No ordinary account
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Make your money work harder.
As their practices have flourished, many independent practitioners have been saving their profits into standard commercial bank accounts.
Faced with the risk of large tax charges for withdrawing funds from their businesses, doctors often leave these untouched.
However, by doing so, they could be risking their capital losing real-term value and missing out on opportunities to put their money to work in support of their own goals.
With this in mind, it’s essential that doctors consider how they can get the most from the money they’ve worked so hard to earn – including commercial investments and pension saving.
Beating inflation
The top commercial account providers in the UK are currently paying 0% interest.
With inflation at 0.7%,¹ this means those keeping their money in low-interest commercial accounts will see their funds gradually lose value in ‘real terms’ – effectively reducing their buying power as the price of goods and services rise.
It may sound like an extreme example, but £100,000 left in an account earning 0% interest for the past five years with 2% inflation would now be worth just £90,573 in today’s terms.²
Investing, however, can offer the chance to achieve real-term growth by outpacing inflation.
There is a range of investment options available. The right one for each doctor will largely depend on their appetite for risk.
For example, investing in stocks and shares may involve more risk than investing in government bonds – government ‘IOUs’ that pay interest on investors’ money for a fixed period of time, but could bring higher returns in the long run.
Investments are typically held for at least five years, but often longer. If practitioners are likely to need the money sooner, it might not be right for them.
A financial adviser can help assess whether investing aligns with individuals’ financial plans. Potential investors should always remember that the value of investments can go down as well as up, and they may get back less than they invest.
Pension saving
It is never too early to grow pension savings.
While dependent on individual circumstances, redirecting business savings into pensions could deliver significant benefits for the business as a whole, while providing a tax-efficient way for doctors to extract value from their businesses towards their future goals.
For example, businesses can claim Corporation Tax relief against employer pension contributions.
By making an employer contribution to their pension pot – where appropriate – a business owner could grow their retirement funds while reducing the amount of tax their business has to pay.
Meanwhile, saving into pensions can provide inheritance tax benefits and can help to safeguard money earmarked for retirement should a business face liquidation.
Putting funds into a pension might not be appropriate for those who will need access to the money before the normal minimum pension age of 55 – or 57 when the rules change in 2028.
Practitioners will also need to ensure that they have enough headroom in their annual allowance and lifetime annual allowance to avoid potentially punitive tax charges.
Again, a financial adviser will be able to help assess each individual’s options.
At Wesleyan Financial Services, we understand the unique financial needs of independent practitioners. Our specialist financial consultants can advise on how to get the most out of the money you have saved.
To arrange an initial 30-minute ‘Quickstart’ conversation to discuss your finances, email financialreview@wesleyan.co.uk
References
1. ONS Consumer Prices Index including owner occupiers’ housing costs (CPIH) = 0.7% in February 2021
2. Assuming the lump sum deposit of £100,000 earned 0% interest in an environment of 2% inflation for the last five years