Fiona, a 32 year old Associate dentist, contacted us after reading one of our articles in the trade press. She has recently married and, whilst she has no children at this stage, she and her husband are planning to start a family very soon.
She works on a self-employed basis, as she has done since she qualified and started working 8 years ago. She currently does 80% NHS / 20% private. They hold £20,000 in a deposit account, which they view as their emergency fund.
Her immediate aims were:
- To assess whether her income protection cover is adequate as her earnings have increased somewhat since she set up the policy 8 years ago
- Her accountant has mentioned that she should consider changing from a self-employed basis to a limited company as she could save tax: she wants to know if she should change business structure
- Even though she is a member of the NHS Pension, she would like to make additional provisions towards her retirement, which she anticipates will be at age 60
Fiona also asked us if we could mention any other areas that she should consider.
What We Did
The first step was to look at her income protection position.
She had a policy with a well known provider, which she purchased just after graduation.
Analyzing it, we discovered:
- She was underinsured versus her current income, so there was scope to increase this
- Her current plan had ‘reviewable’ premiums, which means that the insurance company is able to increase premiums in the future. This as opposed to a ‘guaranteed’ premiums plan, where the price and cover amount is fixed, apart from inflationary increases
- She said she would be able to cope financially for 3 or 6 months without any income, therefore she would be able to consider a policy that pays out after this period. The alternative would be to have ‘day 1’ cover, which is provided by two main providers (note that these are ‘reviewable’ premiums plans)
- It also runs to age 60. Whilst this is in line with her desired retirement age, it may make sense to have cover run until age 65 or even 68. The latter is Fiona’s state pension age and is also the age when she will be able to access her NHS pension without it suffering any actuarial deductions (this is the 2015 scheme, Fiona also has some NHS pension in the 2008 scheme, which she will be able to access at age 65)
The solution was for Fiona to apply for cover with an alternative provider. It included:
- Cover against current income
- Guaranteed premiums
- 6 months ‘waiting period’
- Set up to age 68
As Fiona’s main income is derived from NHS activity, were she to change to a limited company structure, she would lose the right to remain as an active member of the NHS pension scheme. This has been the case since 7 November 2011.
Interestingly, this is the position with Fiona as a ‘performer’. Were she to run her own practice as a Principal, she would be able to remain as an active member of the scheme as she would now be a ‘provider’ (although her pensionable income would be limited to salary + dividends).
Fiona said that she would not want to lose access to the NHS pension, therefore, we advised her to remain self-employed (she also decided to look for another accountant as her current one was not a dental specialist, which is why they weren’t aware of the NHS pension issues).
When looking as far ahead as retirement planning, we would usually look to compile a Comprehensive Financial Plan (see the Principal Dentist case study). We determined that now would not be the best time to do this with Fiona and her husband, especially as (fingers crossed), Fiona may well be on maternity leave in the not too distant future.
That said, Fiona had sufficient disposable income to at least start making provisions for additional retirement income.
We discussed the fact that there are a number of options available, all which carry their own advantages and disadvantages.
- Increasing contributions to the NHS pension
- Investing into personal pensions
Note the above benefit from tax relief on all contributions (eg for a 40% taxpayer, for every £100 invested an additional £66.67 is added by HMRC).
- Buy to let property
- Individual Savings Accounts (cash and / or shares)
- Deposit accounts, including National Savings
Fiona indicated that she had disposable income of £400 per month. When discussing the options, she said that flexibility of when she could access the funds at retirement would be important.
We then discussed in depth how much risk she wanted to take. The outcome of this process was that, partly due to the time between Fiona’s age and her retirement, she felt comfortable taking quite a bit of risk, which she was aware she’d be able to reduce as the years progressed.
We advised her to invest £300 per month into a growth oriented personal pension (which, with tax relief, will equal £500 per month). The other £100 per month would be invested into a growth oriented ISA. Both are very flexible and Fiona is able to increase / decrease contributions as she sees fit.
We suggested Fiona should also consider:
- Setting up Wills, as she and her husband did not have these in place
- Lasting Powers of Attorney
- Reviewing their mortgage deal as their 2 year fixed rate had recently ended
- Likewise, to review the life cover and critical illness cover policy they had purchased from their bank for the mortgage
- To review their overall protection provision again if they are successful in starting a family
Fiona now has a plan of action and we have agreed to meet up every year or so. Also, when we all agree the timing is right, we will work together to compile their comprehensive financial plan.
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