Retirement Planning for Barristers

While often high-earning, barristers are typically self-employed or sole practitioners within a chambers. With self-employment comes the ups and downs of unstable income, cash flow planning and learning how to manage things like retirement savings on the job, so to speak. This can no doubt be a bit of a quagmire with niche financial considerations and specific requirements based on multiple criteria.

As a high-earning self-employed person, it’s all the more important to work with professionals who know ‘what’s what’ when it comes to retirement planning and understand the complexities of the system, because if left too late planning may only be able to do so much.

Specific considerations for self-employed barristers

While it may be daunting to think about retirement when you have fixed, monthly payments to make for your mortgage, chambers rent and other costs, putting aside for pension contributions will place you well in the long run. We know how difficult it can be when income can fluctuate wildly; that’s a part of the reason we do what we do.

Retirement planning for self-employed barristers is about more than contributing to your pension — it’s often about how you manage and address your money as a whole. It can be a shift in mindset entirely. Some considerations in retirement planning for barristers outside of direct contributions to pension plans include:

●       Capital gains tax

●       ISA allowances

●       Venture Capital Trust (VCT), Enterprise Investment Schemes (EIS) and Seed Enterprise Investment Schemes (SEIS) planning

●       Cash management in savings interest and liquid funds for emergencies

●       Charitable giving

 Of course with contributing to pensions yourself there are a number of considerations, rules and obligations you should be aware of when planning your retirement contributions.

How much can you contribute to a pension?

How much you can contribute to your pension (gross) in your annual allowance depends on what your income is, in short. If you go above your annual allowance you’ll likely need to pay a tax charge. Sometimes your pension provider may, but likely the cost will be on you.

If your threshold income is over £200,000 or your adjusted income is over £240,000 you’ll have a tapered, lower annual allowance after which point you’d have to pay tax on your contributions. Otherwise, your annual allowance in 2022 is £40,000. It can get as low as £4,000 a year with tapering.

To determine your threshold income, start with your net income for the year, and deduct the gross amount of your pension contributions where you had relief at source. While there are a few other more niche deductions and additions, this is the basic calculation for threshold income.  

For adjusted income, start with your net income for the year and add the amounts of claims made for tax relief on pension savings paid before tax relief. Again, there are a few other calculations here, but that’s the broad calculation.

Carry forward

With all of that, you may also be able to carry forward unused annual allowance from the immediately previous 3 years. The biggest requirement for this is that for the immediately previous 3 years you’ve been a member of a UK registered pension scheme, or a qualifying overseas scheme..

Gross up

For personal contributions, your pension plan often acts as relief at source and adds 20% to your pension pot contributions, so when you calculate what you can contribute to your pension pot, it’s important to take this into consideration.

 What you’re contributing is the net amount, add 20% for the gross, and that amount is what you need to be using to calculate your threshold income as well as your annual allowance. Contributing £40,000 net on your own will mean that you’ll need to pay a tax charge in most circumstances because of the grossing up of your pension pot by your pension plan.

Rather, if you’d want or need to hit the annual allowance, in 2022, you’d want to pay £32,000 yourself. It’s remembering things like these that sometimes as a self-employed person you can encounter because you’re time-poor or cash flow stressed. 

Lifetime allowance

The lifetime allowance for the total of all your pension savings can change, at the time of writing, it sits at £1,073,100.

Different types of pension pots have different rules around what figures count to your lifetime allowance, so your pension provider should be able to provide details about where you are in relation to the lifetime allowance.

 If you go above the lifetime allowance, as with your annual contribution, you’ll likely owe a tax charge, which they’ll take out before you receive payments. You’ll need to report this as well. The tax rates paid on amount above the lifetime allowance are:

●       55% if you get it as a lump sum

●       25% if you get it any other way, for example pension payments or cash withdrawals

Setting goals, building a plan and getting next steps

This is really where a wealth manager or an outside perspective can be helpful. It’s a bit easier when you’ve seen a thousand retirement plans to say whether or not what you as a client are hoping to do is realistic for your lifestyle and your expectations, and what that looks like with less than consistent income.

Whether that’s setting a consistent plan to always hit the annual allowance or to diversify your pension and retirement planning in different ways with other investment strategies, a financial advisor should be able to help you find the best solution for the kind of wealth, and life, you’re looking to build both in the short term and in the later years of your life with your loved ones.

We have a useful Financial Planning for Barristers Guide available to download from our dedicated Barristers page here, or you can get in touch if you would like to know more about our services.