Richard Lishman, the managing director of the 4dentists Group, looks at the implications financial charges are having on savings and pensions.
When looking to the future, your pension plan can make a big difference. A good pension will not only help you set up funds for when you decide to retire, but help your savings to grow faster, acting as a reliable financial safety net that is available for when you need it.
However, as you are probably already aware, there are almost endless pension policies on the market, meaning that making an informed choice is easier said than done. Your current pension policy may look good on paper, but is it performing the best for you and giving the highest returns? A pension review is a smart way to gauge if your current pension policy is the most beneficial option for you and can help you have a better understanding of this important part of your finances moving forward.
Why should you get a pension review?
Often, individuals will have a certain financial goal in mind for retirement, so this is a good yard stick to measure pension performance against. A pension review will assess if you are still on track to meet your financial goals, especially as it will take into account rates of inflation and the current value of currency. A projection you made 20 years ago, for example, may not be the same sum you want to aim for today, so a pension review can reveal whether your existing policy continues to be right for you. By having a review and switching to another pension plan, you could see your funds grow faster.
Some individuals use pension reviews as a way to save in other ways, too. Say, for instance, you have multiple pension policies and are currently paying annual fees on each one – the pension review process could reveal that a single pension fund is a better way forward and will save you money on annual fees, giving you the chance to streamline your savings.
A pension review is also a fantastic chance to reassess your priorities and see whether your pension policy is still aligning with your lifestyle. Unlike many careers where working hours and earnings are fairly easy to predict, dentistry has a level of flexibility that affords professionals more freedom, meaning that your priorities, income and objectives can change considerably in a short amount of time. Examples could be that you have recently become qualified to supply dental implants and are now earning much more in your practice, or perhaps you may be nearing retirement and want to step away from your business and work less, adjusting your income to reflect this. In these situations a pension review is beneficial, even if you are approaching retirement age, as you can set out a smarter, up-to-date plan and find policies that support your new outlook – no matter what that may be.
Know your limits
Pension schemes will traditionally have annual and lifetime limits on how much can be invested. For the vast majority of people, the annual allowance for pensions is £40k. However, changes to Tapered Annual Allowance have meant that high earners are restricted in their annual allowance if they earn over £240k per year and for every £2 they earn over this sum, their annual allowance is reduced by £1. In 2019/2020 this meant that annual allowance could be reduced down to £10k, but this has changed again recently and the maximum reduction to this figure is now £36k, leaving you with an annual allowance of just £4,000. This, however, is only applied if you are earning £312k or over.
Lifetime allowance is also something to watch out for. Currently in the UK this figure is capped at £1,073,100, meaning that if you exceed this amount you will be subject to taxes on whatever amount goes above this limit. The tax on additional savings can be as much as 55 per cent.
A pension review easily allows you to see how much annual and lifetime allowance you have under your existing pension policy/policies and uses this information to see whether different plans could help you avoid unnecessary tax bills further down the line.
NHS pensions
Never discount your NHS pension if you have one, especially as some of the advantages of this policy are likely to be very favourable to your financial goals.
First of all, it is a guaranteed pension, meaning that you can rely on it to always deliver capital. Furthermore, the cost of the pension is removed before tax, for example, if you earn £50k and the pension costs £5,000 per year, only the remaining £45k of your salary is subject to tax deductions. The NHS pension also grants you a tax-free lump sum whenever you decide to cash it in – definitely something to bear in mind!
Stay on top of your pension
Your pension plan is an integral part of your future plans. As such, regularly reviewing your pension with the help from industry experts is a guaranteed way to gauge the performance of your current pension, see whether it aligns with your future goals and explore alternatives.