How you can help doctors give their pensions a boost

Doctors who receive a dual income could save more for their retirement without extra tax liability if they set up a LLP, employ their spouses and establish their own defined benefit schemes, writes Mark Lisle of Rowanmoor Pensions.

My son has always wanted to be a doctor. If he can get the requisite A levels at A grade, secure a place to study for five years (which is a feat in itself), and accept the endless back-to-back shifts of the junior doctor, and the dedication and commitment required to qualify, the rewards could be substantial both personally and financially.

With the opportunity to supplement their health service earnings with consultancy work from private practice, many doctors have self-employed income to more than match the revenue available from a career in the NHS but not a comparable pension. Yet the opportunity does exist.

Set up a pension scheme

In this post A-Day environment pensions have moved on (though not necessarily up), yet the old stalwart of pre A-Day pensions, ‘employ your spouse’, rears its head again. This is reminiscent of the days when defined benefits (DBs) ruled and defined contributions (DCs) were the poor relation. This time, with a twist, that works particularly well for the doctor in the house and other like-minded professionals.

When operating as a limited liability partnership (LLP), provided an employer-employee relationship is established, if a consultant doctor were to employ their spouse, they could choose to establish a DB pension scheme, invite their spouse to join and then join themselves.

Consult an actuary

To make this work, what is needed is that most useful of players in the game of pensions: an actuary. An actuary is the nearest thing the financial services industry has to a specialist in medicine, as they have spent many years seeking the requisite qualifications. Often professionals who do not waste words but are blessed with sparkling arithmetic, actuaries are pensions’ answer to The Stig; this is their playground.

Using the services of an actuary can add value in all parts of the pensions planning process, from establishing initial contribution opportunities for the scheme to the calculation of pension benefits derived from the arrangement.

Defined benefit scheme advantages

Now the science part: as the scheme is a DB scheme, the maximum amount of benefit that can be funded in a year is based on the promised pension, not the contribution paid. A flat factor of 16:1 converts the new pension the scheme promises in that year to an amount that can be measured against the annual allowance.

For example, if the DB scheme promises to pay a pension of £3,000 a year from the chosen retirement age, this converts into an amount of £48,000 (£3,000 times 16), which is less than the annual allowance of £50,000, and so the member does not suffer any tax charge.

There is more though, and it gets even better. A pension of £3,000 a year in a DB scheme requires a contribution of much more than £48,000. Why? Because when assessing the cost of the pension, the actuary must take into account increasing life expectancy, make allowances for increasing inflation and can factor in benefits payable to dependants. That could require a contribution of more than £100,000 depending on the doctor’s age.