4 Ways Doctors In The UK Can Manage Their Financial Health In The Current Climate

As an Independent Financial Adviser that has specialised in working with doctors across the UK for 20 years, I find there are common issues that I regularly deal with. If you can manage these, your financial health will be better than ever!

1.  Ensure You Can Retire When You Decide

The stress you absorb across your career can take its toll. Most working doctors I know look forward to retiring (or at least semi-retiring) by 60.

In order to retire at the age you desire (not when the government chooses) you need to have built up sufficient pots to deliver the capital and income you need to maintain your lifestyle over the long term.

Key considerations for this are:

Mind the Gap!

The Retirement age of the 1995 section of NHS pension is 60, whereas for the 2015 section, it’s your state pension age (which we know is set to increase). For every year you retire “early” in the 2015 section, you effectively lose 5% of your retirement benefits. So, retiring at 60 when your state pension age is 68, results in a 40% reduction of your retirement income!

Having additional pots built up will enable you to `bridge the gap` and avoid/reduce the hefty penalties that come with retiring early.

Maintaining Lifestyle

Let’s face it, you’ve got used to a certain level of income over the years, and a lifestyle to go with it! In my experience, the NHS pension alone often isn’t sufficient. 

So, having those additional pots may be essential to supplement your retirement income, especially when non-pension pots can often generate income in a more tax-efficient manner.

The problem is further exacerbated by the 2015 section being a Care Average Scheme (CARE) as opposed to the 1995 and 2008 Final Salary sections, so like for like, the benefits may not be as high as if you were solely in the 1995 section.

The “What If’s”

Retirement planning is incomplete without adequate risk management strategies in place. For your investments, I’m sure you accept risk management as an essential and ongoing process. 

But the biggest risk is that of ill-health or death; if you suddenly have a serious illness or are off sick for a prolonged period, this could have a devastating impact on your future plans, with those hard-earned savings you put away for your future being instead burnt on paying for care and household bills. 

The answer is to ensure you have sufficient protection in place (e.g. life and critical illness cover and income protection). Working with an IFA will ensure the most appropriate, comprehensive and competitive solution will be recommended from the whole of the market. 

2.  Stay Ahead of NHS Pensions Tax Issues

With the new Tapered Annual Allowance rules, it’s easy to be lulled into a false sense of security; your pension tax issues have not gone away!

Annual Allowance

Although the Taper Threshold and Adjusted Income levels have increased by ￡90,000, many doctors will still be caught out by the overall ￡40,000 limit. Planning ahead and even understanding the implications of accepting further work is not easy when NHS pension statements are always a year behind!

Remember, the government has agreed to meet the cost of any Annual Allowance tax charge in 2019/20, but only if you use Scheme Pays to pay for it (you have until 31st July 2021 to do this).

Scheme Pays

If you have an Annual Allowance charge to pay, it is your responsibility to report it and pay it. Scheme Pays allows you to get the NHS pension scheme to pay for it by way of reducing your retirement benefits to cover the charge, but it’s akin to taking out a long term personal loan (currently charged at 2.4% + CPI).

Lifetime Allowance

Currently at ￡1,073,100, this is a limit one must be very mindful of, especially if you have accumulated other pension pots aside from the NHS, as there are large tax charges for going above it. There is still protection available (e.g. Individual Protection 2016), but there are trade off’s to consider and conditions to be met. 

3.  Mitigate Inheritance Tax (IHT)

When you die, the value of your estate (net of liabilities) is calculated, and anything above the Nil Rate Band (NRB), currently ￡325,000, is subject to 40% tax. There are quick wins, such as leaving everything to your spouse, which will ensure that there is no IHT payable on first death. The surviving spouse will then inherit your unused NRB, therefore allowing a total estate value of ￡650,000 before IHT is due. 

There is also the Residents Nil Rate Band (RNRB), which applies if you leave your main residence to your descendants, so this may, if all conditions are met, enable a total NRB of up to ￡1M, before any IHT is due. 

It’s important to keep your will updated, and if you have previously incorporated any property trust planning within your will, you need to check that this does not negate the RNRB (I have seen plenty of cases of this!).

Where your estate is worth more than the exemptions and NRB’s, a structured plan can be put in place to mitigate any potential IHT, incorporating trusts, gifts, and even insuring the liability, whilst ensuring that you maintain access to the capital you need during your lifetime and avoiding the pitfalls of simply relinquishing control. 

This is highly complex and professional advice can ensure your hard-earned wealth passes down the generations and not to the taxman!

4.  Take Advantage of Market Opportunities to Boost Your Wealth

Despite the recent recovery, there is still a way to go for most markets and if you’re able to look beyond the current volatility, there are fantastic opportunities for longer term growth. 

However, we don’t just buy into markets because they look cheap! One must be aware of the current and potential geo-political and socio-economic factors and understand how to manage their impact.

Of course, it’s important to understand your attitude to risk and its context within short, medium and long-term time horizons.

I would encourage you to consider Impact Investment: This is the most effective and profitable way of investing in well managed companies solving global challenges. It’s a huge leap forward from terms you will probably have heard of: Ethical or Socially Responsible Investing, the latter of which has become a bandwagon in recent times.

By their nature, Impact portfolios are investing in high growth sectors, underpinned by substantial government investment and have proven highly resilient in recent times. 

For example, at some point we are all going to need cleaner energy, improved technologies, and more effective healthcare.

Indeed, some of the companies we’re currently invested in are playing key roles in the fight against Covid-19, including test kits and vaccines, through to the provision of data centres and global digital architecture.

Need help?

These are all complex issues and require professional advice that incorporates your specific circumstances, needs and objectives. 

If you’d like to discuss securing your financial future, message me on LinkedIn or email me at [email protected] to arrange a 15 minute chat about you and your goals.

Information is based on our current understanding of tax legislation and regulations. Any levels and bases of, and reliefs from, taxation are subject to change. The rules around trusts are complicated, so you should always obtain professional advice.

The value of investments and income from them may go down. You may not get back the original amount invested. Past performance is not a reliable indicator of future performance.