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Personal Financial Matters
Financial Planning: the 5 basic areas
Doctors find financial planning a nightmare and often don’t like thinking about it. After all, we have been trained as medical people not financial or business people. So here are 5 areas that you need to think about and will make your financial life a lot more stable.
- The NHS Pension Scheme
- Life Assurance
- Critical Illness Cover
- Income Protection
- Locum Cover
The NHS Pension Scheme
The NHS Pension Scheme (NHSPS) is one of the finest occupational pension schemes available and it forms the bedrock of most doctors’ financial planning strategy. In general, try not to leave the NHS pensions scheme. If you are thinking of doing so, please seek advice from a good pensions advisor for (most medical accountants have NHS pension experts).
There are three different ‘sections’ of NHS Pension Scheme
- the 1995 Section
- the 2008 Section and
- the 2015 Section.
The 1995 and 2008 Sections of the NHS Pension Scheme pay a final salary pension. The 2015 Section pays an income based on your career average earnings, which is less generous than the final salary scheme.
Some people who were members of the original 1995 or 2008 sections of the NHS pension scheme were moved into the 2015 Section on 1 April 2015. But others qualify for ‘protection’ because the age at which they could claim their pension was close when the changes were introduced.
- Read more at which.co.uk (nice and simplified)
- The NHS Pension site
- Request an estimate of the value of your NHS pension
- Click here to access the Total Rewards Statement Portal
- If you’re not married nor in a civil partnership, make sure you fill out the Nomination Form to tell the NHS Pensions Agency who exactly to pay benefits to in the event of your death.
NHS Pensions Agency
Lancs, FY7 8LG
Tel: 01253 774980
Scottish Public Pension Agency
7 Tweedside Park
TEL 01896 893 000
75 Duke Street
Londonderry, BT47 6FP.
Tel: 028 71319000
If you have worked in a combination of England/Wales, Scotland and/or Northern Ireland, please note that if you ask for a statement of service to date from say the England/Wales division, it will not show your total statement of service whilst you were in Northern Ireland or Scotland. In such cases, you will need to write to the Northern Ireland or Scotland branch to get that information, and you should consider writing to them to transfer to statement of service to their equivalent in England and Wales; this will unify them.
The NHS Pension provides generous Death in Membership lump sum benefits. In most cases this will NOT be enough to support a family and repay debts. Hence the need for Life Assurance, in the form of a lump sum or regular income payable in the event of death within a specified term. But it really depends on your individual circumstances – whether you have a mortgage, kids in private school, big loans and so on. So please talk to an independent financial advisor to map out your individual circumstances and hence advise you better.
Death in Membership Benefits are normally tax-free and can be used for:
- Family protection to maintain the family’s standard of living and aspirations
- Mortgage protection to clear or reduce an outstanding mortgage debt
- Inheritance tax planning to provide funds via a trust to help pay any inheritance tax liability
Life assurance policies fall into two main categories:
- Protection policies designed to provide cash (tax-free) in the event of death only.
- Investment policies to provide cash in the future, not just in the event of death, as the result of regular savings.
Life Assurance benefits should normally be written under Trust to ensure that the life assurance benefits are paid to the right person(s) quickly and without the need for probate, outside the deceased’s estate, making the payment usually free from inheritance tax.
- Are your existing life assurance contracts placed under a suitable trust? This is particularly important for those couples who are not married or in a formal civil partnership.
Critical Illness Cover (CIC)
CIC provides a capital sum in the event of a policy holder being diagnosed with a qualifying critical illness (usually a limited list of common significant conditions). While this money can be used for any purpose it is normally recommended to use it to protect a mortgage or other debts. So, it is worthwhile having when your still at the stage in your life where you have a mortgage and other debts and loans. When you are mortgage free and financially solvent, you could question whether you really need this. Again, for your particular circumstance, speak to an Independent Financial Advisor for guidance.
- Do you have any outstanding loans and liabilities? Are they properly protected so that your family doesn’t have to struggle to find a way to pay them off in the event of you having a Critical Illness and not being able to work?
While we never imagine that ‘it could happen to us’, anyone can be struck by an accident or long term illness at any stage in their career. Statistics show that under the age of 65, we are more likely to develop a long term disability than to die, so income protection insurance can be more important than life assurance.
The NHS pension scheme provides ill health retirement benefits; however, these are minimal in the early part of your career and will never fully replace your income, even after many years of service. As your earnings potential is your greatest financial asset it is important to protect this against illness or accident. As you consider this area of your financial planning you should be aware of the following issues:
An Income Protection Plan (IPP) is designed to pay an income in the event of a policyholder suffering from an illness or injury, whether permanent or not, that results in a loss of earnings.
- It pays a tax-free income in the event of a policyholder being unable to work in their chosen profession, as a result of illness or injury
- It should normally commence payment when a salary or practice drawings reduce or cease
- It continues to be paid until the policyholder is fit to return to work, or the insured’s normal retirement age, whichever is earlier
- It can supplement any NHS ill health pension. Benefits payable under an income protection plan may be reduced if the plan holder is also in receipt of an NHS ill health pension
Points to consider when taking out a policy:
- Definition of Illness – what is their definition of illness?
- Definition of occupation (Own, Any or Suited) – for doctors, we should generally go for cover that says own occupation. In other words, pay out happens if you can’t do your own (GP) occupation. You don’t want an “Any” policy which would state that a pay out only happens if you can’t do ANY job (including non-GP like working at MacDonalds!).
- Practice agreement – what does this say about when the practice will stop paying you after a prolonged illness?
- Level of cover – how much benefit is required? Don’t necessarily go for the max to help you lead a life of luxury – unless you’re happy paying the high premiums. Most should go for a level of cover to help you and your family live comfortably without struggle (rather than luxuriously) – this will ensure you don’t pay unnecessarily high monthly premiums. Discuss in detail with an Independent Financial Advisor.
- NHS ill health retirement benefits – before decided what level of Income Protection Policy cover to take, work out what level of benefit you would recieve from the NHS ill health retirement benefits. Then work out what financial top up you need. A good Independant Finanacial Advisor will help advise you.
- Would your existing income protection arrangements be adequate, to replace your income and continue to support your family’s current standard of living?
Locum insurance is something that GP partners need to consider. It provides a regular income after a waiting period (usually 4 weeks) for a specific period (usually 12 months after incapacity). Monies would normally be used to employ a locum doctor while the member is off work sick. Premiums qualify for tax relief.
Locum Protection Cover – General Key Points
- Cover should dovetail with your Practice Agreement
- Do not over insure, as cover is expensive!
- Benefits are taxable but the cost of a Locum is tax deductible
- Income Protection Plan (IPP) already in place
- Locum Costs vary between areas and with supply & demand
When a GP partner becomes sick...
So, when a GP partner becomes sick, usually….
- the first 4 weeks: the practice continues to pay you. The practice also provides cover (internally or via a locum) and absorbs the costs. The practice asks nothing financially from you.
(Net monetary effect: you are not out of pocket, BUT the practice is a little out of pocket for the extra cover they have to provide for you).
- from 5 weeks – 52 weeks: the practice continues to pay you. The practice also continues to provide cover for you (usually via a locum). The practice will ask you to reimburse them for the cost of this locum through your locum cover insurance. So, in summary, you still get your usual monthly wage packet from the practice even though you are off sick. And the locum insurance you have will reimburse them for their locum expenses to cover you.
(Net monetary effect: you lose nothing, the practice loses nothing)
- from 53 weeks onwards: your practice will probably have an statement in the Practice Agreement that it no longer pays you and terminates your partnership. They get their own cover an pay for that (either employing someone permanent or a locum). You now get paid via the Income Protection Plan which you have hopefully taken out until you get better to seek employment elsewhere.
(Net monetary effect: you will get a monthly payout probably less than your usual wage packet but enough to survive on – as dictated by the IPP cover you took out. The practice doesn’t lose anything because they are now paying your wage packet to someone else instead of you).
- If you’re a GP partner, check with your practice exactly what happens when a partner becomes ill for a lengthy period of time.