Avoid the pitfalls of early retirement - You and yourpension

Take steps now to make retiring before the age of 60 affordable. Paul Kendall shows you how.

GPs wanting to retire earlier than the standard retirement age need to plan ahead to ensure they enjoy a similar standard of living when they stop working.

Currently GPs have to work until the age of 60 in order to qualify for full NHS pension benefits. If you retire before this age your pension will be reduced unless your retirement has been approved on grounds of ill health.

Under the existing rules, you can choose to take voluntary early retirement from the age of 50 but your pension will be reduced actuarially to take account of the longer period over which you will receive it.

As you can see from the table of early retirement reduction factors (see right) that are applied to both pension and tax-free lump sum, retiring in your early fifties means a large drop in benefits. Given these reduction levels, you might want to think about doing some work after retiring early.

It is possible to retire early, take your pension and tax-free lump sum and, after one month, return to your practice on a part-time basis.

Work part-time

This will enable you to reduce your workload without a substantial drop in overall income. For a GP partner this presupposes that the other partners are happy to take you back.

If you are a single-handed GP, you need to apply to the primary care organisation (PCO) for approval to return to your practice which might not be forthcoming.

Alternatively, you can take up a part-time post or do locum work, for example. There might also be opportunities in the private health sector.

If planning for early retirement as an end to your working life, you might need other resources such as investment income from personal pensions and savings such as individual savings accounts that have tax breaks.

You could also consider setting up a limited company through which to channel non-NHS earnings.

From 6 April 2006 GPs will be able to operate their own self-invested personal pensions (SIPPs). But, given the government's recent U-turn on what can be invested, it is sensible to wait until April before assessing this option.

Another route is to downsize by selling your main home and moving to a smaller property. Any capital released is not liable to capital gains tax.

Over the next few years, pressure to raise the retirement age of GPs and reduce the value of their pensions will increase. With this in mind, younger GPs who are considering early retirement ought to put some method of funding in place.

Adopt flexible approach

Younger GPs need to provide for flexibility in their savings strategy and take advantage of tax-efficient savings schemes. They should ensure that instant access funding is available, because pension investments cannot be accessed until the scheme retirement date.

Older GPs are less likely to need such emergency funds and should consider longer-term investments such as personal pensions, property and the stock market.

The NHS tax-free pension lump sum of three times the amount of annual NHS pension can provide a source of funds for investing in income-producing savings to assist in financing early retirement. There is also the possibility of being able to transfer the total NHS pension fund into an SIPP on retirement.

This would result in a much larger tax-free lump sum. But this must wait for final legislation in 2006/7.

The recent increases in GPs' pension uprating factors will result in larger pensions. Even after the pension is discounted for early retirement, it will still provide a significantly higher level of income than at present.

A large number of GPs have delayed their retirements to ensure that they gain the full benefit of the increase, making it likely that the number retiring will rise after April 2006.

Seek independent advice

Before deciding to retire early it is advisable to ask an independent financial advisor (IFA) for advice. You can obtain an estimate of your NHS pension from the NHS Pension Agency or its equivalents in Scotland and Northern Ireland.

The IFA can compare the projected NHS pension and any other source of post-retirement income to your income pre-retirement and examine the implications.

This should included a detailed look at cash flow and provision for outstanding liabilities. One liability often overlooked is income tax on the last year's practice profits and deferred national insurance contributions.

- Paul Kendall is a chartered accountant from medical specialist firm Dodd & Co in Penrith www.doddaccountants.co.uk


- Your NHS pension and tax-free lump sum will be reduced.

- Part-time work following early retirement might be worth considering.

- Private pensions and ISAs can provide additional funds.

- NHS pension levels are set to increase to make early retirement more affordable.

- Review post-retirement income with a medical specialist IFA.

- Make sure you take into account outstanding debts payable after retirement, for example, the income tax bill for your last year in practice.


Age Pension Lump sum
59 94% 97%
58 89% 94%
57 84% 92%
56 80% 89%
55 75% 86%
54 72% 84%
53 68% 82%
52 65% 79%
51 62% 77%
50 60% 75%

No reduction if retirement is caused by permanent ill health - see

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