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Picking the best date to retire

Why you should retire from your GP partnership on the first May bank holiday. Dr Bill Spiegler

The big day: failure to plan the precise date of your departure could end in an instant loss of £2,000 and long-term losses of thousands more (Photograph: Getty Images)
The big day: failure to plan the precise date of your departure could end in an instant loss of £2,000 and long-term losses of thousands more (Photograph: Getty Images)

Having finally made the eminently sensible decision to retire from your partnership, and knowing roughly when you want to go, I think it is crucial to turn your thoughts to the precise date that you should leave.

To fail to consider this could be a costly and irreversible mistake that could easily mean an instant loss of more than £2,000, and a long-term loss of several more thousands of pounds over the course of your retirement.

As well as this, your spouse could continue to lose out substantially after your demise if they were to survive you for any length of time.

So, from a financial point of view, when is the very best time to retire and to start getting your NHS Pension Scheme (NHSPS) benefits?

The first thing to consider is how the GP pension 'dynamising' factor is treated when totalling up working for only a part of an NHS financial year, which runs from 1 April to 31 March.

Pension dynamising factor
At the risk of teaching my grandmother how to suck eggs, simply put, the dynamising factor is the multiplier by which the whole of a GP's pension is enhanced by each year of NHS service in order to take into account inflation for that given year plus an annual uplift (see box, below).

UPRATING YOUR NHS PENSION POT
  • The dynamising factor is applied to annual NHS-pensionable earnings, up to and including 31 March, and is calculated by adding 1.5% to the percentage increase in the Consumer Prices Index (CPI) as it stood in the previous September.
  • If you retired on 1 March 2012, the factor is 6.7% for 2011/12.
  • The annual CPI increase in September 2011 was 5.2%. Adding the 1.5% uplift to this equals the 6.7% dynamising factor.

This assumes membership of the 1995 Section of the NHS Pension Scheme, to which most GPs currently belong.

 

If only a part of the financial year is worked, then each month worked will attract one-twelfth of the dynamising factor for the financial year that it falls into. So far, so simple.

However, it gets more complicated, although very much in a GP's favour, if retirement takes place some time after the start of a month.

In essence, a GP only needs to work some of the month in order to attract the whole of that month's enhancement to their pension.

In fact, if one day of any month is worked, that day will still attract the same one-twelfth of the dynamising factor as working for the whole month would do.

Because of this, it makes complete sense to retire as near to the beginning of the month as possible (see the example, below).

EXAMPLE

Consider a GP in the 1995 Section of the NHS Pension Scheme who retired on 30 June 2011 with an annual pension of £60,000. Had they worked for just one more day, until 1 July 2011, they would have enhanced their pension by one-twelfth of the dynamising factor for 2011/2012.

  • Retirement on 1 July instead of 30 June means an extra month's dynamising factor of 1/12 x 6.7% = 0.56%.
  • So the GP's pension could have been enhanced by 0.56% of £60,000 = £336 per year.
  • This, like the rest of the pension, would be indexed-linked to the CPI in September, for as long as the GP lives to draw it.
  • Three times this amount, just over £1,000, would also be added to the tax-free lump sum (although this would be actuarially reduced if early retirement was taken).

Partnership payout
The second consideration is a little controversial and involves maximising your partnership share on retirement.

Most standard partnership agreements state the required notice period, generally three or six months, if a partner is to leave the practice.

They do not usually stipulate an actual day of the week for retirement. So why retire on a Friday when you can make Sunday, or even better still, a Monday bank holiday, your last day?

To clarify, consider a GP partner whose annual profit share is £150,000: they would lose out on 2/365 of this, or about £820, by declaring Friday as their last day rather than the Sunday two days later - or worse still, 3/365 and about £1,230 loss if there happened be a bank holiday Monday to retire on three days later.


Dr Spiegler: 'The best time to retire from a financial point of view is at the end of the day on the first bank holiday in May' (Photograph: UNP)

So Saturday morning surgery rotas permitting, the GP could be on average £1,000 better off for doing no extra work at all.

Of course your partners may, quite fairly, argue that they will lose out to the same amount, but just watch them do the same thing when they decide to go.

So, unless you (or your accountant) know of a compelling personal financial reason to the contrary, the best time to retire from a financial point of view is at the end of the day on the first bank holiday in May.

However, if this does not fit entirely with your life plans, a reasonable compromise would be to make the end of the first Sunday in the month your chosen time for the great escape.

  • Dr Spiegler is a retired GP in Leicestershire


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