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Retirement dilemma

Retirement: When is the right time?


The pandemic prompted the “great resignation” among those nearing pension age, but as Rebecca Cave discovered, there is a lot to consider when fixing one’s own retirement date.

16th Jun 2022
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I’ve reached that stage in life when many of my friends are retiring or semi-retiring each year, often much earlier than their designated state pension age.

Then a recent family bereavement made me stop and ask myself: “Why am I working so hard?”

The other MTD

When you run your own business, as I do, making the decision (MTD) about retirement is not simple.   And then there is the other MTD – making tax difficult, I’m sorry, making tax digital.

Every article I write about MTD generates more comments about retirement. A common attitude is: “I’m going to retire before all this nonsense starts,” and I do sympathise with this approach. 

However, MTD has featured as a big part of my writing portfolio since 2015 when it was first promoted by Chancellor George Osborne under the eye-catching slogan: “The end of the tax return”. I am loath to leave the story half-told, as I believe there will be many more twists, and U-turns before MTD ITSA is fully implemented.  

We are also eagerly awaiting MTD for corporation tax, slated to start no earlier than April 2026, which means HMRC isn’t even working on that problem yet. It is beginning to look like my retirement date may also tied into the MTD timetable.

How much do I need?

Retirement means switching sources of income from salary and dividends, or self-employed profits, to pension benefits, possibly topped up with some investment income. This new mixture of income will not be as flexible as business profits, but the starting level can be higher if you can delay breaking into your pension pot. This takes me back to the original question: when should I retire?  

Accountants are adept at drawing up cash-flow forecasts, but it’s not so easy to take a dispassionate view of your own finances. The calculation needs to take a realistic view of your current and future spending requirements, and also consider the needs and expectations of any dependants. 

Some key questions to ask yourself are:

  • Does my pension have to provide for a spouse?  
  • How much of my net assets do I want to leave to the next generation?   
  • What is my life expectancy?
  • Do I want to retain a care-home fund?
  • What level of inflation should I build into my forecast?  

Can I sweat my assets?

Many people of retirement age own a mortgage-free property, which could be used to generate additional income.

In the short-term spare rooms can be let tax-free using rent-a-room relief, or for the next 12 months under the Homes for Ukraine scheme. In many parts of the country the market rent for letting one room can easily cover the energy and council tax bills for the whole property.  

In the longer term, equity release or the sale of the property can generate a lump sum to pay for care home fees.   

Passing on your business 

How and when to dispose of your business is a big part of the retirement decision. 

If the business has significant value, then a sale of the whole caboodle in one go could provide you with a tidy lump sum, subject to tax at only 10% using Business Asset Disposal relief (formerly Entrepreneurs’ Relief).          

In an ideal world you would have planned for your retirement years in advance and introduced junior partners to buy you out at the appropriate moment.  

The long goodbye

You may want to wind down gradually, maintaining some business income while taking a limited level of pension benefits. The junior partners plan can help with such a staggered step-down. 

If you practise on your own then natural wastage can help. You may turn down all new work, while divesting yourself of those clients who are more PITA (Personal Income Tax Act) than piggy-bank. However, this may undermine the value of the business such that it’s impossible to sell on the rump of your client base when you finally feel it's time to zero the Xero.

Contribution cap 

If you do take the slow down but still earning route, remember there is a nasty sting in the pensions law that could limit your options. 

As soon as you start taking any pension benefits from a defined contribution pension scheme (money purchase), your future pension contributions are limited to £4,000 per year. This applies whether you have taken a draw-down or an annuity. It effectively caps contributions by both you and your employer to all of your money purchase pension schemes, even if you have only taken benefits from one fund. This cap doesn't kick in if you only take the tax-free cash from your money purchase pension fund or SSAS.  

What’s next?

Do you have a post-work plan? All of the young-retired friends I have spoken to say they are incredibly busy, and don’t know how they ever had the time to work.

The key to retirement happiness seems to be to have a range of interests and stimulating tasks. As an experienced accountant you will find there are numerous voluntary organisations that could use your skills, but you may think that balancing the books is behind you and now it's time to balance your life.

This article has been amended to correct the point that taking tax-free cash does not trigger the £4,000 contribution cap and to amend SASS to SSAS (Small Self Administered Scheme).

Replies (14)

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By mkowl
17th Jun 2022 10:02

I think we all ponder it, I always consider my ideal scenario would be not to retire fully but have a tie in with a firm where you can access their systems and software, do your own work but in exchange offer some advice, help with training, be a back up resource. Work less in the summer but do more October to March. In the main it would be the freedom from the day to day running of a practice and the monthly grind of hitting

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By Mike18
17th Jun 2022 10:03

Thank you for this article Rebecca. I can't fault any of the logic. In the end retirement decisions always involve compromise once you cease to work even in part.

Thanks (1)
By lynnemery
17th Jun 2022 10:36

If you only take out the 25% tax free lump sum from a money purchase scheme & leave the rest still in the fund are you still limited to the £4k annual allowance for contributions from you and/or an employer

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Replying to lynnemery:
Head of woman
By Rebecca Cave
17th Jun 2022 17:42

You are correct, the MPAA it doesn't apply if you just take the tax-free cash. I'll amend the article. I should have double checked that, my bad..

Thanks (1)
Replying to Rebecca Cave:
By lynnemery
20th Jun 2022 15:54

Thankyou Rebecca but I just wondered what SASS stands for. I also wondered if taking from a final salary pension scheme at say 60 a tax free lump sum and a pension from that final salary pension scheme from say the civil service whilst only taking the tax free lump sum from money purchase scheme's would trigger the £4k annual limit to money purchase schemes & also whether someone could take the full state pension at retirement age and pay it all into a money purchase scheme

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Replying to lynnemery:
paddle steamer
20th Jun 2022 17:30

Should be SSAS- small self administered scheme

Thanks (1)
By Jane Wanless
17th Jun 2022 11:48

I confess to being one of those people the Government is complaining about, having taken early retirement in March 2020 (what timing!) and still not 60. As others have said, I don't know how I managed to fit in work as I've managed to fill my time up with things that interest me, rather than what I had to do in employment (including volunteering for Tax Help for Older People).
Rebecca has mentioned the sting of the £4k limit after accessing the pension, and I think the limit is very wrong. Depending on the type of work, it can be difficult to keep up with full time employment and a gradual reduction might be more appropriate. It would allow for aging muscles in more physical work, and allow for people to build up other interests, rather than face a cliff-edge that some feel when suddenly cut off from colleagues and the routine of work.
I'm very happy with my retirement and new interests, but everyone is different. For the sake of those who want or need a gradual phasing in of retirement, the £4k limit should go. It should be more about the needs of society than a concern about possible tax abuse.

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By Geoff56
17th Jun 2022 12:45

I am not a pensions expert and I do not advise on pensions, but I thought the £4K cap on contributions only kicks in if someone begins to access their benefits flexibly. I did not think that taking the tax-free lump sum and/or purchasing an annuity triggered this.

I stand to be corrected but would be grateful for confirmation of the position.

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Replying to Geoff56:
By lynnemery
17th Jun 2022 13:14

I thought it did not kick in if you only take the 25% tax free lump sum and keep the rest in the money purchase pension fund

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By Silver Birch Accts
17th Jun 2022 15:24

Rebecca, you are one of the dwindling reasons I still read AW. Thank you for the article.

Thanks (2)
the sea otter
By memyself-eye
17th Jun 2022 18:42

I quit last July/August. Dissolved the company at 68 yrs old (me, not the company).
1. Lost interest in tax n'stuff'
2. IR35 - yes even applies to accountants
3. Built up enough in the company to take cash out (mostly)tax free
4. Saw MTDITSA coming down the road (& see 1 above)
5. Wife & Co director diagnosed with cancer
6. Prefer playing the stock market (always have in truth)
7. Have enough pensions (just) - don't need/want the extra
8. Pub opens at 4:00pm
9. Spent too much time/not enough time on my narrowboat!
10.Who gives a sh*t anyway?

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By Winnie Wiggleroom
18th Jun 2022 07:38

The way I see it is that we (in small practice) are lucky enough to be in a position of choice that hardly anyone else has, one could for example keep a handful of decent clients to support well into retirement age provided one kept ones marbles and still wanted to do some work. If not we have probably built up a decent cash sum if we decide to sell up.

For all the moaning about HMRC, MTD and clients I count myself fortunate to have chosen this route through life, the vast majority of people do not have that choice.

Personally I am quite a way off retirement but I can see myself carrying on in a reduced capacity well past traditional retirement age.

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Replying to Winnie Wiggleroom:
paddle steamer
20th Jun 2022 10:30

Catch with just a few clients is firm admin and CPD seem to take up the same time irrespective of the annual fees issued, as they become a larger proportion of practice hours they can get to the point where it is difficult to know if it still makes sense. (I kept on one larger client by persuading them to take me on as an employee instead, so effectively kept the fee without all the CPD/Admin grief, but it is manily bookeeping/payroll and there is an outside firm re year end/tax.)

I started valuing my hours differently as I got older and the advent of MTD really nudged me where I was likely going anyway, I just packed up practice a few years sooner than I might otherwise but have kept on my FD role on a three day week basis.

I will not be carrying on any debits and credits when I retire, no keeping my hand in , for me it will be a fixed day, likely in 2026, and that will be it, ledger closed. Carrying on whilst drifting out of date, especially re tax, really does not appeal, when I was younger I saw a few such individuals who really ought not to have been asking clients for fees, I never want to be one of them.

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By Tanekajabari
29th Aug 2022 12:37

Full retirement age, or the age you need to be to collect full Social Security benefits, is 66 years and two months for those born in 1955 and will gradually increase to 67 for those born in 1960 or after.

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