of retiring should be giving serious consideration to their pension planning in the coming months. Otherwise, their plans may not come to fruition. For someone turning 50 shortly before 6th April 2010, failure to act in a timely fashion would result in a postponement of almost 5 years. Hence advance preparations should be made to ensure it is logistically possible to realise pension benefits.
It is important to make clear that just because someone draws on retirement benefits does not mean they have to retire as far as work is concerned. Hence this issue does not merely affect those pharmacists who are intending to retire from work but those that may take benefits without actually giving up work.
In this current environment, many people have turned to their pension to take the tax-free cash lump sum. There are numerous reasons to do so.
Where individuals are struggling in the current economic climate, a lump sum may help to alleviate personal financial hardship, being used to redeem debts, overdrafts and mortgages..
A pension may also provide a valuable capital sum to inject into a business. It may help a company to repay it debts, to help it survive a lean patch, or to invest for the future in the hope of an eventual upturn in fortunes.
Clearly every circumstance is different and any decision in this regard should be addressed with the benefit of professional, independent financial advice.
In these situations, individuals may not wish to take an income from their pension. After all, if they are not ceasing work and are continuing to earn income, what is the point of taking income that is perhaps surplus to requirements and of course taxable?
Where surplus income is directed into a pension, it remains tax neutral as Income Tax relief applies to the contribution (Note that this does not apply in regards to the tax-free cash lump sum as reinvestment or ‘recycling’ of tax-free cash is prohibited). The benefits of taking maximum income rather than no income at all can translate into higher tax-free cash entitlements and improved death benefits. Let us take a look at an example: -
Bob Smith, a pharmacist aged 50, has a fund of £300,000. He wishes to take £75,000 tax-free lump sum but will continue to run his pharmacy business, earning £35,000 p.a. He wishes to retire fully at age 65.
|
Tax-free cash only with no income |
Tax free cash plus maximum income from Unsecured Pension (USP) |
Tax free cash @ 50 |
£75,000 |
£75,000 |
Retirement income fund remaining |
£225,000 |
£225,000 |
Lump sum death benefit |
£146,250 |
£146,250 |
Retirement income gross p.a. |
Nil |
£14,530 p.a. |
Pension contribution |
Nil |
£14,530 p.a. |
Retirement income fund @ 65 |
£524,000 |
£170,000 |
Retirement planning fund @ 65 |
Nil |
£348,000 |
Total retirement fund @ 65 |
£524,000 |
£518,000 |
Lump sum death benefit |
£340,600 |
£458,500 |
Additional tax-free cash @ 65 |
Nil |
£87,000 |
Total tax-free cash |
£75,000 |
£162,000 |
Source: Scottish Widows
It would appear that by taking income, Bob has suffered a reduction in his retirement fund of £6,000. However, Bob’s tax-free cash position has improved by £87,000. If this had been left in the fund to provide income, it would have been subject to Income Tax, at least at basic rate and possibly at higher rates depending on other sources of income. If taken as a tax-free lump sum and invested appropriately using various allowances and investment wrappers such as Individual Savings Accounts (ISAs) or bonds, it may provide a tax efficient, indeed maybe even tax-free, income. In addition, from the outset, the death benefit available by opting to reinvest surplus income has improved gradually so that by the age of 65, prior to taking income from the newly accumulated pension fund, the death benefit had increased by £117,900.
In conclusion, whilst those pharmacists approaching, or those that have already attained, age 50 may not feel there is a need to review their pension planning, there are cogent reasons why they should do so.
There are both advantages and disadvantages to unsecured pension and ones that should not be considered without the benefit of professional, independent financial advice. Should you require assistance in this regard, please do not hesitate to contact one of our Financial Services Partners, Steve Prosser, Jeff Crewdson or Chris Raggett to discuss your requirements more fully.
Date of Article: 12th August 2009
