Get ready to be a pension millionaire
With many GPs bound to be nearing the maximum £1.5 million pension pot in 2006, Dr John Couch shows what you should do if you want to increase your retirement funds
When Gordon Brown's pension cap comes in to force in April 2006 many GPs will be flirting with the maximum £1.5 million pension pot equivalent. Existing supplementary pensions can be ring-fenced prior to this, but pension savings after this date which breach the limit will face a huge tax hit of 55 per cent. In future, GPs wanting to increase retirement funds will need to take a much broader view.
The current situation
Under the new rules, the annual value of occupational pensions will be multiplied by a factor of around 20 to reach a notional pension pot value (no mention has yet been made of whether the value of a lump sum will also be included).
If the predicted rise in pension values is correct, by 2006 many GPs' potential pension will be £55,000 a year or more. This would produce a pot value of at least £1.1 million. Many GPs make extra pension provision via added years, AVCs and personal pensions. The £1.5 million cap could be broken, particularly by funds that perform above expectations.
In addition to this, in the aftermath of the Equitable Life saga, many now question the wisdom of too much bias on pensions for retirement income.
Pensions have other downsides. Although contributions attract tax relief, pension income is taxable. Once invested, the money is tied in (for the ill-disciplined this may be an advantage!). After retirement the money must be used to buy an annuity at some point and is therefore not available for inheritance. The money is lost when you die.
Retirement investments outside pensions get around these problems. Many of them even carry some tax benefits.
Individual saving accounts
Investment in ISAs has proved very popular since they were introduced. Each person can invest up to £7,000 per annum, of which £3,000 can be a cash ISA (a straightforward savings account). Money within the ISA is allowed to grow tax free and, as importantly, can be taken tax free at any time.
If the maximum is invested each year and investments grow reasonably well, a sizeable figure can be available on retirement. Money can be switched within the ISA so, at retirement, investments can be geared to produce more income and less growth if needed. The income is tax free so £60 of ISA income is worth £100 of pension income as a majority of GPs will still be in the 40 per cent tax bracket on retirement.
There are a wide variety of investment and risk types available. Although the amount that can be invested will fall to £5,000 per annum from 2006, over 20 years a pot of £150,000-£200,000 could be accumulated producing tax-free interest of up to £10,000 annually.
If you have the opportunity to invest in your practice premises, give this serious consideration. You will get full tax relief on loan interest, rent reimbursement of around 7 per cent on the value of your share, and medium- to long-term growth in capital value.
Finally on retirement, taper relief will knock off a large chunk of any capital gains tax.
Many people are now investing in property as an alternative to pensions. You may want to buy a second property solely for your own use. On retirement you then have the option of selling and investing the proceeds for income.
But if you rent out the property either full-time or as holiday lets for a minimum period each year, you can claim a variety of tax relief including mortgage interest, insurance and running costs. Of course you also receive the letting income. In addition any capital gains tax can also be reduced.
On retirement you can use the property yourself, continue to let it or sell to invest the proceeds elsewhere. The only note of caution currently is that the market may be at its peak.
You can also take a softer route and invest in a portfolio of property, including commercial property, via unit and investment trusts or OEICs.
Stocks and shares
If you have stopped working out-of-hours you may have enough time and interest on your hands to invest actively in individual stockmarket companies. This requires much research and the ability to buy and sell quickly, but the rewards can be greater than investing in a spread of shares via unit trusts and so on.
Once again, now that GPs have a little more leisure time, you can consider pursuing interests that have an investment potential. Whether it is art, antiques, fine wines, cars or even stamps that turn you on, why not try to increase your skills, have fun and make money at the same time?
The list above is not exhaustive. A range of other investments are possible from premium bonds and National Savings to venture capital trusts. Whichever routes you follow it is vital to note a few basic rules (see box).
Follow the basic rules
lAim for a sensible spread of investment and risk types
lTake the best advice you can on your retirement situation, investments and tax position
lDo your own research
lMonitor your situation, your investments and any tax changes regularly
lMaximise the potential of your NHS pension – this will still be the core of your retirement income
John Couch is a GP in Ashford, Middlesex