Chris Lancelot: Retirement lump sum - handle with care

The current difficulties in the financial markets make aspects of GP retirement more difficult. In the past it was easy. It was to most doctors' advantage to take '24-hour' retirement, which meant being away from the practice for a day, then working no more than 16 hours a week for the next month.

Afterwards they could return to work if they wished, having collected both a sizeable tax-free lump sum and a monthly pension payment - in addition to their drawings from the practice. Not only that, but those drawings attract no deductions for pensions. For many doctors, 24-hour retirement meant their combined monthly income was higher than they had earned in the past.

But the financial crisis has added a new dimension to the decision-making process. The decline in house prices, the devaluation of the pound, a volatile share market, minimal returns on bank deposits and the ever-present threat of inflation means that it is now very difficult to find a safe place to invest a pension lump sum.

A doctor retiring today might receive a lump sum of £150,000, but a combination of inflation and devaluation may make this worth £125,000 in a few years. Can anyone nowadays reliably invest £150,000 so as to keep its value, never mind making a profit?

The problem is intensified because both pension and lump sum are index-linked until drawn. Once the lump sum is taken it no longer automatically keeps pace with inflation/devaluation.

GPs may exchange part of their future monthly pension for an increased lump sum: but this means exchanging inflation-proofed regular income for extra cash that is at risk from inflation. In the past, accountants usually advised GPs to take 24-hour retirement within two years of reaching 60. That advice probably still stands because the ability to combine index-linked pension and full drawings is compelling.

However, the lump sum presents a problem. If a retiring GP in good health has either debts - especially high-interest ones - or plans an immediate capital purchase such as a boat, then it's easy: use the lump sum to pay for it. Otherwise, beware: it will almost certainly be safer not to exchange future inflation-proofed income for an increased but potentially devaluing lump sum.

Dr Lancelot is a GP from Lancashire. Email him at GPcolumnists@haymarket.com.

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