Some dentists may be considering early retirement amid the Covid-19 pandemic, but it will be crucial to make the right pension choices
With the UK slowly emerging from lockdown, dentists were able to return to their practices on 8 June. But faced with new ways of working and potentially difficult financial consequences, will some dentists choose to stop practicing? If so, many will also need to think about their pension planning.
The bottom line is that until the Covid-19 pandemic is over, dentists will need to work according to strict social distancing and hygiene rules. This will make it significantly more challenging to fulfil NHS contract commitments; it will simply no longer be possible to see one patient every 15 minutes, as before.
Moreover, with NHS commitments taking much longer to fulfil, the time available for private work will inevitably be shorter. As a result, many dentists’ earnings may be adversely impacted for some time to come.
In which case, it’s likely that some dentists will decide this is the moment to stop working – to sell their practice or to retire earlier than they had previously anticipated. But what will this mean for their NHS Pension Scheme benefits? How do they access their savings – and should they do so?
Weighing the considerations
In practice, there are lots of different factors to take into account here. For example, many dentists will have built up benefits in more than one section of the NHS Pension Scheme – the 1995 or 2008 sections, say, or the 2015 scheme. They will need to consider whether to access all of these benefits simultaneously or whether to treat each section individually.
Another issue is the potential cost of accessing pension benefits early. Different sections of the scheme carry different penalties for early access – and charge them in different circumstances – so this could have a significant impact.
Also, many dentists will have private pension entitlements in addition to the benefits they are due from the NHS Pension Scheme. For some, it may appear to make sense to take an income from these plans, rather than accessing the NHS scheme, in order to avoid penalties from the latter. However this in itself can lead to additional taxation penalties for some Dentists when drawing their NHS Pension which could mean that this course of action is not the most suitable for all.
Many of these questions are not straightforward and dentists should certainly consider taking financial advice on how to make the right decisions. Bear in mind that even the normal retirement age – the age at which members can access benefits without penalty – in the different NHS schemes varies:
- In the 1995 section, the normal pension age is 60, but savers are entitled to access their benefits from age 50 onwards if they were members of the section on 5.4.06 or 55 if they joined after this date;
- In the 2008 section, the normal pension age is 65, with benefits accessible from age 55 onwards;
- In the 2015 section, the normal pension age mirrors the state pension age; this is currently around 66 but is increasing incrementally over time. Members can begin accessing benefits from age 55.
What the rules mean in practice
To see the potential impact of the different decisions that dentists might now make about their pension entitlements, imagine the case of a 55-year-old dentist, James. Let’s say James has built up benefits in the 1995 section of the NHS Pension Scheme which amount to a £30,000 pension plus a lump sum entitlement of £90,000; in addition, he has 2015 scheme benefits of £8,000 and a private pension plan currently valued at £250,000; his state pension age is 67.
Applying the rules of the different sections, James would see significant reductions to the value of his NHS Pension Scheme benefits if he chose to access them all today. The 1995 benefits would reduce to a pension of £23,610, with the lump sum dropping to £76,680; the 2015 benefit would come down to £4,432.
However, benefits from the 1995 and 2015 schemes do not have to be taken simultaneously and a dentist in this position would have a number of different options.
For example, he could choose to leave his NHS entitlements untouched for longer, thus reducing or eliminating early access charges; instead, he could take an income from his private pension. Alternatively, he could draw down on the 1995 scheme benefits only, given that this section has a lower normal pension age, and delay drawing his 2015 benefits; again, this would reduce early access charges and he’d be able to supplement his income using his private pension.
Equally, our dentist James might choose to take all his NHS pension benefits now, despite the prospect of reduced benefits; after all, he will likely be drawing the pension for longer than anticipated – five years more for the 1995 section and 12 years more on the 2015 scheme – so will have a good chance to recoup this money.
Or our dentist might even have other sources of income – other savings and investments, say, or even different employment. In which case, he might choose to leave all his pension benefits untouched.
Inevitably, these will be individual judgements for every dentist now considering their options. When you access your pension benefits – and in what order – will potentially make a very significant difference to your standard of living, but the optimal solution will depend on your personal circumstances.