DTUK1010

April 19-25, 201022 United Kingdom EditionMoney Matters Dental business is their business An ASPD member has: ■ An unprecedented track record working with the dental profession throughout the UK ■ A true and expert understanding of all current issues within NHS and Private Dentistry ■■ All members enjoy an enviable reputation as being some of the best Providers within their specialist areas W ith many a negative story on mortgage borrowing in the na- tional press and savings rates at a historically low level, many dentists are wondering in which direction their financial plan- ning is heading. With a raft of recent changes made to the NHS pension scheme, here we discuss its benefits and consider whether the scheme remains one of the best. Retirement mainstay Dental practitioners with pre- dominantly NHS income should continue to see the NHS Superan- nuation scheme as the mainstay of their retirement planning. In fact, other than GPs, dentists are the only self-employed profes- sional group, who benefit from an employer’s pension scheme. The benefits for dentists are sometimes misunderstood and should be differentiated from the main NHS ‘final salary’ scheme. In practice, many dentists will have an NHS pension based on a combination of two different sources of income – practice principal earnings and associate earnings. Pension benefits: Initial career phase (associates): Pensionable NHS earnings for associate dentists should be based on the amount of contract allocated to them by their prin- cipal. A nominal 43.9 per cent is used. For example, if an associate is allocated a contract amount of £182,232, they should have ‘NHS earnings’ of £80,000. (Bear in mind this is not necessarily the amount of income they will be paid – this will depend upon the agreement they have with their principal.) Let us assume the associate had 10 years of associate earn- ings before becoming a practice principal. On that basis, their to- tal associate (NHS) earnings will be £80,000 x 10 = £800,000. The resulting pension will be 1.4 per cent of total associate earnings resulting in a pension of £11,200 per year, for life. Secondary career phase (principal dentists): The final pension is based on 1.4 per cent of total career average re-valued earnings (CARE). For princi- pals ‘NHS earnings’ are effec- tively their contract value less a fixed percentage (56.1 per cent) to allow for non-pensionable ‘expenses’ For example a prin- ciple with NHS ‘earnings’ of £100,000 would have a contract of £227,790. Let us assume that the den- tist in question enjoys a level contract value of £227,790 and therefore annual NHS earnings of £100,000 for 25 years. CARE in this situation would be £2.5 mil- lion. The resulting annual pen- sion will be 1.4 per cent of this figure – £35,000 per year, for life. Total career pension using the case study above gives a to- tal pension of £46,200 per year from 60, for life. The earnings on which the pension is based are ‘uprated’ to allow for infla- tion’ and the resulting pension is index-linked to keep pace with inflation after retirement. There are many variables that will come into play, not least the size of the NHS contract and the length of service. Further NHS pension sch- eme benefits include an optional tax-free lump sum, discreti- onary ill-health benefits, death- in-service benefits including a lump sum and partner/de- pendents pensions. What changes mean For those who joined the scheme before April 2008, the retirement age remains at 60. For those join- ing after April 2008 the retire- ment age is 65. To compensate for the later retirement age, the accrual rate was increased from 1.4 per cent to 1.87 per cent. All members now have increased flexibility on retiring and return- ing to work, with options to in- crease the lump sum at the ex- pense of pension. On a less positive note contri- bution levels were increased in April 2008 from the standard six per cent. Dentists now contribute from 6.5 per cent to 8.5 per cent dependent upon NHS income levels. Added years purchase has been replaced by the less attrac- tive additional pension purchase. Despite recent changes, the NHS pension scheme remains one of the best available. How- ever, with life expectancy stead- ily increasing, the cost of funding the scheme is an increasing bur- den to the NHS and ultimately a drain on UK Treasury funding. It remains to be seen if the changes implemented in April 2008 will be enough to prevent cost cutting fur- ther dilution of scheme benefits. A note of caution For dentists with private fee in- come, it’s good to remember that the NHS pension accrues only from NHS income. Those prac- titioners with increasing private- fee income should take inde- pendent advice on mitigating the resulting loss of NHS pension benefits. Further information on the NHS pension scheme can be found at www.nhsbsa.nhs.uk/ pensions. The NHS pension scheme advises that: “If you are in any doubt about the pension arrangement that will be the best one for you, you should seek inde- pendent financial advice”. There are further related sub- jects that dentists should seek in- dependent financial advice on. These are: The ‘Lifetime limit’ on pension funds, annual allow- ance for pension contributions, early retirement options and the nomination of beneficiaries for death in service benefits. DT Jon Drysdale asks whether your NHS pension is secure in the eye of the financial storm of recently implemented changes Stormy seas for pension plans? About the author Jon Drysdale is a qualified mortgage adviser, an inde- pendent financial adviser and a di- rector of Practice Financial Manage- ment Ltd (PFM), an ASPD member. ASPD members of- fer professional, objective and practi- cal advice and services, based on ex- perience within the industry, to dental practices and other businesses within the dental sector. ASPD members in- clude solicitors, accountants, banks, financial advisers, valuers and sales agencies, insurance brokers and leas- ing and finance companies. For more information on the ASPD, call 0800 458 6773 or visit www.aspd.co.uk. To con- tact PFM, visit www.pfmdental.co.uk. ‘If you are in any doubt about the pension arrangement that will be the best one for you, you should seek independent financial advice’ NHS pension plan in the eye of the financial hurricane