The purpose of this article is help you look at the key factors when planning your retirement, putting a retirement plan in place, and the main options available to you.
Eliminate the uncertainty
When contemplating, or reaching, a planned retirement, your concerns can be heightened, since you are moving into what we can describe as the Third Stage of your life. In an ever changing world there is a huge degree of uncertainty. During the last three years in particular we have had a global pandemic and a land war in Europe. Many countries are still dealing with the fallout from the former while the latter shows no sign of abatement. However, historically, there has always been similar turmoil and uncertainty in the investment markets, yet life has gone on in spite of it all.
The Third Act of your life
The first act of life is mostly about youthful enthusiasm and education, the second act is mostly about career and family. In my view, the third act of life should be about your pursuit of your own fulfilment. That is enjoying your hard work and your prudent financial planning. (And in many cases leaving some kind of legacy).
A Financial Plan that is specific to a GP
I have written previously about being prudent and putting the building blocks in place for a sound retirement plan, regardless of global uncertainties. In this article I outline the factors to consider when planning your retirement. In addition, I summarise the main options available to you to provide a sound, and tax efficient income in retirement. Our first step with our clients is to have a Financial Plan. Within it we focus on simple steps towards financial security, maximising tax reliefs and the potential return from your investments.
Key factors you need to consider at retirement
Each individual’s circumstances should be assessed, in the main, under the following headings (but other factors may also need consideration):
- Age – a GP retiring at age 72 has a reduced life expectancy, and potential income need, than a GP retiring in their early 60’s.
- Current health – underling health issues are a key factor which need to be considered.
- Attitude to risk – If going the ARF route, too conservative an investment approach may mean you run the risk of low growth potential over time. The annuity may be the more prudent option in such instances.
- Taxation/Multiple Pensions – If multiple income sources and pensions – what is the most tax efficient way to structure the drawdown of your income? Which pension / retirement account should you draw on first?
- Other income sources – Rental income/state pension/HSE pension/part-time work. At what point does the taxation and the Law of Diminishing returns kick in for part time work?
- Spouse/Dependents – Is your spouse/partner dependent on the income – if so how do you ensure they are protected?
- Your Will & Legacy – Is your Will up to date, and a Power of Attorney is appointed. Do you want to leave funds to family/children?
GMS Annuity
While the Approved Retirement Fund (ARF) tends to be the preferred option on retirement, the GMS scheme offers attractive annuity rates. This option needs to be carefully considered before making a decision. It is also the intention of the GMS trustees to increase the pension income (Annuity) from the GMS scheme in line with inflation. Two-thirds of the pension passes on death (if applicable) to the spouse.
Approved Retirement Fund (ARF)
An ARF allows retirees to keep control over their pension savings. Their pension fund continues to be invested, preferably in a mixture of assets but predominantly in globally equities for growth. This allows retirees to potentially benefit from investment returns and continue to grow their pension fund while taking regular withdrawals to provide an income during retirement. A key difference between the ARF and an annuity is what happens on death. The ARF option allows retirees to keep control over their pension savings. An ARF can then pass on to the deceased estate – assuming the assets outlive you under a growth orientated investment strategy.
Caveat Emptor
When it comes to retirement advice, many financial advisors have a conflict of interest when advising GP clients. It is important to point out that many advisors are financially incentivized to sell an ARF (they are usually paid a commission), whereas if a GP goes down the annuity route with Mercer there is no remuneration to the advisor. This is where it is very important to make sure that you get impartial advice with a clear understanding of both the benefits or downsides of both the Annuity and ARF option.
Delayed Maturity and Drawdown of GMS
It is also important to note, just because you have retired/resigned from the GMS, doesn’t mean you have to drawdown your GMS pension. Many GPs may have other sources of income and savings. Or, in some cases, continue to help out and cover sessions in the practice from which they have retired. You may not need to drawdown your GMS pension immediately and can delay up to age 72. This allows the funds to remain invested in a tax free growth environment and avoid paying tax on any income drawdown.
Irish State Pension – your potential entitlements
You also need to factor-in your entitlement to the State Pension. From age 66, a GP is entitled to the State pension. The current full contributory State pension (average of 48 or more PRSI stamps) is €13,843 pa plus a spouse benefit (means tested) of €12,365 if eligible (over age 66). We always recommend you review your PRSI record, and for your spouse if applicable, well in advance of retirement. The information can be requested by calling the Dept. of Social Protection at 0818 200 400.
State Pension Eligibility – unexpected obstacles
There have been some very unfortunate cases concerning GPs and their entitlement to the State pension. They apply for their State Pension only to find that they are not eligible. Some GPs were employed by the State to provide services to a district hospital or long-stay care facility. The PRSI contributions for this income, for entrants pre 6 April 1995, is Class D. This class of PRSI is not regarded when determining the State pension entitlement. Impacted GP’s can have a significantly reduced entitlement or in some cases, have lost all entitlement to the State Contributory Pension.
UK State Pension Entitlement
Many Irish doctors have spent time training or working in the UK. For those with a potential UK State Pension entitlement (minimum 3 years National Insurance credits required to qualify) the good news is the deadline for buying additional credits has been extended to April 2025.
Have clear goals
You should use your income as a tool to achieve your life goals. Although I am obviously biased, a trusted financial advisor can help you reach those goals. But only if she/he has the expertise to do what’s required. Then, together, you can define your goals clearly and identify the ways to achieve them. For many investors, emotions tend to override investment decisions. That is why a financial plan (and trusted advisor) is essential to guide you from making poor investment decisions along the way and have a disciplined approach.
Your Retirement Plan – for now, and your future
The essence of retirement planning is estimating your income needs – both now and in the years to come. A prudent financial plan, reviewed annually with your advisor, will allow you to calculate the level of capital required to maintain your desired lifestyle. You then have every chance of putting a realistic plan in place to help you achieve your goals and maximise your Third Act!
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