With news that the Government is proposing a change to the State Pension age from 67 to 68,
our new Head of Pensions, Phil McEvoy, takes a look at how this, and
other changes, may affect dentists and what you should do:
Everyone knows pensions are a long term game. We as individuals have
responsibilities to make provisions for our old age, and we also have
justifiable expectations that Government will arrange some communal form
of provision for us too.
In addition to the communal system, government also adopts an
approach of encouraging people to save, by allowing a deferral on income
tax (up to certain limits) into an employer’s or private pension fund
There are two very topical things it is worth commenting on about
recent approaches by government in both providing an income in older
age, and in encouraging people to make their own provision.
How is the state pension going to change?
The state pension is the communal mechanism that government provides
to citizens who have paid, or who have been credited with, National
The last decade has seen a flurry of activity changing the rules
around state pensions and, in most respects, making them less generous.
The changes include:
- Changing the way in which state pensions are calculated: a new state pension
was launched in April 2016. Unlike the previous two-tiered system, this
new system, provides for a single level of state pension, determined by
an individual’s National Insurance record. In the short term, some will
find the new system to be more generous; for others it will be less so.
In the long run, the impact of these reforms is that expected
expenditure in 2060 was reduced from 9.0% of GDP to 8.4%. So – a reduction in expected expenditure on state pensions for the longer term.
- Changing the mechanism by which state pensions are increased:
although we now have the Triple Lock (which increases state pensions by
the best of average pay increases, price inflation increases or 2.5%)
the move was counteracted by measuring price inflation by the Consumer
Prices Index (CPI) rather than the more generous Retail Prices Index
(RPI). According to the Office for Budget Responsibility, the Triple
Lock costs £4.7bn for the years from 2010 to 2022 whereas the savings on
Benefits (the majority of which is the state pension) over the same
period is £30bn as a result of switching from RPI to CPI
- Changing the State Pension age: the earliest age at
which someone can draw on their state pension has been increasing under
changes brought in by all flavours of Government. The law currently
says that it will reach 65 for women in late 2018, then:
- Rising to 66 between 2018 and 2020
- Rising to 67 between 2026 and 2028, and
- Rising to 68 Between 2044 and 2046.
look set to accelerate that last increase, with the increase to 68 now
set to happen between 2037 and 2039 (i.e. seven years early). That
change alone is expected to save the Treasury £74bn in the years 2037 to
2046. This might come as quite a blow to any dentists currently aged
between 39-47, and you might need to rethink your retirement plan, as
you have to wait a year more, before you can access the state pension.
What about private saving for pensions?
Given that the communal system is being restricted, it might be fair
to presume that Government is doing more to encourage private saving –
to personal or workplace pensions. To a degree that is true – since 2012
a policy called automatic enrolment
has said that employers must enrol (most) employees into a workplace
pension and that a minimum level of contributions must be paid by
employee and employer.
That has had the effect of ensuring more people are saving towards
their retirement, although everyone agrees that minimum levels of
contributions (currently 2% of pay, rising to 8% of pay over the next
couple of years) are not sufficient for a good standard of living.
The net impact of more pension savers is that the state will provide tax relief more widely than before. The current published figures
suggest that since the advent of automatic enrolment, the net impact is
that some extra £2bn per annum is given to pension tax relief.
However at the same time, Government has made the incentives to save less attractive by restricting the tax reliefs available.
Tax relief is given on pension contributions, subject to two main limits:
- Annual allowance
– a limit on the contributions to, or growth in, your pension over the
course of a tax year. When introduced in 2006, this allowance was set at
£215,000. However it has been gradually eroded and the main limit is
currently £40,000 per annum (reduced further for high earners).
- Lifetime Allowance
– a limit on the overall value of pension savings that can be built up
on a tax preferred basis. In 2006 this was set at £1.5m, but it has been
reduced to £1m.
The reductions in these allowances are estimated to generate some
£23bn of savings to the Treasury between 2010 and 2022. This is
ultimately money that is being taken out of savers’ pockets and is
reducing their individual provision for old age. In particular it is
hitting highest earners and those with largest pensions the hardest.
However it looks broadly as if it offsets the £2bn per annum cost of
widening pensions access (and therefore giving tax relief to more
people) achieved through automatic enrolment.
So it looks as if Government, who are reducing the general value of
the communal provision, is not currently in the mood to increase the
individual incentives to make your own provision.
Despite all of this it is still worth bearing in mind that workplace
pension schemes for dentists such as those in the NHS, universities and
armed forces are good vehicles for retirement savings, as they benefit
from the tax relief that exists, as well as a generous contribution from
employers and/or contracting authorities.
It is worth speaking with an independent financial adviser about
saving for retirement – it doesn’t matter how young or old you are,
investing for your future is a prudent financial move at the moment.Phil McEvoyBDA Head of Pensions
Need some financial advice?
Our partner, Lloyd and Whyte can offer independent financial advice
and they are specialists in the dental sector.
Want to know more about pensions?
BDA advice provides a general overview of the main elements of the NHS Pension Scheme
in relation to dentists working in general dental practice and those
working in the salaried services within a hospital, community or
salaried general dental service setting. We also provide information on
employee pension arrangements.