Legal professionals are renowned for working hard and often have a healthy remuneration package to match too. But making sure that this income is maximised, and enough is set aside for retirement, is critical to achieving the lifestyle you want once you leave the profession.
Here are four keys steps that will help you get the retirement you deserve:
- Know how much you want
Before deciding how much of your monthly pay packet to set aside each month, it’s important to recognise how much income you’ll need in retirement.
Our research has shown lawyers will need on average £48,458[1] per year later in life, but this might fluctuate over the years, particularly ahead of key life or family moments.
However, often when you retire your monthly outgoings will decrease. You will have potentially paid off your mortgage, your children may have moved out, helping to reduce household bills, and you will no longer be making pension contributions. On the other hand, you may wish to travel more or help a child or grandchild out with large financial purchases such as a deposit for a house or university fees.
Our research has shown lawyers will need on average £48,458[1] per year later in life, but this might fluctuate over the years, particularly ahead of key life or family moments.
[1] *Research based on a survey of 2,624 professionals (203 Doctors, 201 Dentists, 101 Lawyers, 101 Teachers and 2018 general consumers) by Censuswide on behalf of Wesleyan, January 2017
^which.co.uk/elderly-care ( 2016/2017 ) - February 2017.
Another important consideration is factoring in care costs you may need to cover. The average weekly cost of a room in a residential home in the UK is £600 and a room in a nursing home is £841^. However, these are only average figures, so you could be looking at considerably higher figures depending on where you live.
If you are a partner, you may be looking to sell your share whilst continuing to work at your practice in a reduced or lesser capacity. Alternatively, resigning from your partnership may result in the sale of the practice or a merger. Any lump sum or income received from this will have tax implications and need to be carefully considered as part of your retirement income.
It’s therefore important to make sure that you think carefully about how much you want in retirement and when you want to access it. Once you’ve done this you can calculate how much you need to set aside each month to make sure your pension will provide this.
- Think about when to access your pension
Knowing when to access your pension can be confusing, especially since the introduction of pension freedoms.
For some, tapping into their pension when they reach their preferred retirement age is sensible but for those that plan to stay in work past then – which is the case for around 60%* of lawyers – it might not be necessary.
It’s important to understand pension freedoms too. Since their introduction in 2015, pension freedoms mean you can now draw down a cash lump sum from your pension from the age of 55, regardless of whether you have retired or not. Accessing your pension pot early can release funds – particularly useful if you’re paying for a child’s house deposit or wedding – but could reduce the amount you’ll get later in retirement.
For some, tapping into their pension when they reach their preferred retirement age is sensible but for those that plan to stay in work past then – which is the case for around 60%* of lawyers – it might not be necessary.
- Don’t let tax catch you out
There are two main types of tax that relate to your pension pot – the Annual Allowance (AA) and the Lifetime Allowance (LTA).
The AA is the amount you can set aside each year into a pension without being taxed. As of April 2014, the amount of pension contributions you can make before being taxed is £40,000 with any payments above this charged at your marginal rate of tax, which could be as high as 45 per cent.
Although £40,000 might seem a generous amount, many lawyers could unknowingly exceed this limit, especially at the end of their career. If you expect that you’ll exceed the AA in a given year you can offset this against any unused allowances from the previous three years.
The LTA is the total amount you can build up in all your pension plans over your lifetime without incurring a tax charge and is currently set at £1.03m, reduced from £1.25m to £1m in 2016. If the total value of your pensions exceeds the LTA, when your draw down your pension will incur a tax charge on the excess – reducing your retirement income.
To allow you to protect existing pension savings you have against the reduction in the LTA, HMRC introduced two new forms of LTA protection in April 2016. The first is an Individual Protection, which gives you a personal LTA equal to the whichever is the lowest of the following: (a) the value of your benefits at 5 April 2016 or (b) £1.25m. The second is a Fixed Protection 2016, which gives you a personal LTA of £1.25m.
- Always seek advice
We’re living longer and our ambitions for retirement are bigger and bolder than ever, so making sure you have enough set aside to fund the retirement you’ve dreamed of is crucial.
If you’re planning for retirement or looking to make your money work harder, speak to one of our specialist financial advisers.
Wesleyan provides specialist financial advice and services to lawyers and can provide guidance planning for retirement. For more information, go to www.wesleyan.co.uk or call 0800 092 1990.
This article is provided for information only. No liability is accepted for any consequence arising from any action or decision taken or not taken resulting from the content of this article. Nothing in this article should be taken as advice.
[1] *Research based on a survey of 2,624 professionals (203 Doctors, 201 Dentists, 101 Lawyers, 101 Teachers and 2018 general consumers) by Censuswide on behalf of Wesleyan, January 2017
^which.co.uk/elderly-care ( 2016/2017 ) - February 2017.
