Many of us are looking down the barrel of our ‘normal retirement age’ being 67. A chilling thought. One that drops to freezing when you think about how you’re going to finance the gap between when you want to retire and when you can actually afford to retire.
With the seemingly ever-reducing lifetime and annual pension allowances, there has never been a more important time for doctors and dentists to look at alternative ways to save for retirement outside of the NHS Pension Scheme.
So what are your options?
1. ISAs: Always a good starting point:
Everyone in the family can hold tax free money in an ISA, even the children.
Unlike pensions, ISAs are instantly accessible.
Whilst ISAs don’t offer the tax relief that pensions do, they do offer other tax advantages. Under current legislation, a family of two adults and two children under 16 could save £48,736 p.a. (tax year 2019/20) in a tax-efficient ISA environment.
The deadline for Help to Buy ISA passed on the 30th November 2019.
2. Pensions for your spouse
Instead of looking at funding your retirement individually, look at it as a family and consider ‘the better half’. Whatever your spouse’s occupation, it’s worth looking at their pension options too.
If your spouse doesn’t earn
If your spouse doesn’t work, they can still have a pension that you pay into and get basic rate tax relief on your contributions, up to a maximum of £3,600 p.a. total contributions (this costs you £2,880 after tax relief). If this is their only pension in retirement, they may even be within their personal allowance (currently £12,500) and have no tax to pay on their pension income.
If your spouse works and is a basic rate taxpayer
If your spouse works, are they eligible to join an occupational work pension scheme? If they are and they contribute to the scheme, would their employer match their contributions?
Assuming your spouse is a basic rate taxpayer, to add £1,000 to their pension actually means you only need to contribute £800 and the Government will pay in the rest (£200) via the tax relief. That’s an extra 25% added straight away to your spouse’s pension, on top of what you yourself have put in.
If your spouse works for you or within your practice
It's not uncommon for spouses to work within the same practice as each other. If your practice employs your other half (crucially it can’t be you that employs them), and they earn a lower salary, perhaps working on a very part-time basis up to the National Insurance threshold (currently £6,136 p.a.) they can still join the NHS Pension Scheme.
Therefore, your family is receiving an income but below the income tax threshold. If this is the only source of income they won't pay any income tax and they won't be paying employee National Insurance contributions, plus the practice won't be paying employers contributions.
All in all, this is an efficient way of the practice increasing manpower and your family income rising in a tax-efficient way! With the added bonus of gaining valuable NHS Pension scheme benefits for your wife or husband.
Of course, practice employed spouses earning more than the National Insurance threshold can join the NHS Pension scheme too.
On the other hand, if your spouse is employed by you and you pay them through your Limited Company, you (as a company) can provide them with a pension. This would normally be an allowable business expense and tax-deductible. However, before you consider going down this route, you should first speak to your accountant or the Inland Revenue.
If your spouse is a 40% taxpayer
If your spouse is a higher rate taxpayer, you need to review what pension provision they have and make sure they will not be over the allowable limits. After allowing for tapering, and assuming they won’t exceed the limits, high earners should prioritise putting contributions into their pension. As a 40% taxpayer, adding £1,000 to their pension will actually cost you £600 after tax relief. That’s a 67% difference between what it cost you and what actually goes into their pension.
3. Venture Capital Trusts (VCTs)
VCTs are investment trusts that attract 30% tax relief. They are more complex than standard investments and do inherently carry greater risk.
Even so, if you have maxed out your annual or lifetime pension allowance and are looking for other tax-efficient investment opportunities, you may want to at least explore investing in a Venture Capital Trust.
VCTs are not suitable for everyone and it’s important that you fully understand the risks involved. We would always recommend you talk to a financial adviser before making investment decisions.
4. Pensions for your children
No matter how unfair the recent pension age and allowance changes feel, they’re still preferential to what the next generation has in store.
To help soften the blow for your children, you could pay up to £240 a month (net) per child into a pension for them. Yes, they too can have a pension and benefit from tax relief.
A very little can go a long way after years of compound growth.
Will your pension be enough?
Many doctors and dentists equate retirement planning to simply saving into an NHS pension. Given the changes to pension legislation, tax reliefs and allowances, will your pension alone give you the freedom to retire when you want to, not when the Government can afford you to?!
Fully understanding ALL the options available to you and your family can really help to make that early retirement a reality, rather than an elusive pipe dream!
Why not contact your financial adviser to check you are fully utilising all options?
Our articles are designed to be informative but do not constitute financial advice. We recommend seeking specialist advice before making a decision.
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The Financial Conduct Authority does not regulate offshore investments, tax advice, estate planning and some forms of mortgages. The tax reliefs referred to on our articles are those currently applying in the United Kingdom to UK Tax Residents. These tax reliefs are liable to change. The value of any tax relief available will depend upon the individual circumstances of the taxpayer.