The cost of retirement

It might sound like a cliché, but it’s never too early to start thinking about retirement. The further you plan in advance, the more comfortable a retirement you’re likely to enjoy.

For those in the medical profession, membership of the NHS Pension Scheme is certainly a handy place to start, but the NHS pension won’t necessarily provide you with your dream retirement on its own.

Making the most of your pension (and any other retirement income) depends on careful planning, smart timing and clear understanding of all the options open to you.

How much do you need in retirement?

Effective retirement planning begins with knowing how much money you’ll need for the retirement you want. The Retirement Living Standards suggests that couples need a retirement income of £47,500 per year to be ‘comfortable’ (for individuals it’s £33,000) – but naturally, it depends on your own unique circumstances, and the expenses you’ll incur in later life.

On that note, it’s important to recognise that your spending in retirement may look significantly different to how it does now. Usually, by the time you’ve reached retirement, your mortgage will be mostly or completely paid off, and your children may have completed their education and left home. You won’t have the expenses associated with travelling to work either.

Changing priorities

On the other hand, you might be ready to travel the world – and that doesn’t come cheap. You’re likely to spend more on holidays and leisure activities, and you’ll need to consider the costs you might face in the later stages of your retirement too, such as the cost of care.

Recognising how your income needs may fluctuate throughout the various stages of your retirement is key to making the right long-term choices with your money. Discussing your situation with a Wesleyan Financial Services Consultant can help, as they have the insight and expertise to assist with all aspects of your retirement planning.

How to find out what your pension is worth

To get a better understanding of what your retirement income might look like, you can check the value of your current NHS pension at any time through your Annual Benefit Statement on the Total Reward Statement website.

Early and late retirement options

When you have an idea of how much income you’ll need to fund the retirement lifestyle you want, you’ll have a clearer sense of when you might be able to retire.

Depending on which part of the NHS Pension Scheme you’re in, you’ll be working towards a normal pension age of either 60, 65 or the state pension age – but you’ll have the option to sacrifice some of your benefits and retire early (from 55), or to continue building your benefits and retire late (up to 75).

You also have the opportunity to take a phased retirement, stepping back into a role with less responsibility or less working hours, while still drawing your pension.

For most medics, the NHS pension will be your main source of income in retirement, so getting this decision right will be critical to living the lifestyle you want to lead. While you can’t put a price on spending extra years with your loved ones, early retirement could put a strain on your finances in later life if it’s not properly planned out.

You can find out more in our guide to NHS pensions and early retirement.

Accessing your other retirement income streams 

Your NHS pension will usually consist of both a regular monthly payment and a retirement lump sum. Sometimes, you’ll be able to take a larger lump sum up-front, in return for reducing your monthly pension.

How you choose to take your pension – and what you do with that lump sum - will depend on various factors, but one of the most crucial is your access to other retirement income streams.

In an ideal world, your NHS pension will be supplemented by savings, investments and personal pensions, but you’ll need to consider the best time to access these. You may not always be able to get your money as quickly as you need it, as some investments can’t be cashed in instantly.

Property, for example, can take time to sell. If you have invested in the stock market meanwhile, you may not wish to sell your shares or fund units until market conditions are more favourable. There could also be financial penalties for surrendering investments early.

Accessing your pension

If you have personal pensions, the earliest you can take your money out is currently aged 55. However, this is set to increase in the near future – so you’ll need to plan with that in mind. Depending on the types of pension you hold, you may also have several options on how you access your benefits. You may be able to:

  • Use your pension to buy a guaranteed income for life (annuity)
  • Use your pension to provide a flexible retirement income (flexi-access drawdown)
  • Take your pension pot as cash
  • Take your pension as several lump sums
  • Mix your options

Having a plan in place that takes all your income streams into account can help ensure liquidity in your later years, so speak to a Financial Consultant to understand the right retirement strategy for you.

Your entitlement to the state pension

Another common retirement income stream is the state pension. However, the age at which you can draw your state pension is currently going through a phased increase, rising steadily towards 68 for most people. That means you could be retired for a good while before you can take it.

Changes in 2016 introduced a new flat-rate state pension to replace the previous one, which was made up of two parts – a basic state pension and additional state pension. This has implications for members of the NHS Pension too, because prior to these changes, the NHS Pension Scheme automatically ‘contracted out’ members from the additional state pension - allowing you to pay lower National Insurance Contributions (NICs) and pay into your NHS pension instead.

As a result, while the full new State Pension is £175.20 per week, you may receive less when your entitlement is calculated.

Your entitlement may also be reduced if you have less than 35 years of qualifying NICs – and you may not be entitled to any state pension at all unless you have at least 10 years of qualifying payments.

To help you make accurate calculations about your retirement income, you can ask for a forecast of your new state pension on the UK government website.

Tax implications and the Lifetime Allowance

Even in retirement, you still need to think about tax. When you retire from the NHS, you’ll normally be able to take 25% of your pension benefits as a tax-free lump sum, but the remainder, paid to you monthly, will count as earned income - and is therefore liable for income tax if it exceeds your personal tax allowance.

There’s a further consideration in the form of the Lifetime Allowance – the total amount you can build up in all your pension plans over your lifetime without incurring an extra tax charge.

The Lifetime Allowance for most people is £1,073,100 in the tax year 2021/2022. This limit applies to the value of all pensions you belong to, including the NHS pension (but excluding the state pension).

It means that for many doctors and dentists with long membership and high earnings, there’s a real risk of being charged at retirement, reducing your retirement income. The charge on excess earnings over the limit is as follows:

  • 55% if you are taking the excess as a lump sum
  • 25% of the capital value where you take it as a taxable pension income

These charges are paid directly to HMRC by the NHS Pension Scheme, who then recover the cost by reducing your NHS pension benefits.

Needless to say, the Lifetime Allowance has caused consternation for many in the medical industry, but the good news is that some protections are now available to help you protect more of your hard-earned pension from tax.

You can find out more by speaking to a Wesleyan Financial Services Consultant.

What happens to your NHS pension when you die?

Even with all the planning in the world, you never know what’s going to happen in the future. So while it’s never nice to think about, it’s important to know what would happen to your NHS pension if you die.

Usually, pension benefits and a life assurance lump sum can be paid out to the surviving spouse or civil partner if you die either in active service, or if you’ve been taking your pension for less than five years.

The exact benefits payable will depend on your circumstances at the time of your death, including what section of the NHS scheme you were in. You can see the various permutations in our article, what happens to my NHS pension when I die?

It’s just one example of how retirement planning doesn’t just affect you but your loved ones too – and that’s why it makes sense for most couples to plan retirement finances together. You may share a dream for retirement, but your benefit entitlements and minimum pensions ages may be very different. Making a proper plan is therefore essential if you’re to take your retirement income in the most efficient way.

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