Thinking of retiring? What are your options?

At some stage, all practitioners will begin to think about retiring. There’s a lot to consider, so you should start preparing as early as possible, writes Justin Purcell.

retirement planning

For practitioners contemplating retirement, preparation is important – the earlier the better. Here are some questions to ask yourself right now:

  • When are you planning to retire? At what age?

  • Have you developed a retirement plan yet?

  • Is your mortgage paid off?

  • Will you need to fund future rent payments?

  • What other financial commitments do you have?

  • Do you have dependants?

  • Do you have you a private pension in place?

  • How will you extract value from your practice when you retire?

  • Is your practice saleable? How much is it worth?

  • Who can you sell it to?

  • Can you merge your practice with another firm?

  • Who will take over your practice?

A potential merger may be a spur for retirement. It secures the future of the existing practice, offers new opportunities to those staying on, and allows the retiring practitioner to exit on favourable terms.

If a merger is not on the agenda, other options for those looking to retire include:

  • Finding an internal successor to take over the practice. Traditionally, firms may have transferred within the family or to a senior staff member. More recently, however, many of these potential successors prefer to remain as salaried employees.

  • Selling the practice to a third party, either another firm or perhaps to an ambitious employee from another firm who is looking to acquire their own practice. There will be a range of tax, financial, and commercial issues to consider before this becomes a reality.

  • Simply closing down the practice. Even this creates challenges, as another solicitor must be found to assume responsibility for your client book and legacy issues. Typically, that other solicitor might pay you a fee for that client book, contingent on the amount of legacy debtors that they would collect.

A phased approach

Anyone contemplating retirement should consider it as a two-phase process:

  1. The pre-retirement phase, where you plan for and consider the key issues.
  2. The negotiation and execution phase, during which your exit from or sale of your practice is carefully managed to ensure the optimum outcome.

During the initial planning phase, key points to consider include:

  • Assessing and making provision for your income requirements in retirement. Clearly, pension planning will play a big role. You might also consider whether (as is often the case) you want to remain with the firm in a consultancy role for a period post-retirement, and what level of income you might derive from that.

  • The options for disposing of your practice and structuring your affairs to optimise the tax treatment on the cessation from or sale of your practice.

  • If you are in a partnership, then it is important to open discussions with your fellow partners well in advance of your exit, so that terms and timing can be agreed. Their input and agreement will also be required to facilitate any retirement planning you might engage in.

If you plan on selling your practice, key negotiating points will include:

  • The valuation of goodwill. Typically, a vendor will look to attribute a value to goodwill, particularly as this can attract a favourable tax treatment. The tax treatment is less favourable for a purchaser, however, so you may meet some resistance.

  • What is to become of the business premises?

  • The terms of sale. Will consideration be paid upfront or in stages, and will there be any contingent element? Capital gains tax (CGT) will be payable upfront on the entire amount regardless, and this should be factored into cash-flow planning.

Tax issues

Pension contributions can attract income tax relief, so you may wish to bolster your fund in the years preceding retirement. The extraction of your retirement benefits from the fund can be done in a tax-efficient manner with careful advance planning.

The sale of your practice may qualify for either:

  1. Retirement relief on CGT (you can claim full relief when the market value at the time of disposal does not exceed a threshold of €750,000 for disposals on or after 1 January 2014 and you are under 66; or €500,000 for disposals on or after 1 January 2014 and you are 66 or older), or
  2. Entrepreneur relief (a reduced CGT rate of 10% on the first €1 million of gains on disposals of business assets). Balance at 33%. Ownership requirement is 3 years.
  3. Freehold Property can qualify for Retirement or Entrepreneurial Relief in certain circumstances.

Both are subject to detailed conditions and require careful advance planning.

Cessation from practice can result in a portion of your final-year profits dropping out of the tax assessment as, for your final period of accounts, you are only assessed on profits arising from 1 January to the date of cessation. The timing of your retirement is important: ideally, you would do so in a year in which profits are high and choose a date at which the tax benefits can be maximised.

Start early

When planning retirement, start early and set goals and objectives. Prepare a retirement plan. There is value in your practice: you will need to establish that value and unlock it. You may need to use an accountant/consultant to help with this. Be flexible and use sound commercial business sense.

Justin Purcell is the Law Society’s practice support executive.

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