Saving for Retirement Aside From Using Pensions
Most people understand the importance of building up retirement savings to provide the income they need to maintain a comfortable standard of living once they stop working. Doctors generally build up their main retirement provision through the NHS Pension, with some choosing to contribute to personal pensions alongside this.
Pensions are typically used to save for retirement because of the tax benefits. Pensions offer tax relief on contributions and within a personal pension the money invested grows free of income tax and capital gains tax.
However, there are limits to how much can be saved in pensions. There is an Annual Allowance for pension contributions each tax year and also a Lifetime Allowance for pension benefits. Tax charges apply if these allowances are exceeded. The Annual Allowance is currently £40,000 but reduces incrementally for those with income over £150,000 down to £10,000 for those earning £210,000+. The Lifetime Allowance is currently £1,000,000.
Some doctors find themselves at or above the Annual Allowance and/or Lifetime Allowance due to the value of their NHS Pension. In this case, an alternative to a personal pension is required for additional retirement savings. We consider some of the options below.
ISAs also offer tax-efficient saving. Like a pension, within an ISA there is no income tax or capital gains tax. ISAs do not offer tax relief on contributions but the money can be withdrawn 100% tax-free when needed (pension benefits are only 25% tax-free with the rest subject to income tax).
The annual ISA allowance is currently £20,000.
Young doctors aged from 18 to 40 can use £4,000 of their ISA allowance to invest in a Lifetime ISA if desired. The government will add a 25% bonus plus, as with other ISAs, there’s no income tax or capital gains tax. The catch is that the money must be used either for retirement (after age 60) or towards a deposit for a first home. If it is withdrawn at any other time there is a 25% penalty charge.
Venture Capital Trusts (VCT) and Enterprise Investment Schemes (EIS)
For doctors who are prepared to take on a larger degree of investment risk and invest for the long term, VCTs and EIS are tax-efficient UK investment schemes that invest in very small companies. To incentivise investment in these small higher risk companies the government offers various tax benefits. These include tax relief of 30% on contributions, capital gains tax exemption and tax-free dividends (VCTs only). Minimum holding periods apply to retain the tax benefits.
Tax rules are subject to change by the government and the value of tax benefits depends on individual circumstances. Please note this article does not constitute personalised advice. We suggest you always seek advice from a professional financial adviser on the best products and retirement plan for you. If required, please contact Richard Higgs CFP FPFS on email@example.com or 0117 966 5699.