The hunt for yield has become even more urgent amid continued dividend cuts and talk of negative interest rates, and all the while the spectre of several tax hikes looms.
Recent government changes are really shaking up pension planning for medical professionals, but a few simple steps can ensure a fruitful retirement, explains Tom Skinner, senior consultant at Smith & Williamson.
Intended changes to the annual allowance (the amount someone can pay annually into their pension and obtain tax relief) as well as the introduction of the section 2015 NHS pension, which is less generous than previous sections, is causing many senior medical professions to worry about their funds in retirement.
From April 2016, the annual allowance will be tapered down from £40,000 to £10,000 for those earning between £150,000 and £210,000. In essence, these changes mean that for every further £2 earned income over £150,000, pension tax relief available will drop by £1. As the government has also lowered the lifetime allowance to £1m, i.e. the maximum tax-free size of any pension pot, most senior health professionals are finding their traditional retirement planning seriously constrained.
Recent statistics have highlighted that the average pay of an NHS consultant is £112,225. Therefore it is highly likely that the reduction of the annual allowance will affect up to 50% of NHS consultants because all income is counted against the limit, including private practice earnings, investment, rental income and even employer contributions – the last potentially being the most surprising, and unaccounted for by many, as this amount has not traditionally been included when calculating your annual allowance.
In addition to the changes to the annual allowance, the reduction of the lifetime allowance will ensure that most doctors who are approaching the end of their career are likely to have contributed the maximum amount to their potential pension contributions under the NHS pension scheme before restrictions apply.
A useful rule of thumb is this: if you are expecting to have an income of £40-45,000 or over in retirement it is likely you will be affected by the recent changes. Therefore, it’s important to begin planning your finances for retirement sooner rather than later.
However, there are a few simple measures that can be taken which can help build funds in retirement:
An individual can typically make an annual contribution of £40,000 tax-free into their pension, but for Define Benefits schemes this calculation can be a lot more complex. With recent changes to pensions, contributing to the pension of a spouse is likely to play a major part in future tax planning as a couple can save up to £80,000 (£40,000 x 2) tax-free for retirement. This amount is then taxed at the individual’s rate of income tax in retirement, however the spouse must have £40,000 of taxable income.
Everyone should maximise ISA contributions annually, if affordable to do so. Tax-free income in retirement is extremely valuable to those likely to remain higher-rate tax payers. Junior ISAs are an excellent way to introduce children to the concept of long-term saving and, for the parents, an excellent way of gifting money to children.
The current annual limits are £15,240 for an ISA or £4,080 for a JISA. As with pension contributions, a couple should also look to maximise contributions of both parties resulting in a tax-efficient savings vehicle of £30,480 annually.
VCT and EIS vehicles offer the ability to invest in a more tax-efficient manner. However, they are riskier than traditional investments. They may have a place in a retirement plan, along with an investment portfolio, but only after ISAs and pensions have been maximised, including spousal contributions, and after taking expert advice.
Any wealth manager advising health professionals should have a solid understanding of DB schemes but, ideally, the NHS pension scheme as recent changes have made this particularly complicated. Many of the obstacles presented in retirement can be navigated through careful planning.
Should an individual decide that further accrual in their NHS pension scheme is not cost-effective, it is likely they will want to fund retirement through other means. Following recent changes, any affluent individual will traditionally end up with a diverse retirement portfolio made up of state pension, NHS pension, ISAs, personal pensions and investments. Careful planning, as early as possible, will ensure that maximum advantage is taken of the retirement possibilities and ensure you can mitigate the effect of recent changes.
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