Q. With all the recent announcements regarding proposed changes to the NHS Pension Scheme, I have heard that the actuarial reduction percentages have changed for members that are looking to take benefits prior to normal retirement date.

Can you please clarify the position?

A. The good news is that the percentage reductions have reduced slightly. As you are a 1995 section member, let’s look at how you would be affected.

Prior to the change, if you were to take benefits at age 55 your pension would be reduced by 24%, with the lump sum being reduced by 16%. Now the figures are 22/15%, which may not appear to be a big difference, however if you have accrued a pension of £40,000 pa by age 55 and decide to take the benefits you would now receive an additional £800 pa.

You are able to take pension benefits from age 50 or 55, depending upon various factors. Any pension paid to you will increase with inflation each April, although this only applies from age 55.

You can read full details at the NHS’s website.   

Q. I am a 58 year old Consultant who had a family quite late.  As a result we have 3 children either doing A levels or at University.

We plan to pay all their course and living expenses and were wondering about taking out a life policy on my life for, say, the next 7 years ‘just in case’. I ask in particular as I plan to take my NHS Pension at age 60, and therefore lose my Death In Service protection of around £250,000.

We also have plans for the lump sum from the pension, as we want to buy a property in Spain.

I would imagine that at my age such cover would not be cheap, but would feel a bit more secure if we had some insurance.

Is this a sensible approach to take?

A. This is an interesting question. the first thing to say is that we would recommend that you consider an overall financial strategy that includes this issue.

However, just looking at this question on its own, there is something vital that you will need to include to enable you to come to a conclusion on whether your family would ‘have enough’ in the event of your death.

This is because that although you point out that your Death In Service protection will end, there is a little known rule that will still give you life cover based on the size of your pension.

You tell us that your pension is around £45,000 per annum at age 60. On drawing this, the rule is that you will have 5 times your annual pension in life cover, which is a £225,000 lump sum from day one.

This then reduces every day by the amount of pension paid to you.

So for example this would mean after one year, the cover would be £225,000 minus £45,000 = £180,000. This would continue until there is no cover left at your age 65.

This could well be ideal for you in your situation, and you can now do your sums with this protection now built in.

Have you ever decided to clear out the garage or box room that is full of junk that has gathered over the years?

It’s a great feeling when all the hard work pays off and you suddenly find you could actually fit the car back into the garage, or have a new room in the house you can actually use!

We find that this happens time after time with the subject of Financial Planning.

Looking at the last few discussions we have had with doctors & dentists who call us with a question, there is a common theme once we start asking them questions.

Let’s look at a few…

A Consultant in Cambridgeshire:

He already has a Gold Excellence Award and is very likely to attain a Platinum. The implications for him with regard to the pensions Lifetime Allowance and the new Annual Allowance are massive, with potential large tax hits.

When we asked him if he has applied for Primary or Enhanced Protection, designed to mitigate some of the problems for high earners, he said he had never heard of this. Certainly his accountant had not warned him, and he did not have a regular financial adviser.

There was a lot of information flying around in 2006-2009 about this subject, but it is all too easy for a time poor busy Consultant to miss this sort of thing.

A Consultant in London:

This lady called explaining that she was confused by the decision she needed to make between opting for the 1995 NHS Pension Scheme as against the 2008 version.

She had sent off the forms saying she wanted to go for the 2008 Scheme, as she intended to work to age 65, but was now having a crisis of confidence when talking to colleagues.

Having got a handle on her situation, this decision was almost certainly the wrong one, as even if she were to work on past age 60, it would pay to take 24 hour retirement (whic allows you to take your NHS Pension benefits, but simply carry on working full or part time).

Very simply, any uplift of a few thousand pounds more on her pension by still contributing to the NHS Scheme between ages 60 and 65, would be made to look trifling compared to foregoing an income of say £50,000 every year for 5 years! It also means of course she can get early access to the tax free lump sum.

The above presumes that no large pay rises occur after age 60 such as an Excellence Award, although these are likely to be far more difficult to attain in future and of course this would need to be taken into account as she approaches 60.

Having had our discussion, she has contacted the Pension Options Team to ask if she can changes her earlier decision. Let’s hope this works!

A General Dental Practitioner in the North West:

The big subject here was Inheritance Tax Planning (IHT), with an expensive life cover plan being queried in particular.

This chap had been sold a second death life policy many years ago, designed to ensure that when both of them died, the children would have monies to pay the IHT bill. Certainly nothing wrong here in principle, as this sort of planning is very valid for clients in say their 40s into their 60s, as the premiums are usually quite reasonable. Perhaps £20-£60 per month for a few hundred thousand pounds cover.

“But I am paying £200 per month!” he said.

On investigating further, this dentist had been sold the plan back in the 1990s, and was on what is known as the Standard Basis. This is designed to build up a fund of money in addition to providing the necessary cover. The idea being that as the plan is reviewed over the years with premiums rising to cover the additional risk to the insurance company of an older couple, these monies can be used to help with increased premiums.

This fund value was now something like £24,000, which is quite a serious amount of money. So he could, if he chooses, replace this plan with a much cheaper option, and cash the old plan in (assuming he can obtain the new cover).

Now it should be noted that if he chooses to cash in the plan, replacing it with the cheaper option, then there will be a premium review in 10 years’ time, and then after another 5 years etc. 

If the same level of cover was kept, then undoubtedly (as he and his wife would be older) premiums would rise to a higher (possibly much higher)level.  However, with the right strategy and using gifting for example, this could be a more sensible option for them. 

The disappointing aspect is that he was not given the choice.

One of the reasons why there are quite a few of these types of policies around of course is that they were very popular – with the salespeople. The commission on a £200pm premium plan would have been much more than a £20pm policy!

The other vital missing ingredient here was that he had not thought about gifting to his children, especially when into later life, as this can help to reduce IHT problems.

We don’t intend to go into the pros & cons here about this, but we then got talking about his overall need for IHT cover and how much. Amongst many assets, he had a large personal pension fund (£300,000) that on his death was in his wife’s name. This had been included in the total by the dentist to arrive at the sort of figure he felt he needed to cover.

What he did not know was that he had the option to put the fund in his children’s names instead of his wife. This would mean that if he died before taking any benefits (also did he need to take benefits?), this fund would be outside his estate for IHT purposes, saving a potential £120k.

The constant theme is not being in control and not being organised. Of course this is not always obvious until an event occurs that makes someone sit up and notice!

This means that doctors & dentists are missing out time after time on crucial information in order to be able to make the right informed decisions to safeguard their futures.

One other aspect that repeatedly raises its head is that the vast majority of new medics & dentists we speak to do not and never have had a trusted adviser.

They have had plenty salespeople selling or trying to sell them products, and occasionally their accountant will chip in with something, but no one with who they had an excellent ongoing relationship with who listened to them and gave them the answers and strategy they needed.

Other Considerations

We were just going to add that the Hutton Pension Review now also needs to be taken into account, when hot off the press came some news.

With this review we expect the normal retirement age to rise to age 65, and career earnings to be brought in as the basis for benefits to be worked out, as well as costs to rise for employees.

So this news just announced by the government in trade newspaper Money Marketing has confirmed these thoughts:

Treasury chief secretary Danny Alexander says: “Under the agreement that unions reached with the Government in 2009, contribution increases next year were expected. But because these are difficult times for everyone, public sector workers included, we are ensuring those with the broadest shoulders bear the greatest burden.” 

Further increases in contributions are expected between now and 2014/15. The Treasury says higher earners will see the largest increase between now and 2014/15, but that their increase will be capped at 6 per cent of pay before tax.

The Government is currently negotiating with unions about other changes to public sector pensions which could see final salary schemes replaced with career average schemes and bringing the public sector retirement age in line with the age at which you can claim a state pension.

Full Time Pay Range          Proposed additional rate for 2012/13

 Up to £15,000pa                          Nil

 £15,001-£21,000                         1.2%

 £30,001-£50,000                         1.6%

 £50,000-£60,000                         2.0%

 Over £60,000                              2.4%

As the majority of our clients have ‘broad shoulders’, they will pay this extra 2.4% in 2012 on top of the 7.5/8.5% they pay now, and by 2014/15 will likely be paying 13.5/14.5% which is 6% more!

Yes you get tax relief on this, but for a £100,000 earner it will still mean an extra £300 per month or so.

We await more announcements and details!

Back to what we were saying about being organised and having a trusted adviser!

Hopefully the above examples help illustrate the importance of this, and with all these extra changes with the NHS Pension Scheme, how it is becoming even more important than ever!

Key Considerations

Change is constant. It is vital that you are fully informed and respond and adjust to protect your financial future.

Action Point

What effect will The Hutton Report have on your finances?

If you do all your financial planning yourself, make sure that you get organised to make your life a lot easier. Keep on top of the constant changes in legislation and how it affects you.

If you use an adviser, are they on the ball with all the changes? Is it a service they offer, or is it more about product sales? Do you have a strategy, or simply a collection of policies?

A trusted adviser will cover all areas and simply charge you a fee to look after you year after year.

There are certain things we believe are essential for you to have to be able to go forward with planning your life.

If you would like a list of these, called our ‘Have You?’ checklist, contact us for your copy quoting ‘Have You?’.

Seize the moment now and take proactive action to get yourself organised!

Q. It seems that NHS / Private dentists can easily fall foul of the new annual pension allowance. It is interesting to know that if the £50,000 annual limit is breached we can use up unused allowance from the previous 3 years.

In the light of this, can you please advise if we can use up any of our unused allowance from the £255,000 pots from the last three years?

A. Unfortunately, the new rules for carrying forward unused allowances initially use a “notional” annual allowance for the years 2008/09, 2009/10 and 2010/11 of £50,000.

That is they assume that the new, reduced annual allowance has been in place for those years.

From these notional allowances are deducted the actual contributions in those years. In the case of defined benefit schemes, such as the NHS Pension Scheme, these are calculated using the new basis applying a factor of 16 to pension accrual over increases in CPI for the September prior to the year in question.

The relevant figures for each year are:

• 2008/09 1.9%
• 2009/10 5.2%
• 2010/11 1.1% 
• 2011/12 3.1%

You must use the current year first.

I hope this helps with your query.

Recently we’ve touched on the subject of happiness, and what is needed to be happy, click here.

We’ve also mentioned the fact that, generally, people can start to really think about living the life they love and want if they are financially secure, and feel in control of their lives.

After all, it’s difficult to plan for the next 20 years thinking lovely things if your daily life is all about struggle, worry and survival.

This is very relevant when discussing the new HMRC pension tax changes, and the NHS Pension Scheme rule changes that are to be announced soon.

Many doctors and dentists are very worried about the impact that all these changes will have on their finances. Having started to take into account these factors already, and with The Hutton Review yet to be fully announced, many clients are keen to assess what impact the changes may have on their personal plans.

This is particularly true since our clients typically earn (in the NHS) £100k-£150k pa or more, and usually have 20-30 years Service plus.

This is where the new rules on the Annual Allowance (how much you can contribute to your pensions) can become tricky.

If you add the fact that HMRC is reducing the amount you can have in your pension pots (the Lifetime Allowance) from £1.8m to £1.5m in April, there are a lot of calculations to make!

As ever, we want the client to have the funds to achieve their goals, and to do this as safely and as tax efficiently as possible. But these changes are a real threat to senior medics and dentists who earn high amounts and have paid into the scheme for many years and who are perhaps just a few years away from retirement.

Quite simply the government want their pound of flesh, and have targeted the higher earners in particular by introducing these new limits.

We are awaiting the full details of the changes, but the next year or so should prove interesting as we review all the planning for existing clients, and see what new clients bring to the table!

In fact, we have just agreed to work with a Consultant who has Mental Health Officer Status, meaning her 40 years’ service is completed by age 55!

From experience, we know that having a financial strategy is the surest way for you succeed in your aims, and since we have not touched on this for a while, what exactly is proper financial planning about?

We say ‘proper’, as there are some financial advisers who operate by simply selling a series of financial products and rely on the commission from this for their income.

No sale no income.

There’s nothing wrong as such with this proposition, it’s just that we believe there’s a more reliable way in which you can plan your future.

Planning is not about amassing wealth for the sake of it, it’s all about ensuring you have enough money to turn your dreams into reality.

Our clients will know this, but if you don’t currently deal with us, here are extracts from the material we give to new clients to help them create the life they want.

Goal Setting – What do you really want out of your life?

Our Mission Statement:

To empower you to achieve your goals by questioning and measuring your financial life planning.

The first step of any successful financial strategy is to decide what your objectives and life goals are. Get your goals right and everything falls into place.

Successful people have a clear vision of what they want and are working towards.

“The Harvard class of 1954 was asked who among them hadwritten down on paper the goals they hoped to accomplish in their lives. Only 2% had taken the time or had the inclination to specifically and clearly record their goals in writing.

Twenty years later, the same group was contacted. Those individuals who were in the 2%, those who had clearly defined, written goals, had amassed more wealth than the remaining 98% combined”.

Simple, yes.

But easy?

Probably not.

But we believe that you must have a clear vision of what you are working towards, in order to motivate yourself. Successful people are very clear about who they are and what they want.

Unsuccessful people are often confused and uncertain.

However, it is not easy to get your goals right.  If it was easy, everybody would be doing it.  Getting it right requires clear thought, some soul searching and, above all, honesty.

For many of our clients this is the most challenging and revealing part of their financial plan. Goals require a serious personal commitment. You cannot set a goal for anyone else.

It must belong to YOU.

How do you do it?

When people do have goals, they often define them in material terms — for example, a larger house, a better job, more money, a luxury car. Most of us are under the delusion that we act freely.

In truth, we are often enslaved to our egos and to ego-based aspects of our materialistic lifestyle. We can be held captive by our jobs, our mortgages, our clothes or our need to outdo others.

Although many of your concerns will be money orientated, self discovery often has little to do with attaining vast sums of money.

Success, we believe, is composed of four key ingredients:

• Health and Energy

• Loving Relationships

• Meaningful Work (a person’s need for meaning and purpose)

• Financial Independence (we need to have enough so that we do not worry)

Take the time now to write down on a piece of paper all the things that you honestly want for yourself, your dreams and aspirations. You can be as selfish as you like as they can concern only you.

These are likely to fall into a number of broad categories:

• Personal

• Relationships

• Work

• Physical / health

• Personal space / environment

• Educational / intellectual

• Hobbies / interests / passions

Don’t confuse what your real goals are with haphazard thoughts. Some of the ones we commonly hear are when clients say they want:

• A big pension

• Enough money

• Save some money for the family

• Pay off the mortgage

It’s fairly obvious to see that these thoughts will not help them build a robust financial plan.

So, once a client has focused on their real goals in life, we then look at timescale.

‘Dreams are just dreams if you don’t have a deadline’.

As an example of dreams becoming reality, a Consultant client recently decided to work part time from age 60, taking 24 hour retirement and taking his NHS Pension. After reviewing his situation, we confirmed that his finances were in good health and that this was a good option.

This freed up time to enjoy his hobby of boating amongst other things.

But instead of working, say 3 days a week, he made an arrangement with a colleague (who also wanted to go part time) for each of them to work one week on and one week off.

This really gives him the quality time he needs, and as a result he can go boating for a week at a time very easily.

Perfect!

Key Considerations

Planning is becoming even more important due to the radical changes in the NHS Pension Scheme with regards to The Hutton Report and recent HMRC announcements on tax.

Having a cohesive financial strategy allied to what you want to achieve in your life is vital.

Action Point

Do you have your own financial strategy based on your measured goals? Are you taking into account all the recent changes in pension taxation and will you be hit with an unexpected tax bill? What effect will The Hutton Report have on your finances?

Take professional advice from a fee based financial planner you can trust who will review your position and provide you with a comprehensive strategy for the longet term.

We also have some great thought provoking documents that will help – email us for your copy quoting ‘The Big Questions’.

These are even more challenging than those talked about above!

Q. I want to review my Inheritance Tax situation. I am a 50 year old Consultant and expect to work to age 60, if not a bit longer.

Our two children have flown the nest and are independent, and my wife and I have inherited considerable amounts from recently deceased parents.

So with this and a large house with no mortgage, the Inheritance Tax bill looks horrendous for the children if we were both to die!

My financial adviser has made us aware of using a second death life policy to cover the expected ‘hit’, but he was not able to advise us on any death benefits I would receive from the NHS Pension Scheme which I think are rather good at two times salary?

Is this right and can you suggest anything to help reduce Inheritance Tax here?

A. Let us look at the death in service issue first. You are correct in saying that this, in your case, is two times salary. So give or take this would be a £250,000 tax free payment to your wife, as well as a widow’s pension if you had died yesterday.

So looking at this £250,000 in isolation, with your total wealth at £900,000, the Inheritance Tax (IHT) bill for your children (if your wife were to have died at the same time or soon after) would be £100,000 (40% of £250,000, which is the amount in excess of the 2 nil rate bands that you will both qualify for = £325,000 x 2). The respective amounts up to the nil rate bands are taxed at 0%.

Presuming your wife would not need such a lump sum payment from the NHS, you could nominate the children to receive this instead. Therefore this payment bypasses your estate, potentially saving £100,000 in tax (£250,000 x 40%).

The form that allows you to alter the payment automatically going to your wife is called a DB2 form, available from the NHS Pensions Agency – see below.

However, let us take a big step back here. As we never tire of saying; it is vital you take proper planning advice here.

Why? Well, clients often tell us that they don’t want to run out of money before they die, but also want what’s left to go to their children not HMRC.

So, unless you do a proper assessment of what your wife would need if you were to predecease her, it is impossible to look at the ways you can reduce your IHT problem now – i.e. what can you afford to gift to children and yet leave your wife secure?

So we would recommend you ensure you have a cash flow forecast (CFF) built to take into account all these factors. So, let’s say this shows that your wife would not need the death in service lump sum, with peace of mind you can nominate your children as beneficiaries.

Going back another step, we understand that you lost parents within the last year or so and they had Wills. What you could do is consider using a   ‘Deed of Variation’. What this allows is for you to vary the Wills to allow any monies you do not require to go to your children instead . This will maximise the options you have to ensure you are both secure, and yet reduce the IHT problem markedly.

Of course, this will also mean you can see your children enjoy the benefits of some extra money now, typically by reducing or paying off mortgages. We are sure that the grandparents would have been very happy with such use of their money.

Again, a cash flow forecast will give you the confidence to make these decisions knowing all the pros & cons.

Having done this, a life policy written in trust for the children on a second death would be another way to help if required. But this is the last option -not the first.

Best of luck.

NHS DB2 Form

As we’re now approaching the end of the tax year we thought you might be interested in reading a copy of the latest guide that we’ve compiled.

The ‘Year End Mini Tax Guide’ aims to provide you with tips and strategies to help you make the most of your money, and hopefully save tax at the same time

Included are strategies for:

• Income Tax
• Investments
• Pensions
• National Insurance
• Capital Gains Tax
• Inheritance Tax

Simply click here to request your complimentary copy!

Q. I am a 58 year old Consultant with a good NHS Pension Scheme ‘pot’, and as well as this have substantial personal pension funds.

My worry is hearing that the limit on how much you can have in pensions is to be reduced soon. Yet I recall that the previous limit had just been introduced in recent years.

What on earth is going on?

A.The limit you refer to is called the Lifetime Allowance (LTA). This was brought in as part of the ’pension simplification’ rules in 2006.

It stipulated how big a pot you could have in total, excluding State Pensions. If you exceed limits then there are penalties.

This pot limit was originally £1.5m, and grew to £1.8m this year and was to be frozen for several years.

However, as part of the overall “austerity plan”, the new government have changed things again!

The £1.8m limit will be reduced to £1.5m from April 2012, and the amount you can contribute each year to any pension scheme has been reduced to £50,000 pa.

The latter limit is more generous than was thought to be announced, and therefore the LTA limit was reduced rather than kept at £1.8m.

As part of the Government’s Finance Bill, they have introduced transitional measures allowing investors, who believe the value of their pension pot will rise to above this level through investment growth, to apply for a personalised LTA of £1.8m. However, anyone who does this must stop accruing benefits in all registered pension schemes before April 6, 2012 to qualify.

Rules were introduced by the NHS in 2006, called Primary & Enhanced Protection, as well as having rules to deal with accruing benefits. We presume similar rules will be necessary now.

It is vital you look at your position in detail, as well as taking into account probable changes in the NHS Pension Scheme with the Hutton Report due in 2011.

If you have an adviser, then we suggest you review matters as soon as possible.

To read an article we wrote on ‘A Day’, click here. 

No doubt you are aware that more proposed changes to pensions has been announced by the Government.

The good news is that the Coalition has attempted to simplify matters, which is very welcome after Labour’s legacy of the anti-forestalling legislation (how complicated does it need to be?).

Let’s take a look at the main changes that will affect doctors and dentists:

• There’s a new annual allowance (AA) of £50,000 a year (reduced from £255,000), including all individual and employer contributions. This will be frozen at £50,000 until 2016/17. Prior to the announcement it was expected the allowance would be limited to £30-40,000 so this higher amount is welcome.
• The anti-forestalling measures for higher earners will cease (cue round of applause…)
• Tax relief will still be available at an individual’s marginal rate (for example, a 50% taxpayer will get a pension fund of £50,000 for a net cost of £25,000).
• Any unused annual allowance in one tax year can be carried forward to the following three tax years. This is an unexpected bonus and will help smooth any spikes in accrual charges. Carry forward will be offset against any annual allowance tax charge, starting with the tax years 2008/09, 2009/10 and 2010/11 based on the assumed annual allowance of £50,000.
• Where an individual’s pension savings exceed the Annual Allowance and a tax charge is due (at their marginal rate) they will be responsible for notifying HMRC via their self assessment tax return.
• NHS Pension Scheme members will need to value the increase in their annual benefits by a factor of 16 (increased from the current 10). For example, if a 1995 GP/GDP scheme member has an average annual increase of £1,600 pa in pension benefits (which would be earned if the NHS pensionable income is £114,285 pa), this would amount to £13,200 pa Annual Allowance utilised. The member would have £36,800 allowance remaining. Note: this is an approximate estimate (the previous year’s pension income is increased by the Consumer Prices Index to arrive at the £13,200 sum).
• It appears that the Annual Allowance of £50,000 has come at a cost with the reduction in the Lifetime Allowance from £1.8 million to £1.5 million from April 2012. The Government will be consulting on this change later this year with a view to offering some form of protection to those individuals that may lose out.

It is planned that this legislation for the above changes will be incorporated into the Finance Bill 2011. Of course, do remember that there may be amendments to the details of these changes.

Our View

The one change that stands out is the ability to use carry forward of unused relief for 3 years. This provides a great planning opportunity, assuming pensions are the most appropriate vehicle into which you should be investing.

See this article on Pensions vs ISAs.

So, whilst the Annual Allowance has suffered an 80% reduction, it may be possible to contribute up to £150,000 in a pension scheme, less the amount that is being invested in other pensions, including the NHS Pension.

Key Considerations

Investing in pensions offers very attractive tax advantages, with up front tax relief at your marginal rate as well as tax efficient growth (for personal pension schemes).

It’s a relief to see the new Government sweep away some of the complexity that is prevalent in the current legislation, as this can only encourage individuals to take advantage of the benefits that pensions can potentially deliver. 

Action Point

This is a great opportunity to ascertain whether you could/should be investing in pensions. If you’ve been reading our prose for any length of time, you’ll know that we encourage all medics and dentists to take their overall position into consideration before making any important financial decisions.

Why not put this on your ‘to do’ list and aim to check your personal situation before the end of the year?

Q. I wanted to know if tax relief is available when additional pension is bought from the NHS scheme as it is when putting money into a personal pension.

I have a children only dental contract and do not make the same contributions as I did when I fully worked as an NHS dentist. I am not a fan of pensions schemes but can see the benefit of using the tax allowances.

So if I were to contribute more to the NHS scheme would there be similar tax treatment could my personal tax bill be reduced by contributing) or does it only apply to personal pension schemes?

A. Tax relief is available on any registered pension scheme, which the NHS is. As you say, whether you should contribute more into pensions is another matter. You’ll also need to check with the NHS how much you are allowed to contribute, seeing as you have a kids only contract.

I hope this helps!