ARE YOU PREPARED FOR YOUR PENSION?
Good though the NHS pension is, there are many reasons why you may wish to increase your pension or make other provisions, says Dr John Couch
The commonest reason for wanting to top up your pension is to retire early. The changes suggested by the pensions review add urgency to your planning. Although exact details are not available, it is no secret that retirement at 65 will be encouraged and earlier retirement discouraged.
Abatement of pension will occur up to age 65 rather than age 60 at present. It is likely that transfer to the new scheme will be optional up to 2013 but compulsory from then on.
The NHS added years scheme is currently the most secure and attractive way to increase your pension.
It is unlikely that any replacement, as part of the pensions review, will be as generous so take action now. For full details get booklet SD AVC from the NHS Pensions Agency either by written request or as an online download.
The benefits are:
·Each added year increases final pension by 1.4 per cent of one average career dynamised year (eg, if average annual GP earnings are £75,000 at retirement, the pension is increased by £1,050 p.a.)
·Each added year increases the lump sum by three times the pension increase
(eg, £3,150 using above example)
·Widow's pension increases by half the extra member's pension (eg, £525 p.a. using above example)
·Pension and lump-sum enhancement if ill-health retirement taken also applies to added years
·Part years can be purchased
·The above benefits are guaranteed they are not at the mercy of the stockmarket.
For salaried GPs the pension increase is currently 1.2 per cent of the final, as opposed to the dynamised, salary.
Added years can be purchased to increase total service up to a maximum of 40 years by age 60. Since most GPs start work at
23-24 at the earliest, none can achieve more than 37 years' service by age 60. The majority are therefore eligible. Only GPs aged 63 and over or belonging to certain pension schemes from a previous career (and still keeping the provisions of that scheme) are excluded.
Although added years can be purchased as a lump sum, most GPs purchase them via monthly contributions. These are based on a percentage of that GP's superannuable income.
The percentage paid for each added year purchased varies depending on age and the nominated age of retirement (55, 60 or 65). The maximum number of years that can be bought is also limited by current rules allowing no more than 15 per cent of superannuable income to be paid into the NHS scheme.
Since all GPs pay 6 per cent as a basic contribution already, a maximum 9 per cent can be paid via added years. Payments attract tax relief at each GP's top rate, in most cases 40 per cent.
One drawback to added years is that payments are fixed, must be paid regularly and may not be varied.
NHSAVC and freestanding AVCs
Additional voluntary contributions are 'money purchase' schemes. The final payout depends on the performance of the funds chosen and the annuity rates at the time.
No lump sum may be taken on retirement under current rules although this may change in future. Payments can be varied and payment holidays can be taken. The amount paid in must not exceed the 15 per cent rule, so a maximum 9 per cent can be paid excluding the NHS pension 6 per cent employee contribution. The amount paid in is also limited in that it should not produce more than the maximum added years would produce if purchased, using average forecast growth.
Management charges for the NHSAVCs are lower as they are specially negotiated. Also, the pension is guaranteed once it has started. On the downside, the number of funds available tends to be limited.
Freestanding AVCs have more fund choice but management fees are higher.
Private pension plans
A private pension plan, another 'money purchase' pension, is another option. All GPs have private earnings.
A PPP contribution of non-NHS pensionable income (less related tax-allowable expenses for each financial year) can be made up to a maximum percentage dependent on age.
A pension cap is being introduced from 2006 which will penalise funds greater than £2.5 million.
This figure will rise year on year. Occupational schemes such as the NHSPS will be included. This may affect full-time, high-earning GPs so careful independent advice is therefore essential, for this group especially.
Conversely the new rules will allow up to 100 per cent of earnings to be invested in any given year as long as the total
pension fund stays within the cap limits. Investment areas such as property will also be allowed.
If your spouse/partner does not belong to a pension scheme, consider their pension options whether via a stakeholder or PPP.
Don't forget the state pension
Under current rules most GPs will qualify for a state pension at age 65 for men and 60 for women (this will harmonise to age 65 for all within 10 years). A married couple currently receive a maximum £6,400 p.a.
By age 60 most GPs will not have clocked up enough national insurance payments, so those retiring before age 65 should consider extra, voluntary contributions. Whether state pensions for all will continue in future is a moot point. It may be wiser to regard this as a bonus rather than factor it in to pension planning.
John Couch is a GP in Ashford, Middlesex
Other retirement funding and when to retire
and when to retire
With poorer returns on pension funds (added years scheme excluded) many GPs have turned to non-pension investment, focusing especially on the most tax-efficient schemes. The following are all popular.
Up to £7,000 p.a. per person can be saved in an ISA with £3,000 of this in a cash ISA. Not only is interest earned tax free but also any income eventually taken to fund retirement. Income from a pension scheme is, of course, taxable.
·Practice premises share
If sold at retirement the capital can be invested for a reasonable income. Various tax reliefs are available to reduce capital gains tax. Alternatively, if kept, the rent reimbursement will provide a very useful income stream.
Rented property providing an income and capital growth is increasingly popular.
In the medium- to long-term historically the stockmarket provides greater returns than building society investment.
For those considering retirement soon, the consensus advice is to delay until after March 2006 if possible. This is because the second year of nGMS increases will have filtered in for 2005/6.
If you retire after March 2006, the 2005/6 dynamising factors will eventually be applied to your pension retrospectively. The new superannuation rules will delay these figures until 2007. If the increase is, say, 15 per cent for 2005/6 the increase in pension could be around £6,000 p.a. and lump sum £18,000 for an average full-time GP. For the sake of a small amount of extra service this seems a sensible option. Again expert advice is essential.