Partners thinking of retiring - 10 tips to avoid the money pitfalls
15 May 2020
With the current CV19 situation and professional firms embracing the requirement for all of us to work from home wherever possible, the thoughts of many partners, particularly those of more senior years, will be turning to thoughts of retiring.
Therefore, based on my own experience of my recent ‘retirement’ from my firm of 40 years, (although I need for the record to note that I was leaving to start my own consultancy with no thought of actually retiring, the challenges nevertheless being the same) here are my Top 10 Accounting & Money tips for individual partners considering retirement:
1. Plan your cash flow – can you really afford to retire? With limited pension fund “pots” and ultra-low interest rates, annuities and the like are limited. If you have not got a good financial adviser, Tip No1 is - get one.
2. Tax catch up – the vast majority of firms have 30 April year ends, so there is a nasty surprise of a catch up of tax to be paid. Tax on the income earned in the year to 30 April 2020, is only paid in 2021 and 2022! Tax is a personal liability; ensure you know how much will be payable and set it aside from the monies you receive – the firm will no longer pay the tax due on your behalf.
3. Do not expect your future former partners to cut you any slack. Their concern is the on-going practice, not you. Your final pay-out will be based on the last year of your partnership and the accounts for that year. Make sure you have rights to review and check the accounts.
4. With the economy crashing, the UK is going into recession. There will be restructuring required – redundancies and the like. The 2020 annual accounts could well contain restructuring provisions, reducing your share of profits. The benefit of the restructuring however may well be in future years. Tip No4 – be careful and negotiate the impact of such provisions.
5. The accounts profits may also be reduced by estimated bad debt and work-in-progress provisions. Tip No5 – its not unreasonable to have “lookback” arrangements in any retirement agreement, so that actual bad debts etc are what is actually incurred, not estimates.
6. At the end of most leases there may well be a liability payable for dilapidations. The cost is often estimated and provided for every year. Treat them like the other provisions in the accounts and at least insist upon lookback arrangements.
7. The accounting rules usually exclude bringing into profits, contingent fees. If your firm earns significant contingent fees then this can have a big impact, so make sure that these are dealt with properly and your share paid to you post retiring.
8. It will usually take time for the firm to remove your personal guarantees on for example the bank facilities and possibly the lease as well as other liabilities. You should not only insist upon an indemnity from your former partners, you may also need to consider active measures like informing the bank, especially if you have concerns.
9. Most law firms do not pay for goodwill, although the Legal Services Act 2007 facilitated structural changes that have now even led to some firms obtaining public listings for their shares. You may well feel “gutted” if shortly after you retire, your former partners sell out and get paid goodwill. Tip No9 – see if you can get an Anti-Embarrassment Clause – you get paid something if they do sell out.
10. Last Tip – as a partner you may well have had benefits which you never or rarely needed – PHI, life insurance, private medical cover, even mundane things like mobile phone contracts. When you retire these may well lapse. So, make sure you know what you are losing and need to replace – and replace them in good time.
Paul Beber, Managing Director of Cecil Associates, contributed the chapter on ‘Accounting and practical considerations’ to Partner Retirement in Law Firms: Strategies for Partners, Law Firms and Other Professional Services.