How to calculate superannuable profits
Young GPs often hope to retire early but fail to make adequate provision in their pension planning, says Dr Andrew Dearden
in their pension planning, says Dr Andrew Dearden
Most of us realise how important pensions are. But few of us have sat down and planned how to make our pensions work for us. Again, while many of us want to be able to retire early, we make little in the way of preparation, hoping that all will be well when the time comes.
We tend to think more about our pensions the closer we get to retirement age. This is the exact opposite of what we should be doing. The best time to think of a pension, begin planning for it and maximising contributions towards it, is when we are young, maybe even on the very first day we start working for the NHS!
The more we can put into pensions when we start out the greater the impact and the greater the benefits will be when we retire. That said, even if you haven't done anything specific with regards to your pension planning to date, it's not too late to start.
Obviously the GPC and the BMA cannot make general recommendations to doctors as to their retirement intentions. Neither can I, though I get asked to do so a lot. GPs who are BMA members can obtain financial advice from BMA Services on 0845 974 7737, or GPs can contact their own independent financial adviser.
New GP contract
Improved pensions is certainly one of the main outcomes of the new GP contract negotiations. I will go through some of the changes quickly. More detail on all of these is in the four 'Focus On...' documents available on the BMA website (www.bma.org.uk) or from your LMC. There is a 'Pensions Overview' paper and further detailed ones on flexibilities, the dynamising factor and contributions.
All NHS profits (NHS income minus expenses) are now pensionable. Under the old Red Book some income was excluded from being superannuated and contributing to our pensions. Now work performed under GMS or PMS, or under delegation directly from GMS and PMS, is pensionable. So is out-of-hours work performed for a provider that is an NHS body. So are DLA reports and premises and dispensing profits.
It is very important that you keep a record of everything earned from the NHS. You will need to pay pension contributions on your net NHS profits. The contribution rate is 6 per cent for the employee and 14 per cent for the employer's part. All funding for pension contributions will be included in your global sum monthly payments or in your quality and outcome framework payments.
During 2004/5 there have been adjustments to the England and Wales payments with an additional 21p per patient for new money post April 2004, with the equivalent MPIG adjustment, and through the additional £2.50 per average quality and outcome point.
The position in Scotland and Northern Ireland is still to be resolved. Remember, the more profit you make the more pension contributions you will have to pay.
The dynamising factor (DF) is used to uprate GPs' pensionable earnings every year. Now that the DF is based on actual profits, it may not be finally known for some time after the financial year has ended, possibly up to 15 months after the relevant financial year.
The technical steering committee (TSC) will estimate the DF each year (8.8 per cent for 2003/4 and 10.8 per cent for 2004/5) but will then calculate the actual DF based on all GP earnings that year. This is then applied to all GPs' pension 'pots'.
The new flexibilities introduced will offer substantial benefits for GPs who choose to work between general practice and hospital posts. The purpose of the flexibilities is to recognise the growing trend towards portfolio careers where many GPs
will no longer spend the whole of their career as principals, but instead will
move between different contractual states.
These flexibilities mean that any career changes within the NHS will not unduly affect your future pension and you will automatically receive the best benefits available.
If you leave the NHS for a period and subsequently return before retiring, your GP income will be revalued by the better of the increase in the retail price index or by the dynamising factors that have been achieved while you were not working in the NHS. There is no time limit or requirement to return to general practice for this.
Personal pension review
I would suggest reviewing your pension situation annually. You can ask the Pensions Agency for an annual statement to inform you what your NHS pension benefits currently are. It is hoped these will be sent to you automatically in the future. This will be even more important with some of the changes currently being discussed as part of the review.
You should look at your level of contributions. For example are you contributing the most you can afford or are able to? Have you made maximum use of the tax breaks available to you in both the NHS and any private pensions you may have? The reason for doing this is that our working patterns can change fairly quickly and this can affect our pensions.
So if you drop some NHS time and take on some private work instead, or go part-time for a season, there will be an inevitable effect on your NHS pension.
You should consider reviewing your pension arrangements to suit. This may be best done with a pensions expert, financial planner/adviser or the like.
In the new GP contract we won't know exactly what we need to pay to the Pensions Agency until the end of the financial year when our accounts come in. It would be wise to discuss with your accountant how best to make sure you are prepared for the superannuation bill (your total expected contributions minus those already made as monthly payments) that will then need to be paid. This balancing payment will need to be made as a lump sum.
Some practices I know are paying slightly more on a monthly basis (via deductions from their global sums) so their end-of-year bill will be lower. Others are maintaining their monthly contributions and setting aside cash for the bill. Others are planning to use their Q&O payment each April as a way of 'saving' for this (and their tax bill!).
Either way we need to be contributing monthly anyway while saving for the potential readjustment/balancing payment due when our accounts have been done.
This might be best done after discussions with your accountant on projected income and likely levels of pension contributions.
Pension contributions qualify for tax relief. For a 40 per cent taxpayer the 6 per cent employee contribution actually only costs you 3.6 per cent net. As they are tax efficient there is currently a limit that the Inland Revenue imposes of 15 per cent (gross) of your annual taxable income that can be saved in a pension arrangement.
There are proposals to change this and from April 2006 you will be able to save up to 100 per cent of your taxable income or a maximum of £215,000 into pension each year before incurring any tax liability. Obviously, you need to be able to afford it!
Andrew Dearden is chair of the Welsh GPC and chair of the BMA pensions committee
Have your say
The BMA is currently sitting on all the relevant groups that make up the pensions review. The consultative document has of course just been released and the BMA will be communicating with you to let you know how to get involved. Your views will be welcome.