Pensions used to be boring. Until 2015, you paid into a personal pension during your working life and, when you retired, you could take up to 25% of the fund as a tax-free lump sum. The remaining amount then had to be used to buy a guaranteed taxable income for life – whether you needed it or not!
This wasn’t always ideal for dentists. Many wanted to access their tax-free lump sums at retirement to pay off their mortgage or go on a holiday of a lifetime. Being forced to take guaranteed income at the same time (when many already had a substantial NHS Pension) often led to excess income, unnecessary tax and money sitting in unused savings accounts.
The impact of pension freedoms
Then came pension freedoms in 2015, allowing people to access their pensions in a flexible way that suited them. Want to take just the tax-free lump sum and leave the remaining fund invested? No problem. Want to increase your income by £1,000 per month until you receive the State Pension and then reduce it? Fine.
Since then, with the right professional advice, dentists have been using pension funds built up from private income to support retirement lifestyles truly tailored to them.
Tax treatment depends on individual circumstances and may be subject to change in future.
Why pensions became powerful estate planning tools
Pensions provide many tax advantages:
- Contributions attract tax relief at your highest marginal rate
- The fund grows free from income tax and capital gains tax
- Any remaining pension funds on death have historically fallen outside the estate and therefore did not attract inheritance tax
Over the years, I’ve met dentists with significant private pension funds who had no further need for capital or income and were planning to pass pensions to their dependants – avoiding the 40% inheritance tax bill that many of their other assets would face.
The 2027 rule change
From 6th April 2027, most unused pension funds and death benefits will fall into people’s estates on death and may be subject to inheritance tax. The theory behind this change is that pensions are designed for retirement planning, not wealth transfer.
Unfortunately, for many people, pensions are one of their two largest assets (alongside property), so this will significantly increase the value of taxable assets.
Please note the Financial Conduct Authority (FCA) does not regulate inheritance tax planning and trusts.
Why dentists are particularly affected
This change is likely to impact dentists disproportionately compared to many other professions. In recent years, increasing numbers of private dentists have left or reduced their NHS Pension entitlement and have wisely built significant personal pension funds from private income instead.
While there is no universal solution, as everyone’s circumstances and estates are different, there are several key areas for most people to consider when planning their finances.
Key planning considerations
1. Look at the whole estate
Consider your entire estate, not just your pension. There are several exemptions that can be used to mitigate inheritance tax during your lifetime. Ensure they’re used as effectively as possible, using savings and investments as well as pensions.
2. The £2 million threshold trap
If your estate exceeds £2 million, your Residence Nil Rate Band is reduced by £1 for every £2 over this threshold. This means a married couple’s potential joint nil-rate allowance could fall from £1 million down towards a minimum of £650,000, significantly increasing the taxable estate.
3. Don’t forget income tax
Personal income and some pension death benefits are subject to income tax. Any resulting income tax may negate inheritance tax savings – for example, if you use your pension fund to buy an annuity rather than leaving it invested.
4. Be careful with tax-free cash decisions
Understand your objectives and total assets before accessing tax-free cash, particularly if you plan to do so earlier than originally intended. Many pension decisions made at retirement are irreversible – especially taking tax-free cash.
5. The age 75 rule
After age 75, pension death benefits become subject to income tax in the hands of beneficiaries, in addition to inheritance tax. This must form part of any effective estate planning strategy.
Act early, plan properly
It’s essential that you take professional advice to determine the best way forward for your unique circumstances. Review your pension arrangements well before April 2027 to ensure you don’t make a very expensive mistake with one of your biggest assets.
To speak to a Specialist Financial Adviser from Wesleyan Financial Services, visit wesleyan.co.uk/dental or call 0808 149 9416.
Charges may apply. You will not be charged until you have agreed to the services you require and the associated costs. Learn more at www.wesleyan.co.uk/charges.
About the Author
Having built vast experience as a Special Financial Adviser (SFA) over the years, Simon Cosgrove is now a Dental Regional Manager at Wesleyan Financial Services, guiding a team of dental SFAs to support dentists, their families and their practices with expert planning to secure their financial future.
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