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The importance of spouses' pensions

Recent changes to pension rules and higher GP incomes makeit more crucial than ever to prioritise your spouse's pension – medical finance expert Ric Belcher explains why

Recent changes to pension rules and higher GP incomes makeit more crucial than ever to prioritise your spouse's pension – medical finance expert Ric Belcher explains why

Last year the Government introduced a pension funding limit of £1.6m for the 2007/8 tax year. The figure is set to increase over time and will include the value of any pension fund held at retirement, including any NHS pension.

The equivalent value of your NHS pension is calculated by multiplying the annual pension by a factor of 20 and adding the amount of the lump sum. With the higher incomes now being earned by GPs, it only needs an NHS pension of about £69,500 to reach this ceiling.

This is achievable from an average superannuable income of £124,000 (after the dynamising factors have been applied and assuming the equivalent of 40 years' service).For the 2007/8 tax year any income over £39,825 is taxed at 40% – therefore any additional pension saved by the average earning GP will be taxed in retirement at 40%, thus handing back much of the tax relief that has been enjoyed on the contributions made over the years.

By considering your spouse's pensions allowance you could benefit by:

•increasing income in retiremen
t•reducing tax in retirement.

Let's look at four possible scenarios.

1 Non-working spouse
Even though your spouse in this case has no earned income, they are still eligible to contribute up to £3,600 (£300 monthly) into a personal pension. This will attract basic rate tax relief, bringing the cost down to the equivalent of £2,808 (£234 monthly).

At retirement, from any age from 50 onwards (55 from April 2010), 25% of the accumulated pension fund can be drawn tax free – and if this is your spouse's only income in retirement, under current taxation rules the pension is unlikely to be taxed.

2 Spouse employed by you or your practice
It is not uncommon for spouses to receive a notional salary from the GP or from their practice of just up to the national insurance threshold (£5,200 in 2007/8). If your spouse is employed by the practice rather than by you as an individual, they may be eligible to join the NHS pension scheme. Beyond this you or the practice, as the employer, can contribute a maximum of £225,000 into a personal pension on your spouse's behalf.

If agreed by HM Revenue and Customs, this contribution would be classed as a legitimate business expense and is therefore tax deductible. A word of warning: the HM Revenue and Customs may ask you to justify that the value of the total employment package – that is pension plus salary – is commensurate with the duties performed. So seek advice from your accountant first.

3 Average-earning spouse (basic rate tax payer)
Your spouse would be eligible to pay up to 100% of income into a personal pension and claim 22% tax relief. The first option would be to investigate whether they have access to an occupational pension, or if their employer has already made a stakeholder scheme available to employees. It is always advisable to check if the employer would contribute to the pension scheme on their behalf.

Your spouse, in this instance, is unlikely to breach the £1.6m allowance (in 2007/8) and will probably avoid paying higher-rate tax in retirement.

4 Higher-earning spouse (40% tax payer)
Your spouse may be a professional with a high income similar to your own. If your spouse has a lower previous pension provision than you, concentrate on their pension before your own. This is because it may be less likely they will be a 40% tax payer in retirement.

If your pension history is less good than your spouse's, concentrate on boosting your own pension. If both you and your spouse have an equally strong pension history but want to do even better with your pensions, try to keep them at roughly the same amount and have as diversified a pension investment portfolio as you can.

Three types of personal pension
Throughout this article I have referred to personal pensions, of which there are three types to consider after looking into what extra pensions benefits might be available through an occupational scheme.

Stakeholder pensions
Introduced in 2001 to attract those on lower incomes to save for their retirement, stakeholder pensions have an annual management charge that is capped at 1.5%, with no other charges whatsoever. However, in order to offer schemes with such low charges, investment fund choices tend to be somewhat restricted.

Personal pension
These tend to have a far wider range of investment funds, although there is no cap on the charges. It is argued by some that a better fund choice can lead to better investment potential. However, this is in no way guaranteed. Remember that past performance is no guarantee of future performance and that the values of investments held may fall as well as rise.

The better schemes tend to offer a similar charging structure to the stakeholder, but with a number of additional funds where the management charge may be higher.

Self-invested pensions
These give by far the widest choice of investments, from self-selected share portfolios to unit trusts and commercial property, in addition to standard pension funds. Charges can vary enormously between different companies, investment types and different individual investment funds.

It is essential that you seek independent financial advice when considering any of these three options to get a full understanding of the difference between them, and to ensure that the correct option is chosen.

Ric Belcher is a partner at Medical Money Management, and provides independent advice on financial matters and insurance for practitioners. MMM is authorised and regulated by the Financial Services Authority

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