The NHS Pension Scheme vs. private pensions

Retirement planning is a cornerstone of financial wellbeing, yet many dental professionals delay it until further in their careers.

This article provides an overview of pension options available to dentists, empowering them to build a secure financial future and transition smoothly into life after hanging up the loupes.

Introduction

Just as a well-developed treatment plan leads to optimal patient outcomes, a structured retirement plan helps to provide financial stability and flexibility in later years. Dentists have unique career trajectories, often balancing NHS work with private practice, making pension planning particularly complex.

Understanding the available pension schemes and tax considerations is crucial for a seamless transition from clinical practice to retirement—whether that includes mentoring, travel, charitable work, or pursuing new passions. The world can be your oyster with a little prior planning.

Why retirement planning is crucial for dentists

As a dentist, you may find yourself time-poor - focusing on growing your practice, managing day-to-day finances and postponing retirement planning for when it feels applicable to where you’re at on life’s journey. 

When you prioritise retirement planning early on, you allow for greater financial freedom when stepping away from the chair. A solid retirement plan - underpinned by a clear understanding of various pensions and other assets that are designed to fund your retirement - not only ensures you are comfortable but also protects against unexpected financial burdens in the future.

Dentists benefit from considering factors such as desired retirement age, lifestyle goals and long-term financial commitments when structuring their pension contributions.

What a successful transition out of clinical dentistry looks like will vary from dentist to dentist but often involves maintaining financial independence, the ability to fund a desired lifestyle without financial strain and exploring new opportunities beyond traditional practice. This could include roles in consultancy, education, or philanthropy, allowing for continued professional engagement in a different capacity.

Given the complexities of pensions and how they apply to a dentists' career path and earnings, alongside tax laws which are often subject to change, seeking specialist financial guidance tailored to a career in dentistry is important. 

Private pension vs. the NHS Pension Scheme

Private pensions

Private pensions are a popular option for dentists working in some capacity in private practice, or those who want to supplement their NHS pension. There are two main types:

• Personal Pensions (PPs), which allow more control over investments
• Workplace Pensions, where employers (including dental practice owners) contribute a percentage of salary under auto-enrolment rules

Private pensions offer flexibility in investment choices and the potential for higher returns, with access from age 55 (rising to 57 in 2028). However, they carry investment risks and provide less predictable income compared to defined benefit schemes. Investment performance can be affected by market fluctuations, requiring regular reviews to optimise outcomes. 

If you plan to retire early an actuarial reduction in pension benefits comes in to play, accounting for the fact that pension payments will be made for a longer period than if you had waited until the normal retirement age.

Remember, the value of investments and any income can go down as well as up and you may get back less than you invest.

The NHS Pension Scheme (NHSPS)

The NHSPS is a defined benefit pension scheme, meaning retirement benefits are based on salary and years of service rather than investment performance. 

It includes three sections: the 1995 Section with a normal pension age of 60, the 2008 Section with a normal pension age of 65, and the 2015 Scheme where pension age is linked to the state pension age. All three are career average revalued earnings (CARE) schemes for practitioners.

There are other factors such as ‘protected retirement age’ that applies to certain schemes, which is why it’s important to understand your scheme benefits on an individual basis. A colleagues' plan and options for retirement may differ to your own when looking purely at the differences in scheme characteristics.

The NHSPS provides a guaranteed income for life, inflation-linked increases and death-in-service benefits. However, it offers less flexibility compared to private pensions, with pension age increases in line with the state pension age and potential tax implications for high earners, as well as actuarial reductions for retiring early.

Tax considerations and pension contributions

Just as preventive care is key to long-term oral health, proactive tax planning is essential for a healthy retirement fund. Dentists must carefully manage pension contributions to maximise tax efficiency and avoid unnecessary liabilities.

The Annual Allowance, currently £60,000 per year, limits tax-relieved pension contributions but is reduced for high earners. With the abolition of the Lifetime Allowance in April 2024, previous caps on total pension savings have been removed, but new limits on tax-free lump sum withdrawals now apply.

The Lump Sum Allowance (LSA) restricts lifetime tax-free withdrawals to £268,275, though this varies based on pre-2024 pension access or Lifetime Allowance protection. Exceeding this amount incurs taxation at the individual's marginal income tax rate. The Lump Sum and Death Benefit Allowance (LSDBA) caps tax-free lump sums for death benefits, serious ill-health, or overseas pension transfers at £1,073,100, with any excess taxed as income if paid before age 75.

For dentists in private practice, pension contributions are tax-deductible, reducing taxable income and enhancing retirement savings efficiency. However, exceeding tax allowances can lead to significant charges, making careful planning essential - just like having a regular check-up to avoid bigger complications down the line.

Tax treatment depends on individual circumstances and may change in the future.

Conclusion

Retirement is more than stepping away from the practice - it’s about embracing new opportunities while maintaining financial independence.

Whether relying on the NHS Pension Scheme, private pensions, or a hybrid approach, proactive planning is key. By understanding pension options and managing tax implications, dentists can look forward to a rewarding and well-prepared retirement.

For expert guidance tailored to your individual circumstances, speak to a Dental Specialist Financial Adviser from Wesleyan Financial Services today. Charges may apply.