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AS A NON-PRINCIPAL, your income is likely to be more
variable and vulnerable than at anytime since you qualified. Whilst there is
scope for working very hard and ‘raking it in’ most non-principals
prefer to aim for a healthier balance between work and leisure. Non-principals
who have partners who do not earn, or who have dependants, are especially
vulnerable to unforeseen financial difficulties. Non-principals who plan to
spend any lengthy period out of posts which have access to the NHS pension
scheme will eventually have to consider carefully their pension position.
Leaving it until ‘tomorrow’ may result in a considerable gap in
contributions which can be expensive to plug. See chapter on Pensions and the
NHS Pension Scheme. There are, however, probably more important decisions that
have to be considered before pensions which are, after all, very long term
investments.
Financial planning decisions should be taken in the context of an overall
financial plan. An Independent Financial Adviser who knows your circumstances
is in the best position to advise you but here are some of the basics.
Protection
Protection encompasses three main areas; Income Protection, known as Permanent
Health Insurance, Capital Protection, which includes Critical Illness cover and
Life Assurance. Once these three main areas have been addressed, you can then
start planning the exciting parts of your life, safe in the knowledge that come
what may, your lifestyle and future aspirations are safeguarded.
Income Protection is designed to replace the majority of your income, should
you be unable to work through ill health. Due to legislation it is not possible
to receive the equivalent of all your usual income, otherwise there would be no
incentive to work. There is a deferred period always written into these
contracts: that is, you have to be unable to work for a certain period before
you receive any benefit. The shorter the deferred period, the higher the
premiums, and so you have to balance one against the other.
One way to ascertain a suitable deferred period for your own particular
circumstances is to work out how many months’ income you have access to as
an emergency fund. If you have one month’s income you will need one
month’s deferment. It is important to discuss this with your adviser and
ensure the plan suits your circumstances. Employees may be able to afford a
longer deferment period if their contract permits the payment of a proportion
of their salary for a specified term. For example, doctors in hospital posts
will receive, in the event of long term sickness (and sufficient service), full
pay for six months and half pay for six months. Such details depend on the
terms of employment. Non-principals in practices are unlikely to have such
generous terms.
Once the contract has been written, the insurance company cannot cancel it or
start charging you higher premiums for the same benefit because of the number
of claims made. Benefits, once they are being paid, are tax-free under current
Inland Revenue legislation, and could continue up to the age specified in the
contract, usually 60 or 65. This type of plan should form the foundation of all
your financial planning. So make sure you get it right. Women will have higher
premiums than men and alcoholism, drug abuse and pregnancy are usually
excluded. You have been warned!
Critical illness cover
Another form of protection is Critical Illness Cover (CIC). This should run
alongside and complement income protection cover. Under this type of policy, a
lump sum is paid out on the diagnosis of specified Critical Illness. There is
usually a proviso that you have to survive 28 days after the diagnosis before a
claim is paid. Once it has been paid though, you do not have to repay it,
should you recover and be in a position to return to work. It is important to
be aware of the illnesses covered and those excluded by such policies.
Such payments are intended to reduce the stress of unexpected illness. A way of
working out how much you need would be to cover up to the amount of your
mortgage. In the event of an illness being diagnosed, (should you be able to
repay your mortgage) your monthly out-goings would be considerably reduced.
When this is then taken in conjunction with your income protection plan, the
financial burden of illness can be reduced. Instead of repaying a mortgage, you
could well decide to use the funds for any other purpose or do things
you’ve always wanted to. It would be up to you.
Life Assurance
Life assurance can be provided by any number of different plans. You should
bear in mind what the purpose of the cover is. Ideally in the event of your
death you should provide sufficient funds to pay any outstanding loans and also
sufficient capital to provide your dependants with an adequate income. A good
financial adviser will be able to work out how much cover is required and the
term policy should be written over. Don’t get alarmed by the level of
cover you need, as too little cover could lead to major financial problems for
your surviving family. Be prepared to take advice.
The term of the policy should be for the period of vulnerability of your family
and could typically be until your youngest child finishes full-time education.
Different companies’ costs vary considerably. It is best to avoid a
contract where the level of cover is linked to investment returns or where
there is a review date after which either the level of cover and/or the cost
can be reviewed by the insurance company.
The best time to arrange adequate protection is now! You will never be so young
again. Set aside a budget, take advice, and do it! It can secure your future.
Investing in Yourself!
This is financial ‘adviser-speak’ for savings, the next place to put
your money once you’re fully protected.
Savings provide you with a safety net for unforeseen circumstances. You should
probably aim to have 2-3 months income as an emergency fund, and then put the
rest into nest eggs for bigger and future expenses The emergency funds should
be held in ready-to-access accounts with banks, building societies or even
(now) with supermarkets. Postal accounts, smaller building societies and the
supermarkets offer the highest interest rates. Monitor the weekend papers for
the best rates. Rumours abound that there are likely to be some further mergers
and takeovers of building societies, and so lucky ‘carpet-baggers’
may get a windfall if they pick the right ones.
For slightly longer investments, TESSAs (Tax Exempt Special Savings Accounts)
are a good place to start. A TESSA is a savings account which allows you to
build up an investment to maximum of £9000 over five years and then
receive interest free of tax. It is an ideal arrangement for an individual who
pays tax and is particularly suitable if you are liable to higher rate income
tax. You can only invest in one TESSA. The maximum you can invest in the first
year is £3000, with an upper level of £1800 in each of the subsequent
years. Different providers have their own particular features. So shop around.
The financial pages of the weekend papers are again a good place to start.
Regular Savings Plans are the next rung on the savings ladder. Savings
made regularly are a way of disciplining yourself and the prospect of a lump
sum at some time in the future can be an incentive. It is best to consider
these plans as at least ten year savings schemes. The type of scheme suitable
for you will depend on your investment attitude. Do you want a steady
investment growth over the savings period or do you want the up and downs of
stock market investments? Once again, allocate a budget for regular monthly
savings and take advice on the plan which is most suitable for you.
Personal Equity Plans (PEPs) have been very popular and heavily
advertised. These too are tax- free investments that invest in the stock
market. Since they were launched in 1987 they have proved extremely popular.
The investment return can be very good, but you can lose money if your PEP
value goes down. This type of investment must be considered as long-term.
Although you have access to your savings if you need them, the investment
returns are not guaranteed and if you cash a PEP you get the value of the
holdings as of that day. There is always a warning on PEPs; the value can fall
as well as rise and you may not get back the amount that you invested.
There are two types: a general PEP and a single company PEP. You are only
allowed one of each per financial year. The limit is up to £6000 in a
general PEP and £3000 into a single company PEP. Monthly savings can also
be made. Since the proceeds of a PEP can be taken as tax-free income, they
could be used to complement pension plans. As such, they could play an
important part in long term financial planning.
The government recently announced the end of PEPs and proposals to replace them
with an Individual Savings Account (ISA). The details on ISAs including the
transfer of funds from PEPs to ISAs are, at the time of writing, not known. It
is still possible to invest in PEPs and with so many PEP providers, all
offering a vast range of different funds and charges, it would be wise to do
some research before you decide to invest. Alternatively use an independent
adviser.
Shares and Beyond There are countless other ways to invest and save.
This chapter isn’t meant to go beyond the basics, the ‘High
street’ end of the market with a relatively little risk. There are other
places to put your money. National Savings and Friendly Societies offer safe
and secure tax free or tax exempt investments and should form part of an
overall investment portfolio.
Once you have fulfilled the basics, you may consider other forms of asset-based
investments such as Investment Trusts and Stocks and Shares. Unless you know
what you are doing, this can be a risky business although the returns can be
very rewarding. One guide would be never to invest unless you are prepared to
take a loss.
Having said that, if you have in place all the protection you need, regular
savings providing money at the right time, all the emergency funds you could
possibly want and an adequate pension to enable a highly rewarding retirement -
go on, why not invest in the markets? Buying and selling shares can be a
profitable and exciting hobby. It’s easy (and fairly cheap) to buy and
sell shares through banks. With the arrival of the Internet, it’s easier
to track single company’s performance. You could try it for a while with
fictitious amounts and if you decide to move into real money, limit yourself to
losing no more than what you can afford (say x hundred pounds). Remember the
value of shares can go down as well as up!
Advice and where to get it
For further advice, consult an independent financial adviser, read the
financial pages of the newspapers and subscribe to Which? The BMA established a
financial services company in 1983. BMA Services employ salaried independent
advisers who provide an exclusive service to BMA members from 18 regional
offices. Half of the company’s profits go back to the BMA. By calling 0645
747737 you will be automatically put through to your nearest office. If you
move around the country, your file will move to the new local office.
Whichever routes you go down to protect and save, you should review your
situation on an annual basis and an adviser would be in the best position to
provide this service for you.
Update from the
NASGP Webmaster May 1999
With the passing of PEPs and the birth of ISAs in April this year it seems
we all have to start learning again. There is an increasing amount of advice
available on the Internet and one of the best sites is the refreshingly
different is The Motley Fool UK.
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