The legal professional's guide to retirement income planning

Compounding – a pension superpower

Albert Einstein famously said: “He who understands compound interest, earns it. He who doesn’t, pays it”.

Compound interest or ‘compounding’ means that any gain you make on your investments will be reinvested, so you’ll have more money generating more interest over time.

Think of it as the ‘interest on the interest’ that can really boost your pension pot over the years.

Lawyers can be notoriously bad at putting themselves first. But if you keep adjusting your contributions or skipping some in a lean year, you’ll miss out on the full power of compounding.

Pensions and retirement for junior solicitors and mid-career legal professionals

So, your career is going well either as junior solicitor in a private practice or at an in-house legal department.

You’ve got a company pension, probably with a defined contribution, as part of your employee benefits.

What else should or could you be doing?

I’ve got a company pension – can I relax?

Almost! You can always fine-tune your company pension arrangements to your advantage.

If you’re enrolled in your company pension scheme, Michelle advises, make sure you help ‘maximise the matching’.

She explains: “If your employer makes a matching contribution to your contributions, put in the maximum you can afford. The more you put in, the more they put in. You’ll grow your pension pot much faster.

“The magic of compound interest is just incredible. Start early, save often and stay consistent. By the time you reach retirement, you’ll have a good pot.”

If you’re one of the young legal professionals who is planning on making proactive career moves, don’t be tempted to opt out, even if you think it might be easier not to have to keep track of lots of little pension pots at different companies.

“If you opt out completely, you may not have time to manage your own finances to your own best advantage,” says Michelle.

“And you won’t have the luxury of an employer making contributions, or tax relief either.”

Salary and bonus sacrifice

Salary sacrifice is a well-kept secret, but it can make a sizeable difference to your pension.

Use your salary and bonus sacrifice arrangements, if your company has them.

Salary sacrifice means you can pay into your pension by reducing your gross salary. This reduces your net income but saves you both income tax and national insurance.

It may keep you just inside a lower tax rate band too, while adding to your pension.

You may be able to do the same thing with any bonus you receive and have it paid into your pension in the same way.

Pensions and retirement for equity partners, barristers and private client lawyers

If you’ve entered the high net worth bracket, you’re likely to be approaching the height of your earning power and potential.

It can be a cash-rich period in your career, so it’s time to build capital. Pensions are not your only option.

The lifetime allowance has been abolished. Should I just keep putting money into my pension?

Yes, but there are some considerations and alternative options you should know about.

Since the abolition of the lifetime allowance, which was a limit on the amount that could be saved in a pension, you can pay as much into your pension as you like.

But although the lifetime allowance is no more, the annual allowance still stands.

The allowance limits the tax benefits to contributions of up to £60,000 each year. This figure includes any contributions from you or anyone else.

However, if your ‘adjusted income’ is more than £260,000, your annual allowance will be ‘tapered’.

For every £2 of adjusted income over £260,000, your annual allowance will be reduced by £1. The minimum annual allowance is £10,000 where ‘adjusted income’ is £360,000 or more.

What is my adjusted income?

Adjusted income is all your income (from salary, property, investments and savings) adjusted to include anything your employer has paid into your pension.

Working out your ‘adjusted income’ can seem complicated. An adviser from St. James’s Place will be able to help if you think you may fall into this bracket.

You may have options to bring your adjusted income down, so that you mitigate the taper.

The ‘carry forward’ rule

If you haven’t used up all your annual allowances from the previous three tax years, you can use them up using ‘carry forward’.

This means you could receive tax relief on up to £200,000 of pension contributions, if you had three years’ worth of unused annual allowances.

‘Carry forward’ is a useful way to catch up on pension contributions if you’ve had a cash-rich year and didn’t use all of your annual allowance.

For example, you might have had a big bonus, inherited a lump sum, or had a very profitable year if you’re self-employed.

These are the basic principles of ‘carry forward’, but the more you earn, the more complex the tax rules can become.

If you’re planning to make some major contributions to your pension pot, always speak to a financial adviser.

My pension contributions are all ‘tapered out’. Where else can I put money?

If the annual allowance for your pension contributions is tapering off to the £10,000 minimum or less than you would like to save, investment bonds can be a tax-efficient alternative.

Investment bonds are traditionally seen as a stable, long-term place to save, and defer taxes.

“But it’s important to consider how you’ll access the money when you want to,” says Michelle.

“At present, you can withdraw up to 5% each year, without paying any immediate tax. If you don’t make a withdrawal one year, you can carry that forward, but the total can’t be more than the amount paid in.

“You could also set up the bond so it’s in trust. That way, you move it outside your estate and lower your inheritance tax liability too.”

If you do move the bond into trust, additional tax planning is required if the value of the bond is more than your nil rate band.

Michelle adds: “Life bond taxation is a complex area, so it is important to seek tax and financial advice before setting up a bond.”

Where are all my pensions?

By the time you’re in a senior role, you may have worked at a number of different law practices.

If you’ve been in law for nearly 40 years and have worked for different firms, it’s easy to overlook the fact that each one may have a pension pot with your name on it.

The Association of British Insurers (2024) reports that 3.3 million pension pots are now considered lost, you don’t want any of yours to be among them.

Playing ‘hunt the pension’ in the lead up to retirement can be a long-winded business, but a financial adviser can help you track down those smaller pots.

Any further questions?

In such a demanding profession, it’s easy to take your eye off the ball when it comes to looking after your own financial wellbeing.

Lawyers are so busy taking care of their clients and trying to generate revenue, they often don’t have time to sit down and put themselves and their own plans first.

Having a financial adviser in your court will support a great retirement and help make sure your money lasts for as long as you need it to.