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GPs -The Importance of Spouse Pension Planning

When advising GPs on their pensions, we come across the situation where they are very keen to maximise their incomes in retirement, as with the attraction of 40% tax relief, the mechanics for doing do seem irresistible.

However, with recent changes in pension rules and the generally higher incomes earned by GPs, it is now important to ensure that GPs’ spouses’ pension options are also considered as an equally high priority.

Last year, the government introduced a pension funding limit of £1.5m.  This figure is set to increase over time, (£1.6m for 2007/08 tax year) and will include the value of any pension fund held at retirement, including the NHS.  The equivalent value of your NHS pension is calculated by multiplying the annual pension, and adding the amount of the lump sum.    With the higher incomes being earned by GPs in recent times, it only needs an NHS Pension of around £65,000 to reach this ceiling.  This is achievable from an average superannuable income (after the dynamising factors have been applied and assuming the equivalent of 40 years’ service) of £116,459.

For the 2007/08 tax year, any income over £40,485 is taxed at 40% - therefore any additional pension saved by the average earning GP will be taxed in retirement at 40%, thus handing back much of the tax relief that has been enjoyed on the contributions made over the years.

By considering your spouse’s pensions allowance, you could benefit by:

  • Increasing income in retirement
  • Reducing tax in retirement

Let’s look at four possible scenarios:

1 Non Working Spouse

Even though your spouse in this case has no earned income, he or she still has the eligibility to contribute up to £3,600 (£300 monthly) into a Personal Pension.  This will attract basic rate tax relief, bringing the cost down to the equivalent of £2,808 (£234 monthly).  At retirement, from any age from 55, 25% of the accumulated pension fund can be drawn tax free, and if this is your spouse’s only income in retirement, under current rules, the pension would not be taxed.

2 Spouse employed by you or your practice

It is not uncommon for spouses to receive a notional salary from the GP or his practice of just up to the National Insurance threshold (£5,225 in 2007/08).  If your spouse is employed by the practice rather than by you as an individual, he/she may be eligible to join the N.H.S. Pension Scheme.  Beyond this, you or the practice, as the employer, can contribute a maximum of £215,000 into a Personal Pension on your spouse’s behalf.  If agreed by the Inland Revenue, this contribution would be classed as a legitimate business expense, and is therefore tax deductible.  A word of warning, the Inland Revenue may ask you to justify that  the value of the total employment package (pension + salary) are commensurate with the duties performed.  In other words, seek advice from your accountant before proceeding down this route.

3 Average Earning Spouse (Basic Rate Tax Payer)

Your spouse would be eligible to pay up to 100% of income into a Personal Pension and claim 22%tax relief.  The first option would be to investigate whether he or she has access to an Occupational Pension, or if the employer has already made a Stakeholder scheme available to employees.  Further, it is always advisable to check if the employer would contribute to the scheme on his/her behalf.  Your spouse, in this instance, is unlikely to breach the £1.6m limit, and will probably avoid high rate tax in retirement.

4 Higher earning spouse (40% tax payer)

Your spouse may be a professional person with a high income, similar to your own.  If your spouse has lower previous pension provision than you, concentrate on his/her own pension before your own, as it may be less likely that he/she will be a 40% tax payer in retirement. If your pension history is less good that your spouse’s, concentrate on boosting your own pension.  If he or she has a similarly good pension history, and you still want to boost your pensions further, try to keep these even between you to have a more diversified pension investment portfolio.

Personal Pension – 3 Main Types

Throughout this article, we have referred to Personal Pensions, of which there are three types to consider after looking into what extra pensions benefits might be available through an Occupational Pension Scheme.

1 Stakeholder Pensions

Introduced in 2001 to attract those on lower incomes to save for their retirement, they have an annual management charge (AMC) that is capped at 1.5%, with no other charges whatsoever.  However, in order to offer schemes with such low charges, investment fund choices tend to be somewhat restricted.

2 Personal Pension

These tend to have a far wider range of investment funds as there is no cap on the charges.  It is argued by some, that a better fund choice can lead to better investment potential.  The better schemes tend to offer a similar charging structure to the Stakeholder, but with a number of additional funds where the AMC may be higher.

3 Self Invested Pensions

By far the widest choice of investments, from self selected share portfolios, unit trusts, commercial property, in addition to standard Pension funds.  Charges can vary enormously between different companies, investment types and different individual investment funds.

It is essential that you seek independent financial advice when considering any of these three options to get a full understanding of the difference between them, and to ensure that the correct option is chosen.