Looking after your penniesBMJ 2004; 329 doi: https://doi.org/10.1136/bmj.329.7465.s95 (Published 04 September 2004) Cite this as: BMJ 2004;329:s95
Puzzled by pensions? Terrified by tax? Junior doctor Matthew Gardiner and financial planning consultant Christopher Kuit offer a basic guide to money matters for medics
One afternoon at the end of a ward round my boss marched me off to his office and sat me down. “Have you bought back your years yet, and who is your accountant?” he asked. My response was “Er—what?' Pensions had never crossed my mind, and managing my finances came well down on my to do list—certainly below finding a clean lab coat. My boss had opened a can of worms, but one that turned out to be worth exploring. This article covers the broad areas we feel junior doctors should think about when planning their financial futures.
No one expects to become seriously unwell. However, UK figures suggest that nearly two million people of working age will be off work for at least six months at any one time because of sickness or disability. Your income is your livelihood and without it life for you and any dependants can become tough. NHS sick pay depends on years of service; it rapidly tails off and stops. Taking out an income protection plan (IPP) will provide a tax free replacement income when, owing to ill health, you are prevented from working for a number of months or even years.
In addition to an IPP many people purchase critical illness cover (CIC). This pays out a lump sum if you develop a serious illness. Unlike an IPP it could accrue a cash value which, if you remain healthy past retirement, could go towards long term care in old age.
Critical illness cover pays out only if you have a serious illness and survive. Life assurance, on the other hand, pays out to your estate in the event of your death. This is one reason why it is important to make a will giving instructions on how to dispose of your assets. You may think that your worldly possessions total a few CDs and a battered copy of Guyton, but in reality the division of an estate can become a complicated and distressing affair without guidance. Find advice on wills at www.wills.co.uk and complete one online at www.tenminutewill.co.uk
Bricks and mortar
Do you really need to buy a house? The decision to rent or buy depends on your current circumstances. From a financial point of view, if you are going to be in an area for a while it is probably worth getting on the property ladder. While renting, your money is not being invested (apart from in your landlord). Research from Abbey National shows that, on average, buyers are 57%, or £135 000 ($247 000, €205 000), better off than those who rent over a 25 year period.
It's best to see housing first and foremost as a place to live and second as a long term investment. Mortgage lenders are often happy to give doctors 100% loans of up to four or even five times salary. This is tempting, but as prices can fall in the short term and interest rates are rising make sure any mortgage you take on is affordable. Your Mortgage (www.yourmortgage.co.uk) has the low down on house buying and finding a mortgage.
The NHS pension scheme is good. It is calculated using a formula based on years of service and final salary. On retirement at the age of 60 you will receive a pension of up to half your final salary and a tax free lump sum of three times your pension. Normally, having qualified in your early twenties or later you will not be able to accumulate the full 40 years of service before retirement. To gain your full pension benefits you can “buy back” those lost years. Broadly speaking, this can be done by increasing your monthly contributions or by making additional voluntary contributions (AVC).
If you are thinking of taking a break from the NHS you should be aware of the potential affect on your pension benefits. Early on in your career this could mean being removed from the scheme and being given a refund. Your local pensions officer or the NHS Pensions Agency website (www.nhspa.gov.uk) will be able to help.
The golden rule for saving is to get out of all non-mortgage debts first. You should also have some spare cash set aside for a rainy day—ideally, enough to live off for at least three months. When saving you should think in terms of short, medium, and long term aims as well as how risk adverse you are. Start by looking at the interest rate on your current and saving accounts. They are almost certainly not the best on the market. You don't get rewarded for loyalty, so move. In the medium term, money should be put away regularly but remain reasonably accessible. In the long term, develop a portfolio of investments centered on the stock market. These will offer the best returns but need to be kept for a long time to iron out any runs of poor form.
Stocks and shares
Historically, the return on investment in the stock market beats both property and savings accounts. In the United Kingdom, since 1918 the stock market has returned an average of 7% a year in excess of inflation. When exposing yourself to the market you have to consider what level of risk you are prepared to put up with. The choice ranges from managed global equity funds right up to personally trading individual equities (risky).
A good way to start is by buying units in a global investment fund. This spreads the risk across many different sectors and multiple countries. These funds are either “trackers,” with a computer essentially following the stock market, or a professionally managed fund, where a human brain makes the decisions and attempts to do better. Generally, when young you can afford to expose yourself to more risk as you have more time to correct investment disasters. The Motley Fool (www.fool.co.uk) is a great place to start for a jargon busting, irreverent look at investing in the stock market.
What is an independent financial adviser?
An independent financial adviser (IFA) is a person qualified to give advice to clients on financial products who is not tied to any one financial institution. They may charge a fee for their advice or may receive a commission on the products that the client buys. An IFA's recommendations should be based on which company and products best suit the needs of the client.
Find an IFA on the association website (www.unbiased.co.uk/aifa/).
The eminent economist J M Keynes once said, “The avoidance of taxes is the only intellectual pursuit that still carries any reward.” Saving in a tax efficient manner doesn't have to be taxing on the brain. To avoid paying tax on your investment interest you could shelter your savings and investments in an individual savings account (ISA). There are maximum annual allowances for cash and share ISAs. Government premium bonds are also tax free but offer a poor return on investment.
Similarly, if you have a spouse who's a non-taxpayer, transfer money to an account in their name and get them to fill in form R85. You can then use their tax free allowance rather than pay higher rate tax on the interest accrued. You should also be able to claim back tax on expenses associated with your job; contact your local Inland Revenue office (www.inlandrevenue.gov.uk) for further guidance.
The bottom line
Make a will, pay off your debts, protect your income, buy a house, stick with the NHS pension, and invest, invest, invest. Remember, “money is better than poverty, if only for financial reasons” (Woody Allen).
Go to web extra at bmjcareers.com/careerfocus for a rough guide of how much all this will cost