What are the quick wins for your financial peace of mind? Dr Benjamin Holdsworth picks out his top ten issues you need to address.
When the economy is looking challenging, it is important to check your own position as a doctor and to ensure you have taken the necessary steps to achieve financial organisation.
Here’s what you should address:
1 Do you have a retirement plan?
One of the most challenging parts of our job is helping people who have left any form of financial planning until they are about to retire or, harder still, after they have retired.
Is it clear if your savings will always be able to support your expected standard of living?
Those considering the next stage in life after clinical practice can face competing pressures to assist family on the housing ladder before even accessing their own wealth to replace income from employment and practice.
Engaging early can make all the difference between anxiety and excitement.
2Are you on the right pay scale?
Not every adviser understands doctors the way we do. We encounter many new clients who have been on the wrong pay threshold for several years in their NHS job or have not received contractual pay rises when they were due.
They may have had poor advice elsewhere or been advised by a non-medical specialist which means key details of their medical income were missed.
Are you being paid what you are contractually entitled to?
3Have you had your annual pension growth checked?
The maximum amount of tax-relievable pension contributions you can make each year is £40,000 – known as the annual allowance.
The ‘tapered’ annual allowance for those with ‘adjusted income’ of over £240,000 reduces the limit down further – to as low as £4,000 per year for high earners.
NHS Pension Scheme members exceeding the annual allowance in 2019-20 made up a third of the total number of pension tax breaches in the UK.
Note that adjusted income includes not only NHS salary but also dividend income from private practice and investments, rental income, NHS and personal pension contributions.
This widens the net significantly and will catch out many hospital consultants who might otherwise have considered themselves exempt, as well as many GPs.
Check the sums carefully – many annual allowance statements from the NHS Pension Agency have been wrong.
4Will you exceed the lifetime allowance for pension savings?
The lifetime allowance is the total amount which can be built up in a pension without triggering an extra tax charge. It is currently £1,073,100: frozen until April 2026.
Many doctors unwittingly breach the allowance, paying up to 55% tax charges on the excess savings when the fund is drawn.
Not surprisingly, the amount of tax revenue raised from lifetime allowance breaches has increased by more than 1,000% over the past decade. Tax revenue has risen from £32m in 2010-11 to £342m in 2019-20. It was just £5m in 2006. Do you know where you stand?
5Are you aware of the impact of the McCloud remedy?
When the 2015 NHS Pension Scheme was first introduced, older scheme members – those within ten years of retiring – were allowed to continue in their original 1995 or 2008 NHS sections.
In 2018, the Court of Appeal found this to be discriminatory against younger members in a case brought by judges (named McCloud) and firefighters.
The Government agreed to redress this discrimination across all public sector pension schemes, including the NHS.
A consultation in 2021 ruled that affected doctors have the right to choose which remedy benefits to take – the pension benefits from their previous 1995/ 2008 pension scheme or those from the 2015 scheme – at the time of retirement.
However, the Government has confirmed that new legislation to help deliver the remedy benefits will not be in place until at least October 2023.
It is therefore imperative that you continue to assess your tax position now and pay all necessary tax payments. Your tax position will then be corrected at a later date.
If you intend to retire or have retired before the new legislation is introduced, you should be contacted by NHS Pensions and asked to make your McCloud choice retrospectively.
Payments will then be backdated to the time when benefits became payable.
6Are your financial adviser and accountant working together?
When dealing with large sums of money and critical life choices, you need to ensure your professional advisers have the complete picture of your financial interests and as well as competence in the NHS pension.
Make sure your adviser and accountant have the same objectives and work together to ensure opportunities are not missed.
7Are you confident that your practice structure is tax- and pension-efficient?
You may well have considered the advantages of trading as a partnership or limited company, but are you really maximising the efficiencies that these can provide?
The tax landscape continues to change significantly and there are now more implications to consider when selecting the best structure for your business.
Have you overlooked the impact your trading structure has on pension contributions and pension tax?
A limited company can contribute ‘pre-taxed’ company income to a pension. Higher-rate taxpayers can put profit straight into a personal pension rather than taking the income as a dividend.
This applies to any director, so it can be particularly useful to contribute to a spouse’s pension if their lower salary means a higher annual allowance or they do not already have NHS pension contributions to consider.
8Have you thought about the finances of your family?
Are you making the most of inter-generational planning? The introduction of pension freedoms now gives universal access to pension funds from age 55, plus the ability to pass on pensions tax-efficiently on death to family members and other beneficiaries makes pension funding attractive – particularly for some spouses or where the lifetime allowance and annual allowances are less of a concern.
Who will receive your pension fund benefits when you die?
Are your loved ones protected from unnecessary tax charges by considering your inheritance tax position now?
Do you and your adult children have up-to-date wills in place?
9Are you taking advantage of your available allowances every year?
Are you using ISAs, capital gains and gift allowances or maximising tax reliefs through annual pension allowances to minimise the duty owed to HM Revenue and Customs? This includes allowances for your spouse and family.
Individuals have an annual capital gains allowance of £12,300. This provides significant opportunities for tax-free investment returns every year.
At the same time, the reduced annual and lifetime allowances are driving a renewed enthusiasm in ISAs as a supplement to pension funding.
They are particularly tax-efficient for higher-rate and additional-rate taxpayers. The ISA allowance is now £20,000 per person, allowing a couple to shelter £40,000 a year from future taxation.
10How are your investments structured?
Do you have a globally diversified and balanced portfolio designed to withstand market volatility?
Is your adviser supportive in challenging times?
According to peer-reviewed research by asset management company Vanguard, an average investor achieves returns of around 3% more per year with the help of an adviser.
Doctors are facing another incredibly difficult winter, but finding time to ensure your affairs are in order is paramount when the financial landscape is facing constant change.
Dr Benjamin Holdsworth (right) is a director of Cavendish Medical, specialist financial planners helping consultants in private practice and the NHS.
The content of this article is for information only and must not be considered as financial advice. Cavendish Medical always recommends that you seek independent financial advice before making any financial decisions.
Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor. The value of investments and the income from them can fluctuate and investors may get back less than the amount invested.