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Dentists Who Invest

Episode 12

How The NHS Pension Actually Works

Hosted By: Dr. James Martin

Dr James: 0:41

Fans of the Dentists who Invest podcast. If you feel like there was one particular episode in the back catalog in the anthology of Dentists who Invest podcast episodes that really, really, really was massively valuable to you, feel free to share that with a fellow dental colleague who’s in a similar position, so their understanding of finance can be elevated and they can hit the next level of financial success in their life. Also, as well as that, if you could take two seconds to rate and review this podcast, it would mean the world. To me, what that would mean is that it drives this podcast further in terms of reach so that more dentists across the world can be able to benefit from the knowledge contained therein. Welcome. Welcome to the Dennis who Invest podcast. Good evening everybody. Welcome back. Another episode of Dentists who Invest podcast with myself, james Martin. We’ve got a really, really interesting guest on here tonight. This was a hotly requested episode. The reason I say hotly requested is I ran a poll not so long ago on the group and top of the poll came the subject matter for this particular podcast, which is, of course, nhs Pensions. No surprises, no prizes for guessing. We’ve got a wonderful guest with us tonight. He’s very well qualified to speak on this matter. He’s an independent financial advisor. He has expertise, particularly on NHS Pensions, because he deals with so many of us dentists on a day-to-day basis. I don’t think anybody has ever sat me down and actually explained to me why the NHS Pension is so lucrative inverted commas. The reason I say that is all I know is that the received wisdom is that apparently it’s very good, but I don’t think any of us fully know why, and I don’t even fully know what superannuation means, and I don’t think I’m alone on that matter either. So this is why I thought it would make such a great podcast. His name, the guest that we have on tonight. His name is Luke Hurley. Welcome, luke. How are you?

Luke: 2:29

Hi James, Hi.

Dr James: 2:31

Thanks for taking some time out of your day to talk to us, luke.

Luke: 2:34

No problem.

Dr James: 2:35

Luke is at a very interesting time in his life. His wife is going to give birth any day, so we might have to cut this short. I hope not. I hope our fingers crossed. As I say, it’s literally any day. Noise and that right look.

Luke: 2:48

Yeah, last two weeks Interesting stuff.

Dr James: 2:50

Congratulations, Go boy. Thank you. Are you able to say that?

Luke: 2:52

Don’t know.

Dr James: 2:53

Yeah, kept it a surprise have you narrowed it down to any potential names or anything like that.

Luke: 2:57

We’ve got a short list. We’ve got a short, a long short list.

Dr James: 3:00

More of a long list, then I see.

Luke: 3:03

Yeah.

Dr James: 3:03

Fair enough, I like it. I like it Awesome. Well, congratulations, as I say, smashing. So what I think it would be nice to do is just kick off with a little bit of an intro for yourself, luke. So if you’d just like to speak a little bit about who you are, your journey thus far in your career and why you’ve decided to focus on helping us dentists, yeah, sure.

Luke: 3:25

So, university-wise, went to Warwick University, finished up there, took some time out, did an internship in the City of London at a wealth manager, got qualified, accredited as a financial advisor. That business was then sold to a large corporate. So, similar to the dental world, there are some firms that are sort of hoovering up some of the smaller businesses. I decided not to go with the principle not to join the new business and instead set up my own firm doing what I enjoy. It just wasn’t a good fit for me or my clients, so I decided my own thing. All of my clients at that point came with me, so that sort of de-risked the transition in many ways. So it’s not like starting from scratch and in truth I’ve not really looked back since In terms of why dentists I’ve got clients that are associates through to multi-practice business owners. I think as an IFA you can either really focus on sort of geography where you live ultimately or where your offices are or you can focus on profession. I think for me, profession made more sense. Everybody’s financial situation is different, but focusing on a profession enables you to understand and be aware of common themes, particularly in relation to challenges and opportunities from a financial perspective, and then from a business angle as well. From a marketing perspective, obviously it’s easier if you’ve got a niche focus when you’re building up a business, and being able to tailor your services also helps. From an operational perspective, and then from a purely personal perspective. Hand on heart, I actually really like my clients. I’m not saying all dentists are great people, but most of the people I meet have similar values to me and that’s quite important as well.

Dr James: 5:34

Good stuff, mate. Good stuff. So it sort of happened organically then effectively, by the sounds of it. Yeah, the NHS pension is a really interesting one because we’re signed up to it by default when we start out as foundation dentists and I mean, I’m sure there’s a document somewhere with some small print in it. But what I think would be really useful is if the denaries for our study days, the denaries, had a day that was dedicated to finance or perhaps even dedicated to de-jarguing if that’s even a word de-jarguing the NHS pension, because, let’s be honest, life’s too short to read small print and things like that. How many times have I ever found myself pouring over a legal document in my whole life? I should do it, but I don’t, and I think a lot of people will be in that boat as well. So, deenaries, shout out to the deenaries if you’re listening. There’s a good course day in there somewhere and I definitely think that’s one that will be very relevant. But having said that, I’m not going to bad mark the deenaries too much, because some of the course days that they arranged for foundation dentists were actually really astounding, and to think that it’s all paid for the NHS, I actually feel really grateful. But nonetheless we digress. Look, can you succinctly explain to us what the NHS pension is, how it works, break it right down? Even if you have to kind of fundamentally address or explain, describe what a pension is itself, then I actually think, even though that’s the very, very basics, there are people out there, myself included, who could probably benefit from that.

Luke: 7:02

Yeah, okay, very high level. I mean this is a. As I said before, this is a bit of a beast, this topic, so I will try to be succinct. I’ll try to simplify some elements to make it informative but also easy to follow. A pension really is just a vehicle to save for your retirement when you stop work. The key point and that probably the biggest misunderstanding when it comes to the NHS pension is that it’s not going to provide you with a pot of money. So there is no designated treasure being built up with your name on it. In essence, what it provides you with is income. So it’s a promise from the UK government to give you a fixed, guaranteed, an index linked so effectively it will go up with inflation payment in your retirement years. So every month a pension payment will be made into your bank account like clockwork. So in terms of what comes out of the other end of it, it’s actually pretty closer to the state pension than a private pension in that it’s an income. It’s not a pot of money. It’s not an investment-based pension like your SIPs or personal pensions and things of that nature.

Dr James: 8:23

Interesting.

Luke: 8:25

That is probably the biggest misunderstanding that people have, and that’s quickly followed up by, without doubt, the biggest misconception, which is that your contributions that you pay as a member of the NHS pension are not being directed into a pot with your name on it, so the contributions that you’re paying are effectively going to the government, who are then using that money to pay those people that have already retired. There’s no investment element, there’s no designated fund. It’s what’s actually called an unfunded scheme. So, to be honest, the better way to think about the contributions is to think of them as a membership fee. That’s what I say to all of my clients your NHS pension contributions are like a membership fee.

Dr James: 9:12

Really interesting. I really like that.

Luke: 9:15

So I mean, they’re kind of like the cost of entry, if you like. They’re tear-de-corn to how much you earn, but they are not what drives the growth in your pension. So your contributions do not drive the growth in your NHS pension. So the next question is or the big question is, what is actually driving the growth in your NHS pension? And the simple answer is it’s your earnings. It’s your NHS earnings. Every year they will keep a record of your NHS earnings. So if you were to get your pension statement, you’ll see a table on there and it will have a breakdown of what they think you’ve earned in the NHS since you first started. Essentially and that’s key, and I’ll come on to talk about the statements a bit later the next thing that you really also need to understand is some of the complexities, because there’s more than one section of the NHS pension. So there’s actually three sections there’s the 1995 section, the 2008 section and the 2015 section. So three versions or three variations of the NHS pension essentially, and they all have slight differences between them and really what it boiled down to was, in 2008, the government trying to reform the pension. They had their first attempt and then then revisiting it for a second time, and that’s where the 2015 section comes from. If you joined the NHS before 2008, then you will have benefits in probably in the 1995 section, unless you opted to convert them. And equally, if you joined after 2008, you will have benefits in the 2008 section and then in 2015,. As a sort of a transitional process, they’ve effectively been shepherding everyone from those two sections into this new 2015 section. So the likelihood is, if you’re working before 2015, you’ll have two sections. If you’ve only started since 2015, you’ll only have one section you following.

Dr James: 11:37

Yes.

Luke: 11:37

Yeah, okay. The next thing in terms of how that sort of actually just one point worth mentioning the benefits you’ve built up in the previous sections are ring fence, so they weren’t converted into the 2015. So they’re effectively earmarked, left alone, deferred, whatever you want to call it, and everything you build up going forward will be, in this 2015 section, the main differences between them, quite honestly. The first is the pension age, ie the normal pension age, basically when you can start taking it. So in the 95 section it was 60. The 2008 section it’s 65. 2015,. It is your state pension age. To find out your state pension age, just Google state pension age calculator and it will take you to a site and you’ll be able to figure it out. James, you and me, it’s going to be 68, unfortunately, but that’s. It’s different based on your date of birth.

Dr James: 12:40

And so I didn’t interject that state pension age. It sounds like to me that they’re wording it in that sense intentionally, so that they can change the state pension age as we go through. So let’s say, me and you, we get to 60. They might have shifted the goalpost to say it’s 75 by then. Is that what you’re getting at? Yeah, oh, I see Right.

Luke: 13:00

However, I don’t I mean the changes to state pension age to go from sort of where it was to where we are now at 68. To quite some time, If we go from 68 to 75 in our lifetime, I’ll be, I’ll be, I’ll be hacked off, but I hope not.

Dr James: 13:18

But it sounds like they’re. They’re being a little bit greasy there, deliberately to to, to to yeah, interesting.

Luke: 13:25

Definitely yeah. The second main change between the different sections is what we call the accrual rate, and basically that’s the secret ingredient in terms of converting your earnings into pension. So the accrual rate is what’s applied to your earnings to work out what the pension is going to be as a result of those earnings. To keep it simple, I’m just going to focus on the 2015 section, as that’s what most people will now be building benefits in. If you if we say you’ve you’ve literally just joined the NHS pension in this tax year and for this tax year you earn 100,000 pounds. To keep it again simple for them, for the math, the accrual rate for the 2015 section is 154th, which, in percentage terms, is 1.85%, or near near enough. So for 100,000 pounds multiplied by 1.85%, you’ve built up 1,850 pounds of income in the pension that will be paid to you every year for the rest of your life, from state pension Age, right the next tax year. So we now fast forward into 21, 22 tax year. You earn another 100,000 pounds. Conveniently, you’ve now added another 1,850 pounds of income that they promise to pay you every year for the rest of your life, from normal pension age until you die, and in essence, you add them together so each year that that amount is building up. The amount of income they’re promising to pay you is building up.

Dr James: 14:58

That’s so well explained, you know that totally makes sense to me now. I never understood that before.

Luke: 15:03

Yeah, so two years at 100k. 1,850 has built up in each year. So you’ve now got 3,700 pounds as an annual pension that’s going to be paid to you every year for the rest of your life, essentially from pension age.

Dr James: 15:18

I guess where you’re going with this is there is a cap at some point, because I could see how it’s if you were contributing to that for a long, long, long time, you might get an incredibly good deal, you know.

Luke: 15:29

Well, the cap is nationwide and it’s called the lifetime allowance and it’s not actually a cap. You can carry on going in building up benefits, but there’s different tax treatment once you go over the lifetime allowance. So that’s really how they.

Dr James: 15:44

Not to take you off script or anything like that. Yeah, no just going to come to that later, yeah.

Luke: 15:48

Yeah, in a roundabout way, there is a you know, the government have applied some form of mechanism to yeah. Yeah, on top of that, you’re building up that based on that accrual rate. On top of that, you’ve actually got something. Even I think he’s actually really powerful which is, if you think about it, 100,000 pounds in 2020 is going to buy you a lot more than it will do in 2030 or 2040 because of inflation, and inflation is the big wealth destroyer over time. It’s the number one risk of any long term wealth building journey. So what? What they do is they, as they keep a record of your earnings. They revalued them every year with CPI, which is a measurement of inflation plus 1.5%, which is actually really powerful because, in effect, the previous year’s earnings and the resultant pension is compounding over and above inflation, from the time that you built it up through to the point where you start taking it, and if you’re looking at two, three decades, that’s. That is powerful.

Dr James: 16:52

Yeah, definitely.

Luke: 16:55

So, to quickly recap, the bulk of your growth in the NHS pension is a result of your earnings. Your earnings are converted into pension because of the accrual rate and then every every past year’s earnings are then being revalued with CPI inflation plus 1.5%. And that in terms of the biggest points throughout that and the biggest misconceptions that I see. First of all, it’s that the contributions have no impact or no role in that process and secondly, that it’s not a pot of money. There’s nothing set aside for you. It’s your contributions are going to the government, who are then paying them out to people that have already retired. A few, just other minor not minor actually the major, but a few other key points. The first is your contributions. Either membership fee is deducted from your gross pay or your gross earnings. So in effect, you’re getting tax relief at your highest or at your marginal rate, what we call marginal rate. So if you opt out of the NHS pension, so you decide you no longer want to be a member of it, which you can do Like everybody in this country you have to be auto enrolled in the pension, but you can, if you choose, opt out. But if you do that, you’re not going to save 12 and a half, 13 and a half, 14 and a half percent, which is your very different contribution levels, because that’s coming out of your that, those contributions coming out of your gross pay, you’re going to have to effectively pay tax on that money instead. Once in payment, the pension increases each year with inflation. So one of the big benefits of the NHS pension is you are protecting yourself against the against inflation, the increase in the cost of living over time, which is really underestimated. In recent years it’s been a lot lower. If you look at the average over the last 50 years, that is about 4% as an average figure. That’s because we’ve had some periods of really high inflation in past decades and inflation at the moment is very low. But you know the inflation over a long time period is an absolute wealth destroyer. The next point to make is the income payments you get out of the pension when you do stop working are taxable income. So it’s not just pay to tax free is taxable income, so you’ve got to add it to your rental income, your state pension income and anything else that you’re drawing an income from. That said, a lot of people when they get to retirement they will possibly drop down a tax band so you might actually drop into a basic rate tax territory, for example. And then also you’ve got the option to convert some of the pension into a tax free lump sum. We call it a commutation factor. It’s one to 12. So in effect, you give up one pound of taxable annual pension and you can get 12 pounds of tax free lump sum. Incidentally, on the old section, the 95 section, used to get a standard lump sum, but in the new section it’s you know, you have to give up some of the pension for it, and that really is At a very high level. There’s a lot more detail potentially in there that I don’t think we need to delve into today, but that’s just scratching the surface?

Dr James: 20:32

is it because I was thinking to myself there’s a lot to this that I didn’t realize, but wow.

Luke: 20:38

Yeah, I mean they’re the high level. Yeah, main points, I think, and some of the main Misconceptions, hopefully, I think you’ve addressed that was the perfect level of depth there.

Dr James: 20:47

Yeah, because I could just feel towards the end that I was beginning to get a bit confused because there was there was so many, so no, that was. That was really good, actually. I just had a question when you were speaking about the how they they adjust for inflation, basically. So they use CPI and they add 1.5 every year. It’s not right. So that means that it’s always ahead of inflation, mm-hmm, isn’t it? Oh well, that’s an amazing deal, yeah, yeah, other pensions don’t do that, do they?

Luke: 21:16

I Mean this is a what we call a DB pension. Yeah, a DB pensions are known for being good at protecting you against inflation, which is that’s really good.

Dr James: 21:27

It’s just you’re guaranteed to beat inflation by at 1.5% Real quick, guys. I’ve put together a special report for dentists entitled the seven costly and potentially disastrous mistakes. The dentist may or never. It comes to their finances. Most of the time, dentists are going through these issues and they don’t even necessarily realize that they’re happening Until they have their eyes opened, and that is the purpose of this report. You can go ahead and receive your free report by heading on over to wwwdentistunevestcom forward slash podcast report or, alternatively, you can download it using the link in the description. This report details the seven most common issues. However, most importantly, it also shows you how to fix them. I’m really looking forward to hearing your thoughts.

Luke: 22:22

Yeah, I mean that to be perfectly honest. When they brought out the changes in 2015, I was amazed that that stayed in there. If I was trying to save money on In terms of providing this pension, that would have been one of the things that I’d have possibly tinkered with, so that is valuable.

Dr James: 22:38

Science generous, yeah, when you spoke about what we just Leads, and it leads on to the next question, very nicely, actually, because I did want to know what’s the what’s the split, what’s the pros and cons of having your own private pension versus having the NHS? Is it as black and white as the NHS pension is almost always, without a shadow of a doubt, better, or are there some private pensions out there that you know off that might be beneficial to certain people in certain circumstances?

Luke: 23:06

Yeah, I think I’m gonna take a quick step back. So when I address this kind of question, I Go again look high level from a financial planning perspective. You know that one of the key tenets is to start with the end in mind. So if we think about what the goal is in terms of a pension or Retirement savings vehicle, for me, for everyone, everybody’s number one long-term money goal, financial goal, is financial independence. So for those that you you know, who are listening, that don’t know, financial independence is basically the point at which you’re working because you want to, not because you have to, and I actually Prefer that term to the term retirement, because I think retirement as a concept is a bit outdated. It sort of suggests that you get to a finish line and then you’re put out to pasture and it has, I think, negative connotations for some people. I prefer to talk about financial independence and what that really it is to plan financial independence when we’re when I’m doing financial planning for somebody, what that really entails is looking at what do you need To to be financially independent, what’s the cost of your lifestyle? How are you going to fund your living expenses when you no longer have money coming in from your earnings and that’s that’s really the core issue and a big problem with that. I think a lot of people have no idea what they’re going to need when they they stop working and, yeah, it’s different for everybody ultimately. And but there is some research actually that I was looking at last week by a group when it’s called retirement living standards and they’ve actually defined three levels of Lifestyle for people that have finished work. The minimum level, which, I would to be honest, is survival costs, is, for a couple, 15,700 pounds per annum. The moderate level, which I guess is the national, is the average, I guess, 29,100 pounds per annum, and they are they are terming a comfortable retirement 47,500 pounds per annum. Now, that’s money spent, so that’s net, and obviously you need to factor in that a lot of your costs. If you’re, if you’re still working, you’ve got mortgage, for example, while going on things like mortgages that will be paid off by the time you get to financial independence. So this is purely money being spent on lifestyle. The figures incidentally a little higher if you’re in, if you’re in London, bad luck. T4 as well today, and the that’s a national average. So there’s different levels and obviously Some people will have a more expensive lifestyle than what they’ve termed comfortable. I see clients that spend a lot more than that and I see clients that spend less than that, and so it’s different for everybody. But the key is to work out roughly to what it’s going to take for you to be financially independent and then from there we work out really how, how we’re going to get you to that point and what vehicles are we going to use to enable you to get to financial independence. And I use the analogy of your stream and your reservoir. So your stream is effectively income that’s going to float you on a regular basis. And the three main ones that I encounter with clients. As first, state pension and this is basically just the pension that everybody gets from the government. If you’ve been paying national insurance for quite some time the new state pension you have to have 35 years of qualifying qualifying years of paying the right level of national insurance or have the earnings in those years to qualify If you are retiring. Today, the full state pension is just over 9,000 pounds per annum per person. So a couple you know you’re looking at in today’s terms about eight just over 18,000 pounds per annum, which a lot of people neglect to think about is actually a tidy sum. 1500 pounds a month is going to go some way towards meeting those living costs I’ve just mentioned. I mean, that’s your survival cost really for a lot of people. So you’ve got your state pension. Don’t underestimate it. You’ve got second rental income. I don’t know, james, if you’ve done a podcast on this, but obviously a lot of you know that’s a massive topic in itself. Rental, rental income.

Dr James: 27:35

We had Harry Singh on Houses yeah, so a lot of my clients have rental properties.

Luke: 27:41

That is another stream, if you like, another source of income to get you to financial independence. And the last Topical is ultimately Define benefit pensions, which one of which is the NHS pension. It’s a stream of it. You know it’s feeding into that stream. It’s a regular source of fixed income. Call it passive income, not turn all income, whatever phrase you want to use, it’s its income. That’s going to be very useful to help you Find the income that you need each year to meet those living costs ultimately. So that that’s that. That’s key. And I think at that point, actually, it’s worth worth noting that these pensions, the NHS pensions, are type of the. It’s called a defined benefit pension. They used to be quite common and a lot of employers in the in the private sector had had them on offer to their employees. They’ve they’ve pretty much closed. Most have closed to new entrants and that gives you, I guess, a hint at the fact that there’s something of value there, because they were costing them too much and they actually now most employers offer DC pensions, which is the alternative, which is effectively things like sips and personal income, effectively things like sips and personal pensions and group personal pensions and things like that, so that should give you a steer. The only real Employer that’s offering them is the is anything in the public sector. You know they’re still operational, so that that should give you a hint as to the value in them and the cost of running them. And, as I said, really the value of the NHS pension in many ways is having that fixed, secure, guaranteed index linked income that’s going to be hitting your bank account. You don’t have to do any planning for you know it’s going to arrive and you know it’s there to help you fund your fund, your lifestyle. To contrast that with the reservoir, to go on to the second part of the story, the reservoir for me is just a giant pool of money. It’s money that you’ve saved and invested to help you reach financial independence. It really refers to what we call your liquid assets, and they’re liquid because ultimately you can access them and utilize them in quite a short period of time. So to contrast that with property property is illiquid Because if you want to Encache it and sell it, you’ve got to go through a reasonably lengthy process, especially with the current state of the market. So things are liquid assets. We’re talking, we’re talking ISIS, we’re talking Any cash pots. You’ve got any money in bank accounts we’re talking any investment accounts you’ve got we’re talking any defined contribution pensions, so SIPs, any investment based pension, basically, is In that pot of money, in that reservoir that you’re going to use in the future to draw down, to help supplement your Streams of income, to give you the lifestyle you need when you no longer, when you’re no longer working. Really, the main difference between things like ISIS and SIPs and things like that, really they’re just tax wrappers. They’re just different tax wrappers. They’re just different pots of money with different tax treatment that are being wrapped around an investment portfolio. And if you’ve used up your ISA and your pension allowances, then you know you you’d look at a general investment account again. It’s just an investment account but it doesn’t have the tax benefits of an ISA or of a pension. But with a, with a private pension, a DC pension, a SIP, you can actually invest in pretty much Anything except for a residential property. It’s so much option in terms of what you want to then do with the money. You can keep it really simple, put it in a you know, a multi-asset fund. You can go really complex and buy a commercial property at the freehold or a leasehold. I’ve helped practice owners in the past by their practice buildings, through their pensions, through their SIPs. You know there really are endless options in terms of the money. You know there really are endless options in terms of what you invest in through the pension. It’s not the pension that’s Going to give you any growth or any Positive outcome. It’s because that’s just the tax wrapper, it’s what’s sat inside of it, the same way as an ISA. An ISA on itself is not going to give you a good return. It’s, it’s what’s in the ISA that’s going to drive those returns Um.

Dr James: 32:18

I didn’t know that about the SIP, I just thought it was. I don’t have a SIP personally, have an ISA, so I I mean to my knowledge you can’t do that with. I mean an ISA to me is just you just buy stocks and bonds within it, but you’re saying that you can also Use it to buy your commercial premises. That your practices in. Does that?

Luke: 32:36

not, not not through an ISA.

Dr James: 32:38

It doesn’t apply to an ISA, right, that was so, yeah, right, fair enough, but it does to a SIP. So there’s a few more sort of caveats to it. Yeah, which was distinguished them from each other interesting?

Luke: 32:47

Yeah, I mean the ISA really you’re. You’re either wrapping it around a savings account, aka cash ISA, and getting next to no interest at the moment, or you’re wrapping it around an investment portfolio and benefiting from tax free growth, tax free income. That’s all an ISA is, effectively, and then a SIP is. You’re getting the tax relief on the way in. The money’s then growing, free of capital gains tax and income tax. So it’s you’re getting that compound growth in a really tax efficient environment and then, when you Choose to draw in it, you’re potentially getting a tax free lump sum 25 percent and the balance, when you do take it out the pension Is is taxable income. The other real benefit, to be honest, of a Private pension is that you can pass on the benefits you’ve built up To your family effectively. So if you die before 75, then the money you’ve built up in a private pension call it, the terms are synonymous really SIP, private pension, personal pension, it all means the same thing ultimately the money you’ve built up in one of those, if you die before 75, you can pass on the full amount to your nominated beneficiaries free of any form of tax.

Dr James: 33:59

Yeah, sit down and invest in personal pensions, so I suppose it’s it makes. I never actually thought about it, but I suppose that it makes sense that it’s treated the same legally as a variety of different pensions. Is that accurate? That’s what you were saying, wasn’t it?

Luke: 34:11

Yeah, yeah, so that yeah. It never thought of it like that. Yeah, the tax treatment is the same, the names for them vary you know the financial services and she loves to complicate things for profit and having lots of different terms really helps mystify things but they all pretty much give you the same, the same options and outcomes. I mean SIPs as a back in the day SIP self-invested personal pension used to be able to access and invest in some slightly more exotic investments not always for the benefit of the for the investor, often for some crooked advisors that put money in all kinds of strange, weird and wonderful things. But nowadays, to be honest, most pensions on offer are SIPs. That’s just the name that they’re allocating. So even a really basic investment based pension. If you went to somewhere like I don’t know one of the platforms on offer without name checking anyone, they’re probably gonna offer you a SIP.

Dr James: 35:13

Where do you stand on this topic? Where do you stand on the whole DIY pension versus you know, some sort of official one that either, whether it be you know, you give some money to a company or whatever, or the NHS pension? Where do you stand on that, for the bit?

Luke: 35:31

I mean NHS pension to private pension. It’s apples and pears so they’re. But DIY versus you know another type of pension where it’s all done for you. Really, it depends on the individual. I don’t, especially for some of the younger associates. You really don’t need to go into some expensive, complex wealth management led pension and pay high fees really for a pension If it’s gonna be sat there and invested and compounding for 30 years. For most people, the best kind of solution you want is something that’s low in fees, that’s gonna give you 100% exposure to global equities and you can, you know, set and forget. That’s really is great value for most people. For your DIY investor, for someone like you. If you’re actually interested in playing around with stocks, then you know, yeah, it’s up to you. But I see lots of people on the other side that have absolutely no interest in doing things themselves and are happy to go into, like, a multi-asset fund where they have very little involvement. So, yeah, it’s down to the individual, really, I think.

Dr James: 36:44

Yeah, interest and stuff. What I was gonna say on that was when you start reading about finance and you realize just how few actively managed funds beat passive funds because of the inherent constraints or constrictions or difficulties that they have assigned to them. It’s astounding. It’s something like 93% of active funds fail to beat passive indexes with time. So this is the sort of effect that you can hijack if you begin to educate yourself a little bit about it. But naturally speaking, just as you said, there will be that element of people out there who just have zero interest in it whatsoever and they would prefer to offload it to somebody else, and that’s totally fine too. But it is just a really interesting one that you don’t even necessarily have to know loads about finance because you have so many. There’s so many advantages and ways that you can save that people who actively manage funds or people who are paid to do it for a living don’t have, so therefore they’ll struggle to beat you. Essentially.

Luke: 37:49

Yeah, look, I mean from my angle, all of the investments I recommend for clients are what we call evidence-based. So they are index funds, they’re passive funds. I don’t use active. You know my preference is not to use actively managed funds. Well, there you go.

Dr James: 38:04

Anybody listening. You’ve heard it from the man who would know. You’ve heard it from the horse’s mouth. Even Luke recommends his clients to go for passive funds Interesting.

Luke: 38:13

Yeah, and that’s as you alluded to. That’s just based on the historic results 93%, you’ve mentioned that’s primary US fund managers. Uk fund managers. Same outcome, it’s 75%, I believe. Last time I had a look. Oh okay, I didn’t know that. The data is astounding. And of those seven or 25% that do outperform, how much of that is due to luck versus skill and how much of that is due to them taking extra risks with your money? It’s, you know, for me it’s. Yeah, I mean, this is a whole different podcast. We’re going off topic.

Dr James: 38:43

Yeah, we are slightly, but it is an interesting one. We’ve scuttled over this earlier. Well, we’ve touched upon it a little bit. Why is the received wisdom that the NHS pension is so lucrative? We talked about the inflation thing. Any other reasons?

Luke: 38:58

Yeah, I think that the main reason why that is banded around is and the reason why I believe in it personally if you were trying to come replicate, I guess, what you get out as an output from the NHS pension, if you were trying to build up a pot of money that you could convert into a guaranteed fixed index linked income, you’d need a very large pot of money. And the reason why is because the government is effectively subsidizing the cost and that’s the benefit. The government is ultimately subsidizing the cost of what’s coming out the other end of it, and for you to just try and build up a pot of money in a private pension to then replicate it, you will need to be contributing a lot.

Dr James: 39:45

Yeah, interesting, mainly that or others.

Luke: 39:50

I mean. So there’s that element to it. I mean it’s also the in terms of. I mean, if we look at pros and cons. So NHS pension is a guaranteed fixed index linked, government backed source of income. It’s a stream, as I said. It therefore gives people security and peace of mind. It’s really useful when I’m doing financial planning or retirement planning for people in terms of working out where the money’s gonna come from when they do start working, and for some people that’s really attractive. The drawback of it is that they’ve been gradually pushing back the pension age. So it was 60, it then went to 65, it’s now state pension age. I see in council lots of people that don’t want to be working in the role they’re doing at this moment in time up into the point of 68, they might want to have had a career change or do something different. That doesn’t mean you have to work until state pension age. It just means that that stream of income is gonna kick in at that point. So you can be doing other things around the NHS pension and building up other streams of income, building up other assets to help fund your retirement over and above the NHS pension. The NHS pension for me is just another tool in the tool bag In terms of comparing that with a oh, and also just a very extra point, the NHS pension. There is death and service benefits. You could, in truth, if you’re in decent health, you could replicate that with some life cover. And there’s also what they term ill health retirement. So if you are sick on a tier one, they’d effectively pay you your pension early. If and If you’re sick and unable to do your job as a, whatever you’re working in, whatever your position is, they’d pay you what you built up. If you’re really ill, they’d pay you a tier two ill health retirement, which basically means they’d pay you what you’ve built up till now and also a percentage of what you would have built up had you been able to work to pension age. And that is also quite attractive. So that’s, I guess, the key elements is the security, the indexation in terms of the protecting against inflation, the private pension very different. It is a pot of money, so it’s more flexible. Currently the access age on a private pension is 55, but it’s about to go to 57 in the not too distant future, so it’s a lot earlier you can start drawing down on that private pension. The death benefits is a big one in terms of pros and cons. The private pension, as I alluded to earlier, the death benefits on those are brilliant and in fact, from an inheritance tax perspective, I’d now argue that a private pension is probably your most efficient vehicle for passing on wealth to future generations. I’ve got lots of clients that actually aren’t drawing on their private pensions because they’ve got other assets and resources to draw on first to reduce their taxable estate for inheritance tax. So private pensions really efficient on. Unfortunately, on the death side of things, nhs pension less beneficial and arguably one of its biggest drawbacks on the death side. It’s an income for your life. If you die then it depends on the section, but the 95 section it’s going to halve. So your surviving spouse will get 50% of what the payments would have been. In the 2008 section it’s 37.5% and in the 2015, it’s 33.75%. So in effect, those regular pension payments from the NHS pension will drop when you pass away. So live to age 90. You’ve had a really amazing, phenomenal pension. Live five years into retirement Not so great.

Dr James: 43:51

And it’s only for your spouse as well, by the signs of it, not anybody else.

Luke: 43:55

Yeah, it dies with the two of you. Yeah, whereas the private pension can be passed on to the future. Yeah, yeah, interest and stuff.

Dr James: 44:04

I certainly didn’t know that I knew about the SIP. That is another reason why a lot of people like their SIPs people who are running you know what’s the very highest tax band. Is it over?

Luke: 44:15

45? Over 150, yeah.

Dr James: 44:17

Over 150. It’s extremely beneficial for them because number one, number one of the tax reductions and number two because of, well, their alliance that they can leave to their family.

Luke: 44:27

Yeah, the big thing on. Well, both pensions ultimately the contra into a private pension and into the NHS pension. Both contributions are coming from your gross pay. So if you don’t pay in, then effectively you’re going to pay tax on that amount. So if you’re paying into a private pension and you’re a 40% taxpayer, then in essence every pound that’s going into your SIP, for example, is only costing you 60p Because, as you not made that payment, you’re going to pay income tax at 40%. And it’s probably a good point to actually also highlight if anybody’s got income between 100,000 and 125,000, that is a nasty tax trap because that’s the point at which they start removing your personal allowance. So for every two pounds you earn over 100k, your personal allowance is reduced by one pound. Now your personal allowance is the first in this tax year, is the first 12,500 pounds that you earn which is tax free. So, in effect, the income that you have between 100 and 125,000 pounds is basically it’s a marginal rate of 60%. So if you’re in that bracket, a pension, paying into a pension, could be a really useful vehicle for reducing your tax bill and you’re going to get some great tax relief.

Dr James: 45:43

We had Mike on the last podcast and he said that when you’re in that tax band off the top of my head it was something like you only get 10p in every pound or something. It was maybe a little more than that. It was maybe about 20p in every pound by the time you’re taking off tax and then you’re also taking off national insurance. So he said, anyway, so that’s another interest. Yeah.

Luke: 46:03

So I mean that’s for a personal contribution. The other thing just very quickly worth mentioning if anyone’s got a limited company, then you can fund your private pension using what’s called an employer’s contribution. So in effect it’s a cost to your business. So you’re going to save corporation tax and obviously you’re not having to pay tax on pulling it out of the pension. So you’re really moving it as a cost to your business from your business into your limited company, into your pension, and that’s great.

Dr James: 46:32

And I’m also correct in saying that when you have, if you run your business, if you run your dental affairs through a limited company, you also can’t have an NHS pension, isn’t that correct? Yeah, that’s another twist to the tale. So there’s various there’s about 10 kind of layers of I suppose you know kind of complexity here. So it’s an interesting one. So a limited company is one to watch out for. Superannuation is a word that people chuck around. I always feel like I’m supposed to know what it means, but I don’t actually know what it means and I’m just going to say I’m going to throw it out there. I just want to, at the risk of making myself look silly. What is superannuation and you know what? I’m sure there can’t I can’t be the only one. There must be other people out there who don’t understand what it means either.

Luke: 47:22

You’re going to be really disappointed. Oh yeah, just me. It’s just another term for your NHS pension. I mean it’s just a. Normally it relates to a workplace pension. You’ll never hear IFAs in financial planners in England talk about superannuation. I’ve never referred to it as superannuation. Maybe more in Scotland and certainly in places like Australia. You know superannuation is the main vehicle for retirement, but in this country it’s effectively just another term for the NHS pension. So once someone’s saying NHS superannuation they just mean NHS pension. And I don’t know, accountants seem to love the phrase They’ve, they’ve. I often hear them using it, but I don’t personally use it. But it just means the same thing.

Dr James: 48:11

There you go. Nice and simple. Always nice when that happens in life, isn’t it? Then we were talking earlier about the different categories and how it seems to be. As we go through time they’re raising this pension age. They’re becoming ever more slippery with their terminology and definitions of when we can get it. Do you foresee a point where the NHS pension will be so much less lucrative to younger dentists that it is a lot more of a question mark over whether or not it’s worth bothering? Or has it reached that point already? What do you take on that?

Luke: 48:47

My honest answer is if, as it, as things stand, the current version of the NHS pension, if I could join it and use it as a tool in my tool bag to get to financial independence, I would. That that’s my honest opinion as just another vehicle to help you get to the long term financial goal. Yeah, I would. I would add it to my bag in terms of you know where the future’s at, where the future’s heading. If they were to change the NHS pension drastically again they don’t. They wouldn’t be doing it in the same way that they haven’t in the past. They wouldn’t be doing it retrospectively, first of all, so they’re not going to go back and change what you’ve built up up until now. So if they were to reform the pension again, you would have the option to look, you know, take a balanced and educated view on whether this is still a good pension for me to be a member of, in terms of whether the government can really go after it. Well, they, they, they, if they go after public sector pensions I mean, I don’t know exactly what the exact percentage is of the country working population that work in the public sector and therefore has a have a public sector pension but they’re on dangerous ground because they don’t want to lose votes, do they? So it’s a big body of people that you can upset very easily if you keep tinkering around with their promised pension entitlements. So I’m not sure they’re going to. There’s going to be huge amounts of reform and if there are, then, as I said you know, take an educated view and decide what you want to do.

Dr James: 50:18

It’s still worth it then.

Luke: 50:20

Still worth it for me. Yeah, yeah, only because, as I said, streams and reservoirs. You don’t have to work through to state pension age. But if you know that from state pension age, if you’re somebody that’s building up wealth for the future, you know that you’re going to get X amount from the NHS pension, x amount from state pensions, x amount from, maybe, rental property. All of a sudden you’re building up a clearer picture of how you’re going to fund that lifestyle when you do start working.

Dr James: 50:47

A personal anecdote from me before we start talking about what we wanted to talk about net. Well, the next sort of subject we wanted to bring up when I was an FD night for for, for better or for worse, when I was a younger dentist and I just began, I had the pension but I declined to pay in to it further and I asked for a refund. Now, whether that was a smart move. whether it was a bad move. From what you’re telling me today probably sounds like a bad move, but that’s what I did anyway. I didn’t really. I just thought that this, I was too young, I’m never going to make it to 65, you know what I mean. I’d rather just have this money in my pocket. That was my logic. But if I could go back now maybe things would be different. But anyway, that’s what I did. When I spoke to the accountants of my foundation dental practice, I realized that because my because whoever ran my practice because the, the contributions had changed, you know, they, they increased with time, not in necessarily in real terms, okay, but the well, just how much. It said in black and white on paper, the figures they’d increased, you know, but I can’t remember the exact details. But as it happened, the accountants, there was a, there was a stack of my money that I’d been accumulating every month that hadn’t actually been going to my pensions, and I only learned this through speaking to the accountant and they were able to give me the money at that point. So, basically, there was this much money, there was quite a bit of money getting siphoned off, and only a portion of that was actually reaching my pension. So what I want to know is how can we be sure that our employers or principal dentists, whatever they’re paying this correctly? Is there any way that us associates can look at what foundation dentists can look at their associate their their pay slip and be able to tell this straight away? Or is it worthwhile checking with your accountant, because it happened to me?

Luke: 52:34

Yeah, okay. I think in terms of keeping track and making sure that you’re being rewarded with the right level of growth in your pension, there’s, there’s, and paying the right level of contributions is probably two elements. The first, ensure you’re paying the correct contribution rate. So there’s a table available online, if you just Google it, that will show you the different income brackets and what the corresponding contribution rate is. That’s the amount that you should be paying effectively. It has what I said earlier your membership fee. It’s important that you’re paying the right level of contributions. And secondly, ensure that you’re you’re checking what record the NHS Pensions Agency have of your earnings. And to do that, I recommend that everybody, if you haven’t done already registers online for pension statements. Just simply Google NHS total reward statements You’ll be able to register. They update them I think it’s once a year, pretty much maybe twice a year, but for some people. So you go in, you’re going to see an updated valuation. It’s going to show you on there what pension they think you’ve built up, but also there will be a table in there for what they think you’ve earned in the NHS and that, as I said earlier, is what’s driving your growth. So you need to check the figures that are on your statement against what your records are in terms of what you think you’ve earned in the NHS, because there’s every chance over time that there might be mistakes made or human error, et cetera. So yeah, by all means have a, have a check, keep an accurate record of your own income. That’s just good practice anyway. If there’s a problem I mean this isn’t really something I normally get involved in, but if you think there’s a discrepancy, then you know, first of all you’re going to go to the practice manager or practice owner and then potentially you’re going to follow up with the NHS Pensions Agency or Dental Services to try and put it right.

Dr James: 54:37

Great stuff, so it’s fairly straightforward then by the science of it.

Luke: 54:40

Yeah, yeah. So I’m cross checking each year and making sure that you know what’s on the statement is what you think should be on the statement.

Dr James: 54:48

We spoke earlier about the ages that you can cash out and it sounds to me like there’s not one answer that encompasses every single individual who contributes towards their NHS pension. Can you give us a quick fire? I know we did talk about this earlier, but can you give us just a quick fire, a little run down for anybody who’s listening, so that they can understand license distinctly, when exactly they can get their hands on their money?

Luke: 55:14

Yeah, so 95 section benefits. The normal pension age is 60. 2008, it’s 65. 2015, it’s state pension age, so it depends on your date of birth. However, you can take your pension earlier than the normal pension age, but it will be reduced. There’ll be an actual area of reduction to account for the fact that you’ve taken it earlier. Again, there’s tables online to help you work out exactly what that looks like for your section, because they differ. And in terms of the private pension, as I said, that’s 55 or it’s about to turn to 57. What’s upOWETX and network? It’s probably worth me actually quickly mentioning it, because I didn’t touch on it earlier how you actually then convert that private pension through to a an income, if you like, when you get to the pension age of a private pension. You’ve got two main. Well, actually there’s two main options. One is to go and buy what’s called an annuity, and that’s you know. A lot of people used to build up a pot of money and then exchange it for an annuity, which is effectively an income for life. So, in essence, what you’re trying to replicate is something similar to the NHS pension scheme. In truth, the sales of annuity products has dropped significantly over recent years because the rates have plummeted and because of the treatment of the death benefits. The second option is to draw down on the pension using one of the flexible income options. So there’s the option to take the lump sum up front and then keep the balance and draw in it as an income, or you can stagger the withdrawals and each payment that you take out of the pension, 25% of it will be tax free and the balance will be taxable. So there’s a lot more flexibility as to how you draw on that income. And if you don’t want to, you don’t have to take the money out of the private pension at all. As I said, you can actually pass it on to family members. So there’s a lot of flexibility there and it is investment based. So you’ve got to. If you’ve got a private pension, you’ve got to clearly take into account the fact that the money is invested in the markets and they go up and down and you have to plan for that and for some people that’s more straightforward than for others. There’s a lot less security in a private pension than the NHS pension.

Dr James: 57:51

Ultimately, there we go, guys. You put the old chestnut to bed. Boom, boom, boom. Nice, succinct answer and possibly what is a world first, that someone has explained when we can get the money out of the NHS pension without us having to troll through all the legal documents and the small print and things like that. So smash them, Luke. Thanks very much. We were talking earlier about private pensions, so SIPs etc. Versus ICES. What should take on that matter?

Luke: 58:19

Yeah, so for me I mean from a technical angle there’s a really just different terms of their tax treatment. We touched on that earlier. You know, with a pension you’re getting tax relief on the way out, but your tax on the way when you, when you draw on it. So on the way back out, the other end and the growth in the income, in the assets that are in the pension grow tax efficiently whilst it’s there, and then you’ve got the inheritance tax benefits and then an ICES. There’s no tax relief on the way in, but there’s no tax on the way out and whilst it’s in there again it’s very tax efficient. But for me the main difference is really about access and from a financial planning perspective, if somebody comes to me and they say you know, luke, I’ve got money that I want to set aside for the future, the key thing I want to know is when do you need that money? If you need that money long before you’re going to get to pension age, then clearly you’re going to have to use something like an ICES. If you don’t need that money and you want to set it aside for financial independence for the longer term, then because of the tax reliefs, then a private pension is going to make a lot of sense. So really it’s it’s goal led. You know, the first thing you should do when you’re investing your money is know why you’re investing in the first place. What is the goal that’s surrounding this? You know, if it’s short term, am I putting money away for when I see quite often I’m putting money away for my children’s future, for example, Well, there’s no point putting it into a pension. So it really is dependent on your personal situation and your circumstances and from a technical perspective, as I said, it’s really about the tax treatment.

Dr James: 59:52

Interesting stuff. Look, you’ve given out so much value in this podcast. I’ve honestly learned a ton about the NHS pension. I must say you’re probably the most prepared beforehand podcast guest I’ve ever had, for anybody can see visually Luke has an essay of notes in front of him and I think that’s testament to your thorough, your, your, your thorough nature and you’ve went through this rigorous, rigorously, basically, and talked about every single linen out of the NHS pension quite clearly. And what blows me away is there’s actually more to it than this that you sort of hinted at earlier.

Luke: 1:00:23

Yeah, scratch the surface.

Dr James: 1:00:26

Yeah, that’s where you come in. I just wanted to hear a little bit more about line meet and what it is that you do to help us dentists understand the pension even more.

Luke: 1:00:33

Yeah, sure, I mean the NHS pension. Knowledge really just comes from helping dentists with their overall finances and, as you said at the start, I help. I’ve got your traditional YFA services, if you like. If somebody comes to me and they need to set up a private pension and they don’t know that, know how, and they don’t want to take the time to do the research and everything else, then for a fixed flat fee I can sort that out for them. In the same way I can set out, sort out, just a normal investment. Equally, though, the big part of my service offering is around the financial planning element, which really entails sort of auditing and optimizing someone’s financial affairs. So it’s a case of looking at where they are now, where they want to get to in the future, and then working out a plan and a strategy to help them achieve those goals. So it’s not product led, it’s planning led, and that’s the difference. I think personally to a lot of advisors your encounter who their main goal is to try and flog you and I said so and in terms of ongoing service options, there’s different, different options to suit different people. As I said, I’m moving all of my business to fix fees, not just initial advice, but also ongoing services to one. Next year, I’m going to hopefully have all clients on a fixed flat fee charging model, which effectively means I’ll be charging in a similar way to to an accountant, which, to be honest, that puts me in the minority as far as financial advisors go, who mainly charge based on a percentage of the assets that they look after.

Dr James: 1:02:07

I, what’s in your, what’s in your investment accounts, I’d be because that is why a lot of people there is their own, they’re so reticent to use financial advisors because they know of the percentage. So the fixed fee thing, that’s something I’ve never come across and I wasn’t even aware that was the thing.

Luke: 1:02:27

Yeah, I mean the percentage model is our cake came out of the. You know the industry previously used to get commission for moving products. That got stopped and in essence a lot of advisors just copied the same percentage model that was on offer and that’s their way of charging. But to be honest, my personal view, if you’re a young associate and you just want to set up a pension, you don’t necessarily need ongoing financial advice for that. You put yourself into a pension product that takes care of itself, dip into financial advice as and when you need it and let your assets grow without the drag of all these additional fees that just stack up on top of each other. Fees are one of the biggest drags on investment performance Massive drag actually, when you compound it over long time periods. But yeah, there’s very few people that are charging fixed fees out there. I think in 10, 15 years it might be the norm. It’s going to take a few of us to possibly stick our head above the parapet and take some flack, but maybe it will move that way in due course.

Dr James: 1:03:35

Hey, to make it normal you’ve got to crack some eggs.

Luke: 1:03:37

No, I mean the only other thing I’d say. I mean I’d be lying if I said I’m desperate for lots of people to call me and ask me loads of questions about the NHS pension scheme. I might, in the new year, come up with a you know, an hourly rate or something to help people if they want to call up and get some advice on that front, and I can charge them a time based charging structure. I generally think I can add value to most people’s financial affairs in one way or another, and, based on the flexibility in my service proposition, there’s something there for everybody. The only other thing to mention, though, is if anybody does want to get in touch. I do have a wife, as you mentioned, that’s 37 weeks pregnant, so I’ll be having a bit of time off, so if I don’t respond immediately, then please don’t think I’m being rude. I’m just trying to learn how to be a dad.

Dr James: 1:04:28

I think we’ll forgive you on that one. Look what are the fees that an IFA would typically charge. What percentage would we expect to look at?

Luke: 1:04:40

It varies enormously. So if you go to an IFA a traditional percentage charging model they will charge you anywhere up front the money you invest, anywhere between maybe one and even up to sort of 4 or 5%. So you go to some of those massive yeah, huge, huge. So you go somewhere. You’ve got 100,000 pounds to invest immediately you’re losing, you know, 3, 4, 5% of that. If you compound that I, you know effectively the opportunity cost, what that would translate to over long time periods. It’s absolutely enormous. And then, on an ongoing basis again, my advisor charges vary from probably 0.5 to 1% per annum on a percentage model. I’m in the middle of, exactly, you know, working out exactly what my fixed fees are going to be for the new year. But if anybody wants to get in touch, then they can just drop me a note.

Dr James: 1:05:40

I’m going to shoot from the hip a little bit with this next part. Look, we’ve got some questions from the group. I hope that’s okay with you.

Luke: 1:05:46

Sounds great. Yep, let’s go.

Dr James: 1:05:47

Let’s go. So first of all we have Mandi Burring. Good evening to Mandi Burring. He would like to know how do we know that the pension is calculated correctly? Did we correct me if I’m wrong? Look, did we sort of skirt over this earlier when you were you were referring to that checking on Google your income ban tax.

Luke: 1:06:11

Total, yeah, total reward, yeah, so Google.

Dr James: 1:06:15

The website wasn’t there or something something else.

Luke: 1:06:17

So total reward statement Google it. It’s just basically the portal they use to give you access to your pension statement, which is updated each year. So go into that, have a look at that, cross check it against your own records. That’s going to tell you how they’ve been calculating your pension and you should be able to determine whether it’s accurate or not.

Dr James: 1:06:38

Nice and simple, and Mandi could also like to know, if we realize that it’s not calculated correctly, who would we contact? Any ideas?

Luke: 1:06:45

Depends on which element I mean primarily. The only the main reason why it might not correspond to what you think it should is down to the earnings, and then the first portal call will be your whoever’s been responsible in terms of the practice you work at to try and put that right.

Dr James: 1:07:00

Good stuff. Sheila Lai, lovely lady very active on the group. She would like to know what is the advice from yourself if you leave NHS Dentistry. Do we just forget about it until retirement, or is there some sort of kind of wizardry that we can do, I suppose, to capitalize on the fact that we’ve left, get it up a little bit early? I don’t know.

Luke: 1:07:19

So if you completely leave the NHS, so you have no extra NHS earnings, then everything you’ve built up will effectively grow with inflation until you get to the normal pension age in exactly the same way. So, in essence, you’re then gonna have to come up with another vehicle to help fund your financial independence, one of which might be, as we said earlier, private pension. It’s a similar story. Actually, I’ve encountered lots of people that obviously have mixed income. So if you’re 50% NHS, 50% private, then clearly you can’t just rely on the NHS pension because you’ve only got 50% of the earnings, so you’re only gonna get 50% of the pension that you would have otherwise built up. And so the same story you need to look at other vehicles to help you get to that financial independence point. And yeah, in terms of past benefits, they’re just gonna sit there and they’re called deferred benefits. You can check in on them. So if you go, as I said, you get registered for that site, get your statements, you’ll be able to see how it’s building up over time in exactly the same way.

Dr James: 1:08:25

Smashing hope that’s helped, Jailer, when were we? So? Next we’ve got David Hoy and David would like to know how do we calculate when we have breached the lifetime alliance?

Luke: 1:08:40

Yeah, lifetime allowance annual allowance is another meaty subject, probably not for today, but I’ll touch on the main points. So, lifetime allowance simple formula to work out where you are with it you go and get your statement from the online portal, total reward statements. You multiply the annual pension figure by 20 and then you add on any lump sum entitlements. So, and whether you’ve got any lump sum entitlements depends on the section you’re in. But you’re adding up the total of the annual pension multiplied by 20 plus the lump sum entitlements. So if you, for example, you’re an older dentist and you’ve got a 1995 pension, 50,000 pounds accrued 20 times 50,000, a million plus the lump sum 150,000 is 1.15 million. Effectively, that’s your value for lifetime allowance purposes. And then you’ve got to add in the value of any of your personal pension SIPs, avcs, any other type of private pension and what you’re looking at there is actually the fund value or the investment value of that account and you’re just adding that on top. And then you’re looking at where you stand in relation to the lifetime allowance. At this moment in time in this tax year, as we’re recording now, the lifetime allowance is 1,073,100 pounds and it’s due to go up every year with inflation. So that gives you a rough idea. The figures I gave earlier 50K pension three times lump sum in the 95, 1.15 million you’re over the lifetime allowance.

Dr James: 1:10:15

Am I right in saying long story short on that one get some advice?

Luke: 1:10:19

Yeah, definitely.

Dr James: 1:10:21

Yeah, that’s what I gathered from that, because what you said, those are some rules of thumb effectively.

Luke: 1:10:26

Yeah, that’s a really very quick summary. It’s quite a detailed and complex area and there’s a lot of stake with those kind of numbers. The annual allowance is another meaty subject.

Dr James: 1:10:40

Oh, was that a question? I must have missed that one.

Luke: 1:10:43

I think it was a question on a question. So the annual allowance is a complex subject. As I said, it’s something that some people might need to get advice on, but it’s basically it’s a restriction on how much you pay into defined contribution pensions. So your contribution into things like SIPs, personal pensions, avcs, stakeholder pensions, anything like that, it’s the gross amount you pay into those Plus how much growth is the growth that you’ve had in your NHS pension. It’s got nothing to do with your contributions into the NHS pension. It’s your growth in the NHS pension. And the big problem there is you will not find those growth pensions. You will not know how much your NHS pension has grown according to these calculations by just going on and looking at that statement online. You have to request the figures manually and to do that the NHS pension will possibly take three months to come back to you with the figures. And you know most people, all of my clients I get them to write off and get those figures every year so we can keep track of how much annual allowance they’ve got, how much they’ve used If they’re paying into private pensions, how much they can pay in if they’re also in the NHS pension. It gets very complex. So the annual allowance is a bit of a beast. At the moment the limit is 40,000 pounds, but it can be reduced all the way down to 4,000 pounds for higher earners because of what’s known as the tapered annual allowance and that’s just. That’s horrible legislation, sloppy legislation. But it’s basically whether you’re tapered or not is based on your total income, so it’s not just your NHS income, it’s all of your income rental income, private income, nhs income, all of it bundled together. That will determine whether you’ve got the 40,000 allowance or you’re tapered. And, as I said, the key there is understanding. If you’re paying into NHS pension and private pensions, you really need to know where you are with the annual allowance. If you’re a high earner, you really need to know where you are with the annual allowance, because you could be walking into a bit of a tax trap.

Dr James: 1:12:43

Look, thank you so, so much for all of that. That was absolutely brilliant, I think, touch wood, we’ve just made it to the end of the podcast. Without your wife, you haven’t a run. I tend to your wife and give up.

Luke: 1:12:53

I’ll go check.

Dr James: 1:12:54

I think we got there. I think we got there smashing stuff. Congratulations once again on the incoming newborn. Thank you so much for coming on the show. I’m sure you’d like to get off now and enjoy the rest of your Saturday evening. Yeah, cheers, james, thanks for having me on Absolutely no problem at any time, and if anybody wants to get in touch with Luke, feel free to do so. He’s on the group. His name is Luke Hurley. He’ll be able to offer you more insight on the subject matter of this podcast, ie NHS pensions. Wonderful stuff, luke. I’ll let you get off now. A pleasure, as always. Cheers, mate. Nice one mate A little bit.

Dr James: 0:41

Fans of the Dentists who Invest podcast. If you feel like there was one particular episode in the back catalog in the anthology of Dentists who Invest podcast episodes that really, really, really was massively valuable to you, feel free to share that with a fellow dental colleague who’s in a similar position, so their understanding of finance can be elevated and they can hit the next level of financial success in their life. Also, as well as that, if you could take two seconds to rate and review this podcast, it would mean the world. To me, what that would mean is that it drives this podcast further in terms of reach so that more dentists across the world can be able to benefit from the knowledge contained therein. Welcome. Welcome to the Dentists who Invest podcast. Good evening everybody. Welcome back. Another episode of Dentists who Invest podcast with myself, james Martin. We’ve got a really, really interesting guest on here tonight. This was a hotly requested episode. The reason I say hotly requested is I ran a poll not so long ago on the group and top of the poll came the subject matter for this particular podcast, which is, of course, nhs Pensions. No surprises, no prizes for guessing. We’ve got a wonderful guest with us tonight. He’s very well qualified to speak on this matter. He’s an independent financial advisor. He has expertise, particularly on NHS Pensions, because he deals with so many of us dentists on a day-to-day basis. I don’t think anybody has ever sat me down and actually explained to me why the NHS Pension is so lucrative inverted commas. The reason I say that is all I know is that the received wisdom is that apparently it’s very good, but I don’t think any of us fully know why, and I don’t even fully know what superannuation means, and I don’t think I’m alone on that matter either. So this is why I thought it would make such a great podcast. His name, the guest that we have on tonight. His name is Luke Hurley. Welcome, luke. How are you?

Luke: 2:29

Hi James, Hi.

Dr James: 2:31

Thanks for taking some time out of your day to talk to us, luke.

Luke: 2:34

No problem.

Dr James: 2:35

Luke is at a very interesting time in his life. His wife is going to give birth any day, so we might have to cut this short. I hope not. I hope our fingers crossed. As I say, it’s literally any day. Noise and that right look.

Luke: 2:48

Yeah, last two weeks Interesting stuff.

Dr James: 2:50

Congratulations, Go boy. Thank you. Are you able to say that?

Luke: 2:52

Don’t know.

Dr James: 2:53

Yeah, kept it a surprise have you narrowed it down to any potential names or anything like that.

Luke: 2:57

We’ve got a short list. We’ve got a short, a long short list.

Dr James: 3:00

More of a long list, then I see.

Luke: 3:03

Yeah.

Dr James: 3:03

Fair enough, I like it. I like it Awesome. Well, congratulations, as I say, smashing. So what I think it would be nice to do is just kick off with a little bit of an intro for yourself, luke. So if you’d just like to speak a little bit about who you are, your journey thus far in your career and why you’ve decided to focus on helping us dentists, yeah, sure.

Luke: 3:25

So, university-wise, went to Warwick University, finished up there, took some time out, did an internship in the City of London at a wealth manager, got qualified, accredited as a financial advisor. That business was then sold to a large corporate. So, similar to the dental world, there are some firms that are sort of hoovering up some of the smaller businesses. I decided not to go with the principle not to join the new business and instead set up my own firm doing what I enjoy. It just wasn’t a good fit for me or my clients, so I decided my own thing. All of my clients at that point came with me, so that sort of de-risked the transition in many ways. So it’s not like starting from scratch and in truth I’ve not really looked back since In terms of why dentists I’ve got clients that are associates through to multi-practice business owners. I think as an IFA you can either really focus on sort of geography where you live ultimately or where your offices are or you can focus on profession. I think for me, profession made more sense. Everybody’s financial situation is different, but focusing on a profession enables you to understand and be aware of common themes, particularly in relation to challenges and opportunities from a financial perspective, and then from a business angle as well. From a marketing perspective, obviously it’s easier if you’ve got a niche focus when you’re building up a business, and being able to tailor your services also helps. From an operational perspective, and then from a purely personal perspective. Hand on heart, I actually really like my clients. I’m not saying all dentists are great people, but most of the people I meet have similar values to me and that’s quite important as well.

Dr James: 5:34

Good stuff, mate. Good stuff. So it sort of happened organically then effectively, by the sounds of it. Yeah, the NHS pension is a really interesting one because we’re signed up to it by default when we start out as foundation dentists and I mean, I’m sure there’s a document somewhere with some small print in it. But what I think would be really useful is if the denaries for our study days, the denaries, had a day that was dedicated to finance or perhaps even dedicated to de-jarguing if that’s even a word de-jarguing the NHS pension, because, let’s be honest, life’s too short to read small print and things like that. How many times have I ever found myself pouring over a legal document in my whole life? I should do it, but I don’t, and I think a lot of people will be in that boat as well. So, deenaries, shout out to the deenaries if you’re listening. There’s a good course day in there somewhere and I definitely think that’s one that will be very relevant. But having said that, I’m not going to bad mark the deenaries too much, because some of the course days that they arranged for foundation dentists were actually really astounding, and to think that it’s all paid for the NHS, I actually feel really grateful. But nonetheless we digress. Look, can you succinctly explain to us what the NHS pension is, how it works, break it right down? Even if you have to kind of fundamentally address or explain, describe what a pension is itself, then I actually think, even though that’s the very, very basics, there are people out there, myself included, who could probably benefit from that.

Luke: 7:02

Yeah, okay, very high level. I mean this is a. As I said before, this is a bit of a beast, this topic, so I will try to be succinct. I’ll try to simplify some elements to make it informative but also easy to follow. A pension really is just a vehicle to save for your retirement when you stop work. The key point and that probably the biggest misunderstanding when it comes to the NHS pension is that it’s not going to provide you with a pot of money. So there is no designated treasure being built up with your name on it. In essence, what it provides you with is income. So it’s a promise from the UK government to give you a fixed, guaranteed, an index linked so effectively it will go up with inflation payment in your retirement years. So every month a pension payment will be made into your bank account like clockwork. So in terms of what comes out of the other end of it, it’s actually pretty closer to the state pension than a private pension in that it’s an income. It’s not a pot of money. It’s not an investment-based pension like your SIPs or personal pensions and things of that nature.

Dr James: 8:23

Interesting.

Luke: 8:25

That is probably the biggest misunderstanding that people have, and that’s quickly followed up by, without doubt, the biggest misconception, which is that your contributions that you pay as a member of the NHS pension are not being directed into a pot with your name on it, so the contributions that you’re paying are effectively going to the government, who are then using that money to pay those people that have already retired. There’s no investment element, there’s no designated fund. It’s what’s actually called an unfunded scheme. So, to be honest, the better way to think about the contributions is to think of them as a membership fee. That’s what I say to all of my clients your NHS pension contributions are like a membership fee.

Dr James: 9:12

Really interesting. I really like that.

Luke: 9:15

So I mean, they’re kind of like the cost of entry, if you like. They’re tear-de-corn to how much you earn, but they are not what drives the growth in your pension. So your contributions do not drive the growth in your NHS pension. So the next question is or the big question is, what is actually driving the growth in your NHS pension? And the simple answer is it’s your earnings. It’s your NHS earnings. Every year they will keep a record of your NHS earnings. So if you were to get your pension statement, you’ll see a table on there and it will have a breakdown of what they think you’ve earned in the NHS since you first started. Essentially and that’s key, and I’ll come on to talk about the statements a bit later the next thing that you really also need to understand is some of the complexities, because there’s more than one section of the NHS pension. So there’s actually three sections there’s the 1995 section, the 2008 section and the 2015 section. So three versions or three variations of the NHS pension essentially, and they all have slight differences between them and really what it boiled down to was, in 2008, the government trying to reform the pension. They had their first attempt and then then revisiting it for a second time, and that’s where the 2015 section comes from. If you joined the NHS before 2008, then you will have benefits in probably in the 1995 section, unless you opted to convert them. And equally, if you joined after 2008, you will have benefits in the 2008 section and then in 2015,. As a sort of a transitional process, they’ve effectively been shepherding everyone from those two sections into this new 2015 section. So the likelihood is, if you’re working before 2015, you’ll have two sections. If you’ve only started since 2015, you’ll only have one section you following.

Dr James: 11:37

Yes.

Luke: 11:37

Yeah, okay. The next thing in terms of how that sort of actually just one point worth mentioning the benefits you’ve built up in the previous sections are ring fence, so they weren’t converted into the 2015. So they’re effectively earmarked, left alone, deferred, whatever you want to call it, and everything you build up going forward will be, in this 2015 section, the main differences between them, quite honestly. The first is the pension age, ie the normal pension age, basically when you can start taking it. So in the 95 section it was 60. The 2008 section it’s 65. 2015,. It is your state pension age. To find out your state pension age, just Google state pension age calculator and it will take you to a site and you’ll be able to figure it out. James, you and me, it’s going to be 68, unfortunately, but that’s. It’s different based on your date of birth.

Dr James: 12:40

And so I didn’t interject that state pension age. It sounds like to me that they’re wording it in that sense intentionally, so that they can change the state pension age as we go through. So let’s say, me and you, we get to 60. They might have shifted the goalpost to say it’s 75 by then. Is that what you’re getting at? Yeah, oh, I see Right.

Luke: 13:00

However, I don’t I mean the changes to state pension age to go from sort of where it was to where we are now at 68. To quite some time, If we go from 68 to 75 in our lifetime, I’ll be, I’ll be, I’ll be hacked off, but I hope not.

Dr James: 13:18

But it sounds like they’re. They’re being a little bit greasy there, deliberately to to, to to yeah, interesting.

Luke: 13:25

Definitely yeah. The second main change between the different sections is what we call the accrual rate, and basically that’s the secret ingredient in terms of converting your earnings into pension. So the accrual rate is what’s applied to your earnings to work out what the pension is going to be as a result of those earnings. To keep it simple, I’m just going to focus on the 2015 section, as that’s what most people will now be building benefits in. If you if we say you’ve you’ve literally just joined the NHS pension in this tax year and for this tax year you earn 100,000 pounds. To keep it again simple for them, for the math, the accrual rate for the 2015 section is 154th, which, in percentage terms, is 1.85%, or near near enough. So for 100,000 pounds multiplied by 1.85%, you’ve built up 1,850 pounds of income in the pension that will be paid to you every year for the rest of your life, from state pension Age, right the next tax year. So we now fast forward into 21, 22 tax year. You earn another 100,000 pounds. Conveniently, you’ve now added another 1,850 pounds of income that they promise to pay you every year for the rest of your life, from normal pension age until you die, and in essence, you add them together so each year that that amount is building up. The amount of income they’re promising to pay you is building up.

Dr James: 14:58

That’s so well explained, you know that totally makes sense to me now. I never understood that before.

Luke: 15:03

Yeah, so two years at 100k. 1,850 has built up in each year. So you’ve now got 3,700 pounds as an annual pension that’s going to be paid to you every year for the rest of your life, essentially from pension age.

Dr James: 15:18

I guess where you’re going with this is there is a cap at some point, because I could see how it’s if you were contributing to that for a long, long, long time, you might get an incredibly good deal, you know.

Luke: 15:29

Well, the cap is nationwide and it’s called the lifetime allowance and it’s not actually a cap. You can carry on going in building up benefits, but there’s different tax treatment once you go over the lifetime allowance. So that’s really how they.

Dr James: 15:44

Not to take you off script or anything like that. Yeah, no just going to come to that later, yeah.

Luke: 15:48

Yeah, in a roundabout way, there is a you know, the government have applied some form of mechanism to yeah. Yeah, on top of that, you’re building up that based on that accrual rate. On top of that, you’ve actually got something. Even I think he’s actually really powerful which is, if you think about it, 100,000 pounds in 2020 is going to buy you a lot more than it will do in 2030 or 2040 because of inflation, and inflation is the big wealth destroyer over time. It’s the number one risk of any long term wealth building journey. So what? What they do is they, as they keep a record of your earnings. They revalued them every year with CPI, which is a measurement of inflation plus 1.5%, which is actually really powerful because, in effect, the previous year’s earnings and the resultant pension is compounding over and above inflation, from the time that you built it up through to the point where you start taking it, and if you’re looking at two, three decades, that’s. That is powerful.

Dr James: 16:52

Yeah, definitely.

Luke: 16:55

So, to quickly recap, the bulk of your growth in the NHS pension is a result of your earnings. Your earnings are converted into pension because of the accrual rate and then every every past year’s earnings are then being revalued with CPI inflation plus 1.5%. And that in terms of the biggest points throughout that and the biggest misconceptions that I see. First of all, it’s that the contributions have no impact or no role in that process and secondly, that it’s not a pot of money. There’s nothing set aside for you. It’s your contributions are going to the government, who are then paying them out to people that have already retired. A few, just other minor not minor actually the major, but a few other key points. The first is your contributions. Either membership fee is deducted from your gross pay or your gross earnings. So in effect, you’re getting tax relief at your highest or at your marginal rate, what we call marginal rate. So if you opt out of the NHS pension, so you decide you no longer want to be a member of it, which you can do Like everybody in this country you have to be auto enrolled in the pension, but you can, if you choose, opt out. But if you do that, you’re not going to save 12 and a half, 13 and a half, 14 and a half percent, which is your very different contribution levels, because that’s coming out of your that, those contributions coming out of your gross pay, you’re going to have to effectively pay tax on that money instead. Once in payment, the pension increases each year with inflation. So one of the big benefits of the NHS pension is you are protecting yourself against the against inflation, the increase in the cost of living over time, which is really underestimated. In recent years it’s been a lot lower. If you look at the average over the last 50 years, that is about 4% as an average figure. That’s because we’ve had some periods of really high inflation in past decades and inflation at the moment is very low. But you know the inflation over a long time period is an absolute wealth destroyer. The next point to make is the income payments you get out of the pension when you do stop working are taxable income. So it’s not just pay to tax free is taxable income, so you’ve got to add it to your rental income, your state pension income and anything else that you’re drawing an income from. That said, a lot of people when they get to retirement they will possibly drop down a tax band so you might actually drop into a basic rate tax territory, for example. And then also you’ve got the option to convert some of the pension into a tax free lump sum. We call it a commutation factor. It’s one to 12. So in effect, you give up one pound of taxable annual pension and you can get 12 pounds of tax free lump sum. Incidentally, on the old section, the 95 section, used to get a standard lump sum, but in the new section it’s you know, you have to give up some of the pension for it, and that really is At a very high level. There’s a lot more detail potentially in there that I don’t think we need to delve into today, but that’s just scratching the surface?

Dr James: 20:32

is it because I was thinking to myself there’s a lot to this that I didn’t realize, but wow.

Luke: 20:38

Yeah, I mean they’re the high level. Yeah, main points, I think, and some of the main Misconceptions, hopefully, I think you’ve addressed that was the perfect level of depth there.

Dr James: 20:47

Yeah, because I could just feel towards the end that I was beginning to get a bit confused because there was there was so many, so no, that was. That was really good, actually. I just had a question when you were speaking about the how they they adjust for inflation, basically. So they use CPI and they add 1.5 every year. It’s not right. So that means that it’s always ahead of inflation, mm-hmm, isn’t it? Oh well, that’s an amazing deal, yeah, yeah, other pensions don’t do that, do they?

Luke: 21:16

I Mean this is a what we call a DB pension. Yeah, a DB pensions are known for being good at protecting you against inflation, which is that’s really good.

Dr James: 21:27

It’s just you’re guaranteed to beat inflation by at 1.5% Real quick, guys. I’ve put together a special report for dentists entitled the seven costly and potentially disastrous mistakes. The dentist may or never. It comes to their finances. Most of the time, dentists are going through these issues and they don’t even necessarily realize that they’re happening Until they have their eyes opened, and that is the purpose of this report. You can go ahead and receive your free report by heading on over to wwwdentistunevestcom forward slash podcast report or, alternatively, you can download it using the link in the description. This report details the seven most common issues. However, most importantly, it also shows you how to fix them. I’m really looking forward to hearing your thoughts.

Luke: 22:22

Yeah, I mean that to be perfectly honest. When they brought out the changes in 2015, I was amazed that that stayed in there. If I was trying to save money on In terms of providing this pension, that would have been one of the things that I’d have possibly tinkered with, so that is valuable.

Dr James: 22:38

Science generous, yeah, when you spoke about what we just Leads, and it leads on to the next question, very nicely, actually, because I did want to know what’s the what’s the split, what’s the pros and cons of having your own private pension versus having the NHS? Is it as black and white as the NHS pension is almost always, without a shadow of a doubt, better, or are there some private pensions out there that you know off that might be beneficial to certain people in certain circumstances?

Luke: 23:06

Yeah, I think I’m gonna take a quick step back. So when I address this kind of question, I Go again look high level from a financial planning perspective. You know that one of the key tenets is to start with the end in mind. So if we think about what the goal is in terms of a pension or Retirement savings vehicle, for me, for everyone, everybody’s number one long-term money goal, financial goal, is financial independence. So for those that you you know, who are listening, that don’t know, financial independence is basically the point at which you’re working because you want to, not because you have to, and I actually Prefer that term to the term retirement, because I think retirement as a concept is a bit outdated. It sort of suggests that you get to a finish line and then you’re put out to pasture and it has, I think, negative connotations for some people. I prefer to talk about financial independence and what that really it is to plan financial independence when we’re when I’m doing financial planning for somebody, what that really entails is looking at what do you need To to be financially independent, what’s the cost of your lifestyle? How are you going to fund your living expenses when you no longer have money coming in from your earnings and that’s that’s really the core issue and a big problem with that. I think a lot of people have no idea what they’re going to need when they they stop working and, yeah, it’s different for everybody ultimately. And but there is some research actually that I was looking at last week by a group when it’s called retirement living standards and they’ve actually defined three levels of Lifestyle for people that have finished work. The minimum level, which, I would to be honest, is survival costs, is, for a couple, 15,700 pounds per annum. The moderate level, which I guess is the national, is the average, I guess, 29,100 pounds per annum, and they are they are terming a comfortable retirement 47,500 pounds per annum. Now, that’s money spent, so that’s net, and obviously you need to factor in that a lot of your costs. If you’re, if you’re still working, you’ve got mortgage, for example, while going on things like mortgages that will be paid off by the time you get to financial independence. So this is purely money being spent on lifestyle. The figures incidentally a little higher if you’re in, if you’re in London, bad luck. T4 as well today, and the that’s a national average. So there’s different levels and obviously Some people will have a more expensive lifestyle than what they’ve termed comfortable. I see clients that spend a lot more than that and I see clients that spend less than that, and so it’s different for everybody. But the key is to work out roughly to what it’s going to take for you to be financially independent and then from there we work out really how, how we’re going to get you to that point and what vehicles are we going to use to enable you to get to financial independence. And I use the analogy of your stream and your reservoir. So your stream is effectively income that’s going to float you on a regular basis. And the three main ones that I encounter with clients. As first, state pension and this is basically just the pension that everybody gets from the government. If you’ve been paying national insurance for quite some time the new state pension you have to have 35 years of qualifying qualifying years of paying the right level of national insurance or have the earnings in those years to qualify If you are retiring. Today, the full state pension is just over 9,000 pounds per annum per person. So a couple you know you’re looking at in today’s terms about eight just over 18,000 pounds per annum, which a lot of people neglect to think about is actually a tidy sum. 1500 pounds a month is going to go some way towards meeting those living costs I’ve just mentioned. I mean, that’s your survival cost really for a lot of people. So you’ve got your state pension. Don’t underestimate it. You’ve got second rental income. I don’t know, james, if you’ve done a podcast on this, but obviously a lot of you know that’s a massive topic in itself. Rental, rental income.

Dr James: 27:35

We had Harry Singh on Houses yeah, so a lot of my clients have rental properties.

Luke: 27:41

That is another stream, if you like, another source of income to get you to financial independence. And the last Topical is ultimately Define benefit pensions, which one of which is the NHS pension. It’s a stream of it. You know it’s feeding into that stream. It’s a regular source of fixed income. Call it passive income, not turn all income, whatever phrase you want to use, it’s its income. That’s going to be very useful to help you Find the income that you need each year to meet those living costs ultimately. So that that’s that. That’s key. And I think at that point, actually, it’s worth worth noting that these pensions, the NHS pensions, are type of the. It’s called a defined benefit pension. They used to be quite common and a lot of employers in the in the private sector had had them on offer to their employees. They’ve they’ve pretty much closed. Most have closed to new entrants and that gives you, I guess, a hint at the fact that there’s something of value there, because they were costing them too much and they actually now most employers offer DC pensions, which is the alternative, which is effectively things like sips and personal income, effectively things like sips and personal pensions and group personal pensions and things like that, so that should give you a steer. The only real Employer that’s offering them is the is anything in the public sector. You know they’re still operational, so that that should give you a hint as to the value in them and the cost of running them. And, as I said, really the value of the NHS pension in many ways is having that fixed, secure, guaranteed index linked income that’s going to be hitting your bank account. You don’t have to do any planning for you know it’s going to arrive and you know it’s there to help you fund your fund, your lifestyle. To contrast that with the reservoir, to go on to the second part of the story, the reservoir for me is just a giant pool of money. It’s money that you’ve saved and invested to help you reach financial independence. It really refers to what we call your liquid assets, and they’re liquid because ultimately you can access them and utilize them in quite a short period of time. So to contrast that with property property is illiquid Because if you want to Encache it and sell it, you’ve got to go through a reasonably lengthy process, especially with the current state of the market. So things are liquid assets. We’re talking, we’re talking ISIS, we’re talking Any cash pots. You’ve got any money in bank accounts we’re talking any investment accounts you’ve got we’re talking any defined contribution pensions, so SIPs, any investment based pension, basically, is In that pot of money, in that reservoir that you’re going to use in the future to draw down, to help supplement your Streams of income, to give you the lifestyle you need when you no longer, when you’re no longer working. Really, the main difference between things like ISIS and SIPs and things like that, really they’re just tax wrappers. They’re just different tax wrappers. They’re just different pots of money with different tax treatment that are being wrapped around an investment portfolio. And if you’ve used up your ISA and your pension allowances, then you know you you’d look at a general investment account again. It’s just an investment account but it doesn’t have the tax benefits of an ISA or of a pension. But with a, with a private pension, a DC pension, a SIP, you can actually invest in pretty much Anything except for a residential property. It’s so much option in terms of what you want to then do with the money. You can keep it really simple, put it in a you know, a multi-asset fund. You can go really complex and buy a commercial property at the freehold or a leasehold. I’ve helped practice owners in the past by their practice buildings, through their pensions, through their SIPs. You know there really are endless options in terms of the money. You know there really are endless options in terms of what you invest in through the pension. It’s not the pension that’s Going to give you any growth or any Positive outcome. It’s because that’s just the tax wrapper, it’s what’s sat inside of it, the same way as an ISA. An ISA on itself is not going to give you a good return. It’s, it’s what’s in the ISA that’s going to drive those returns Um.

Dr James: 32:18

I didn’t know that about the SIP, I just thought it was. I don’t have a SIP personally, have an ISA, so I I mean to my knowledge you can’t do that with. I mean an ISA to me is just you just buy stocks and bonds within it, but you’re saying that you can also Use it to buy your commercial premises. That your practices in. Does that?

Luke: 32:36

not, not not through an ISA.

Dr James: 32:38

It doesn’t apply to an ISA, right, that was so, yeah, right, fair enough, but it does to a SIP. So there’s a few more sort of caveats to it. Yeah, which was distinguished them from each other interesting?

Luke: 32:47

Yeah, I mean the ISA really you’re. You’re either wrapping it around a savings account, aka cash ISA, and getting next to no interest at the moment, or you’re wrapping it around an investment portfolio and benefiting from tax free growth, tax free income. That’s all an ISA is, effectively, and then a SIP is. You’re getting the tax relief on the way in. The money’s then growing, free of capital gains tax and income tax. So it’s you’re getting that compound growth in a really tax efficient environment and then, when you Choose to draw in it, you’re potentially getting a tax free lump sum 25 percent and the balance, when you do take it out the pension Is is taxable income. The other real benefit, to be honest, of a Private pension is that you can pass on the benefits you’ve built up To your family effectively. So if you die before 75, then the money you’ve built up in a private pension call it, the terms are synonymous really SIP, private pension, personal pension, it all means the same thing ultimately the money you’ve built up in one of those, if you die before 75, you can pass on the full amount to your nominated beneficiaries free of any form of tax.

Dr James: 33:59

Yeah, sit down and invest in personal pensions, so I suppose it’s it makes. I never actually thought about it, but I suppose that it makes sense that it’s treated the same legally as a variety of different pensions. Is that accurate? That’s what you were saying, wasn’t it?

Luke: 34:11

Yeah, yeah, so that yeah. It never thought of it like that. Yeah, the tax treatment is the same, the names for them vary you know the financial services and she loves to complicate things for profit and having lots of different terms really helps mystify things but they all pretty much give you the same, the same options and outcomes. I mean SIPs as a back in the day SIP self-invested personal pension used to be able to access and invest in some slightly more exotic investments not always for the benefit of the for the investor, often for some crooked advisors that put money in all kinds of strange, weird and wonderful things. But nowadays, to be honest, most pensions on offer are SIPs. That’s just the name that they’re allocating. So even a really basic investment based pension. If you went to somewhere like I don’t know one of the platforms on offer without name checking anyone, they’re probably gonna offer you a SIP.

Dr James: 35:13

Where do you stand on this topic? Where do you stand on the whole DIY pension versus you know, some sort of official one that either, whether it be you know, you give some money to a company or whatever, or the NHS pension? Where do you stand on that, for the bit?

Luke: 35:31

I mean NHS pension to private pension. It’s apples and pears so they’re. But DIY versus you know another type of pension where it’s all done for you. Really, it depends on the individual. I don’t, especially for some of the younger associates. You really don’t need to go into some expensive, complex wealth management led pension and pay high fees really for a pension If it’s gonna be sat there and invested and compounding for 30 years. For most people, the best kind of solution you want is something that’s low in fees, that’s gonna give you 100% exposure to global equities and you can, you know, set and forget. That’s really is great value for most people. For your DIY investor, for someone like you. If you’re actually interested in playing around with stocks, then you know, yeah, it’s up to you. But I see lots of people on the other side that have absolutely no interest in doing things themselves and are happy to go into, like, a multi-asset fund where they have very little involvement. So, yeah, it’s down to the individual, really, I think.

Dr James: 36:44

Yeah, interest and stuff. What I was gonna say on that was when you start reading about finance and you realize just how few actively managed funds beat passive funds because of the inherent constraints or constrictions or difficulties that they have assigned to them. It’s astounding. It’s something like 93% of active funds fail to beat passive indexes with time. So this is the sort of effect that you can hijack if you begin to educate yourself a little bit about it. But naturally speaking, just as you said, there will be that element of people out there who just have zero interest in it whatsoever and they would prefer to offload it to somebody else, and that’s totally fine too. But it is just a really interesting one that you don’t even necessarily have to know loads about finance because you have so many. There’s so many advantages and ways that you can save that people who actively manage funds or people who are paid to do it for a living don’t have, so therefore they’ll struggle to beat you. Essentially.

Luke: 37:49

Yeah, look, I mean from my angle, all of the investments I recommend for clients are what we call evidence-based. So they are index funds, they’re passive funds. I don’t use active. You know my preference is not to use actively managed funds. Well, there you go.

Dr James: 38:04

Anybody listening. You’ve heard it from the man who would know. You’ve heard it from the horse’s mouth. Even Luke recommends his clients to go for passive funds Interesting.

Luke: 38:13

Yeah, and that’s as you alluded to. That’s just based on the historic results 93%, you’ve mentioned that’s primary US fund managers. Uk fund managers. Same outcome, it’s 75%, I believe. Last time I had a look. Oh okay, I didn’t know that. The data is astounding. And of those seven or 25% that do outperform, how much of that is due to luck versus skill and how much of that is due to them taking extra risks with your money? It’s, you know, for me it’s. Yeah, I mean, this is a whole different podcast. We’re going off topic.

Dr James: 38:43

Yeah, we are slightly, but it is an interesting one. We’ve scuttled over this earlier. Well, we’ve touched upon it a little bit. Why is the received wisdom that the NHS pension is so lucrative? We talked about the inflation thing. Any other reasons?

Luke: 38:58

Yeah, I think that the main reason why that is banded around is and the reason why I believe in it personally if you were trying to come replicate, I guess, what you get out as an output from the NHS pension, if you were trying to build up a pot of money that you could convert into a guaranteed fixed index linked income, you’d need a very large pot of money. And the reason why is because the government is effectively subsidizing the cost and that’s the benefit. The government is ultimately subsidizing the cost of what’s coming out the other end of it, and for you to just try and build up a pot of money in a private pension to then replicate it, you will need to be contributing a lot.

Dr James: 39:45

Yeah, interesting, mainly that or others.

Luke: 39:50

I mean. So there’s that element to it. I mean it’s also the in terms of. I mean, if we look at pros and cons. So NHS pension is a guaranteed fixed index linked, government backed source of income. It’s a stream, as I said. It therefore gives people security and peace of mind. It’s really useful when I’m doing financial planning or retirement planning for people in terms of working out where the money’s gonna come from when they do start working, and for some people that’s really attractive. The drawback of it is that they’ve been gradually pushing back the pension age. So it was 60, it then went to 65, it’s now state pension age. I see in council lots of people that don’t want to be working in the role they’re doing at this moment in time up into the point of 68, they might want to have had a career change or do something different. That doesn’t mean you have to work until state pension age. It just means that that stream of income is gonna kick in at that point. So you can be doing other things around the NHS pension and building up other streams of income, building up other assets to help fund your retirement over and above the NHS pension. The NHS pension for me is just another tool in the tool bag In terms of comparing that with a oh, and also just a very extra point, the NHS pension. There is death and service benefits. You could, in truth, if you’re in decent health, you could replicate that with some life cover. And there’s also what they term ill health retirement. So if you are sick on a tier one, they’d effectively pay you your pension early. If and If you’re sick and unable to do your job as a, whatever you’re working in, whatever your position is, they’d pay you what you built up. If you’re really ill, they’d pay you a tier two ill health retirement, which basically means they’d pay you what you’ve built up till now and also a percentage of what you would have built up had you been able to work to pension age. And that is also quite attractive. So that’s, I guess, the key elements is the security, the indexation in terms of the protecting against inflation, the private pension very different. It is a pot of money, so it’s more flexible. Currently the access age on a private pension is 55, but it’s about to go to 57 in the not too distant future, so it’s a lot earlier you can start drawing down on that private pension. The death benefits is a big one in terms of pros and cons. The private pension, as I alluded to earlier, the death benefits on those are brilliant and in fact, from an inheritance tax perspective, I’d now argue that a private pension is probably your most efficient vehicle for passing on wealth to future generations. I’ve got lots of clients that actually aren’t drawing on their private pensions because they’ve got other assets and resources to draw on first to reduce their taxable estate for inheritance tax. So private pensions really efficient on. Unfortunately, on the death side of things, nhs pension less beneficial and arguably one of its biggest drawbacks on the death side. It’s an income for your life. If you die then it depends on the section, but the 95 section it’s going to halve. So your surviving spouse will get 50% of what the payments would have been. In the 2008 section it’s 37.5% and in the 2015, it’s 33.75%. So in effect, those regular pension payments from the NHS pension will drop when you pass away. So live to age 90. You’ve had a really amazing, phenomenal pension. Live five years into retirement Not so great.

Dr James: 43:51

And it’s only for your spouse as well, by the signs of it, not anybody else.

Luke: 43:55

Yeah, it dies with the two of you. Yeah, whereas the private pension can be passed on to the future. Yeah, yeah, interest and stuff.

Dr James: 44:04

I certainly didn’t know that I knew about the SIP. That is another reason why a lot of people like their SIPs people who are running you know what’s the very highest tax band. Is it over?

Luke: 44:15

45? Over 150, yeah.

Dr James: 44:17

Over 150. It’s extremely beneficial for them because number one, number one of the tax reductions and number two because of, well, their alliance that they can leave to their family.

Luke: 44:27

Yeah, the big thing on. Well, both pensions ultimately the contra into a private pension and into the NHS pension. Both contributions are coming from your gross pay. So if you don’t pay in, then effectively you’re going to pay tax on that amount. So if you’re paying into a private pension and you’re a 40% taxpayer, then in essence every pound that’s going into your SIP, for example, is only costing you 60p Because, as you not made that payment, you’re going to pay income tax at 40%. And it’s probably a good point to actually also highlight if anybody’s got income between 100,000 and 125,000, that is a nasty tax trap because that’s the point at which they start removing your personal allowance. So for every two pounds you earn over 100k, your personal allowance is reduced by one pound. Now your personal allowance is the first in this tax year, is the first 12,500 pounds that you earn which is tax free. So, in effect, the income that you have between 100 and 125,000 pounds is basically it’s a marginal rate of 60%. So if you’re in that bracket, a pension, paying into a pension, could be a really useful vehicle for reducing your tax bill and you’re going to get some great tax relief.

Dr James: 45:43

We had Mike on the last podcast and he said that when you’re in that tax band off the top of my head it was something like you only get 10p in every pound or something. It was maybe a little more than that. It was maybe about 20p in every pound by the time you’re taking off tax and then you’re also taking off national insurance. So he said, anyway, so that’s another interest. Yeah.

Luke: 46:03

So I mean that’s for a personal contribution. The other thing just very quickly worth mentioning if anyone’s got a limited company, then you can fund your private pension using what’s called an employer’s contribution. So in effect it’s a cost to your business. So you’re going to save corporation tax and obviously you’re not having to pay tax on pulling it out of the pension. So you’re really moving it as a cost to your business from your business into your limited company, into your pension, and that’s great.

Dr James: 46:32

And I’m also correct in saying that when you have, if you run your business, if you run your dental affairs through a limited company, you also can’t have an NHS pension, isn’t that correct? Yeah, that’s another twist to the tale. So there’s various there’s about 10 kind of layers of I suppose you know kind of complexity here. So it’s an interesting one. So a limited company is one to watch out for. Superannuation is a word that people chuck around. I always feel like I’m supposed to know what it means, but I don’t actually know what it means and I’m just going to say I’m going to throw it out there. I just want to, at the risk of making myself look silly. What is superannuation and you know what? I’m sure there can’t I can’t be the only one. There must be other people out there who don’t understand what it means either.

Luke: 47:22

You’re going to be really disappointed. Oh yeah, just me. It’s just another term for your NHS pension. I mean it’s just a. Normally it relates to a workplace pension. You’ll never hear IFAs in financial planners in England talk about superannuation. I’ve never referred to it as superannuation. Maybe more in Scotland and certainly in places like Australia. You know superannuation is the main vehicle for retirement, but in this country it’s effectively just another term for the NHS pension. So once someone’s saying NHS superannuation they just mean NHS pension. And I don’t know, accountants seem to love the phrase They’ve, they’ve. I often hear them using it, but I don’t personally use it. But it just means the same thing.

Dr James: 48:11

There you go. Nice and simple. Always nice when that happens in life, isn’t it? Then we were talking earlier about the different categories and how it seems to be. As we go through time they’re raising this pension age. They’re becoming ever more slippery with their terminology and definitions of when we can get it. Do you foresee a point where the NHS pension will be so much less lucrative to younger dentists that it is a lot more of a question mark over whether or not it’s worth bothering? Or has it reached that point already? What do you take on that?

Luke: 48:47

My honest answer is if, as it, as things stand, the current version of the NHS pension, if I could join it and use it as a tool in my tool bag to get to financial independence, I would. That that’s my honest opinion as just another vehicle to help you get to the long term financial goal. Yeah, I would. I would add it to my bag in terms of you know where the future’s at, where the future’s heading. If they were to change the NHS pension drastically again they don’t. They wouldn’t be doing it in the same way that they haven’t in the past. They wouldn’t be doing it retrospectively, first of all, so they’re not going to go back and change what you’ve built up up until now. So if they were to reform the pension again, you would have the option to look, you know, take a balanced and educated view on whether this is still a good pension for me to be a member of, in terms of whether the government can really go after it. Well, they, they, they, if they go after public sector pensions I mean, I don’t know exactly what the exact percentage is of the country working population that work in the public sector and therefore has a have a public sector pension but they’re on dangerous ground because they don’t want to lose votes, do they? So it’s a big body of people that you can upset very easily if you keep tinkering around with their promised pension entitlements. So I’m not sure they’re going to. There’s going to be huge amounts of reform and if there are, then, as I said you know, take an educated view and decide what you want to do.

Dr James: 50:18

It’s still worth it then.

Luke: 50:20

Still worth it for me. Yeah, yeah, only because, as I said, streams and reservoirs. You don’t have to work through to state pension age. But if you know that from state pension age, if you’re somebody that’s building up wealth for the future, you know that you’re going to get X amount from the NHS pension, x amount from state pensions, x amount from, maybe, rental property. All of a sudden you’re building up a clearer picture of how you’re going to fund that lifestyle when you do start working.

Dr James: 50:47

A personal anecdote from me before we start talking about what we wanted to talk about net. Well, the next sort of subject we wanted to bring up when I was an FD night for for, for better or for worse, when I was a younger dentist and I just began, I had the pension but I declined to pay in to it further and I asked for a refund. Now, whether that was a smart move. whether it was a bad move. From what you’re telling me today probably sounds like a bad move, but that’s what I did anyway. I didn’t really. I just thought that this, I was too young, I’m never going to make it to 65, you know what I mean. I’d rather just have this money in my pocket. That was my logic. But if I could go back now maybe things would be different. But anyway, that’s what I did. When I spoke to the accountants of my foundation dental practice, I realized that because my because whoever ran my practice because the, the contributions had changed, you know, they, they increased with time, not in necessarily in real terms, okay, but the well, just how much. It said in black and white on paper, the figures they’d increased, you know, but I can’t remember the exact details. But as it happened, the accountants, there was a, there was a stack of my money that I’d been accumulating every month that hadn’t actually been going to my pensions, and I only learned this through speaking to the accountant and they were able to give me the money at that point. So, basically, there was this much money, there was quite a bit of money getting siphoned off, and only a portion of that was actually reaching my pension. So what I want to know is how can we be sure that our employers or principal dentists, whatever they’re paying this correctly? Is there any way that us associates can look at what foundation dentists can look at their associate their their pay slip and be able to tell this straight away? Or is it worthwhile checking with your accountant, because it happened to me?

Luke: 52:34

Yeah, okay. I think in terms of keeping track and making sure that you’re being rewarded with the right level of growth in your pension, there’s, there’s, and paying the right level of contributions is probably two elements. The first, ensure you’re paying the correct contribution rate. So there’s a table available online, if you just Google it, that will show you the different income brackets and what the corresponding contribution rate is. That’s the amount that you should be paying effectively. It has what I said earlier your membership fee. It’s important that you’re paying the right level of contributions. And secondly, ensure that you’re you’re checking what record the NHS Pensions Agency have of your earnings. And to do that, I recommend that everybody, if you haven’t done already registers online for pension statements. Just simply Google NHS total reward statements You’ll be able to register. They update them I think it’s once a year, pretty much maybe twice a year, but for some people. So you go in, you’re going to see an updated valuation. It’s going to show you on there what pension they think you’ve built up, but also there will be a table in there for what they think you’ve earned in the NHS and that, as I said earlier, is what’s driving your growth. So you need to check the figures that are on your statement against what your records are in terms of what you think you’ve earned in the NHS, because there’s every chance over time that there might be mistakes made or human error, et cetera. So yeah, by all means have a, have a check, keep an accurate record of your own income. That’s just good practice anyway. If there’s a problem I mean this isn’t really something I normally get involved in, but if you think there’s a discrepancy, then you know, first of all you’re going to go to the practice manager or practice owner and then potentially you’re going to follow up with the NHS Pensions Agency or Dental Services to try and put it right.

Dr James: 54:37

Great stuff, so it’s fairly straightforward then by the science of it.

Luke: 54:40

Yeah, yeah. So I’m cross checking each year and making sure that you know what’s on the statement is what you think should be on the statement.

Dr James: 54:48

We spoke earlier about the ages that you can cash out and it sounds to me like there’s not one answer that encompasses every single individual who contributes towards their NHS pension. Can you give us a quick fire? I know we did talk about this earlier, but can you give us just a quick fire, a little run down for anybody who’s listening, so that they can understand license distinctly, when exactly they can get their hands on their money?

Luke: 55:14

Yeah, so 95 section benefits. The normal pension age is 60. 2008, it’s 65. 2015, it’s state pension age, so it depends on your date of birth. However, you can take your pension earlier than the normal pension age, but it will be reduced. There’ll be an actual area of reduction to account for the fact that you’ve taken it earlier. Again, there’s tables online to help you work out exactly what that looks like for your section, because they differ. And in terms of the private pension, as I said, that’s 55 or it’s about to turn to 57. What’s upOWETX and network? It’s probably worth me actually quickly mentioning it, because I didn’t touch on it earlier how you actually then convert that private pension through to a an income, if you like, when you get to the pension age of a private pension. You’ve got two main. Well, actually there’s two main options. One is to go and buy what’s called an annuity, and that’s you know. A lot of people used to build up a pot of money and then exchange it for an annuity, which is effectively an income for life. So, in essence, what you’re trying to replicate is something similar to the NHS pension scheme. In truth, the sales of annuity products has dropped significantly over recent years because the rates have plummeted and because of the treatment of the death benefits. The second option is to draw down on the pension using one of the flexible income options. So there’s the option to take the lump sum up front and then keep the balance and draw in it as an income, or you can stagger the withdrawals and each payment that you take out of the pension, 25% of it will be tax free and the balance will be taxable. So there’s a lot more flexibility as to how you draw on that income. And if you don’t want to, you don’t have to take the money out of the private pension at all. As I said, you can actually pass it on to family members. So there’s a lot of flexibility there and it is investment based. So you’ve got to. If you’ve got a private pension, you’ve got to clearly take into account the fact that the money is invested in the markets and they go up and down and you have to plan for that and for some people that’s more straightforward than for others. There’s a lot less security in a private pension than the NHS pension.

Dr James: 57:51

Ultimately, there we go, guys. You put the old chestnut to bed. Boom, boom, boom. Nice, succinct answer and possibly what is a world first, that someone has explained when we can get the money out of the NHS pension without us having to troll through all the legal documents and the small print and things like that. So smash them, Luke. Thanks very much. We were talking earlier about private pensions, so SIPs etc. Versus ICES. What should take on that matter?

Luke: 58:19

Yeah, so for me I mean from a technical angle there’s a really just different terms of their tax treatment. We touched on that earlier. You know, with a pension you’re getting tax relief on the way out, but your tax on the way when you, when you draw on it. So on the way back out, the other end and the growth in the income, in the assets that are in the pension grow tax efficiently whilst it’s there, and then you’ve got the inheritance tax benefits and then an ICES. There’s no tax relief on the way in, but there’s no tax on the way out and whilst it’s in there again it’s very tax efficient. But for me the main difference is really about access and from a financial planning perspective, if somebody comes to me and they say you know, luke, I’ve got money that I want to set aside for the future, the key thing I want to know is when do you need that money? If you need that money long before you’re going to get to pension age, then clearly you’re going to have to use something like an ICES. If you don’t need that money and you want to set it aside for financial independence for the longer term, then because of the tax reliefs, then a private pension is going to make a lot of sense. So really it’s it’s goal led. You know, the first thing you should do when you’re investing your money is know why you’re investing in the first place. What is the goal that’s surrounding this? You know, if it’s short term, am I putting money away for when I see quite often I’m putting money away for my children’s future, for example, Well, there’s no point putting it into a pension. So it really is dependent on your personal situation and your circumstances and from a technical perspective, as I said, it’s really about the tax treatment.

Dr James: 59:52

Interesting stuff. Look, you’ve given out so much value in this podcast. I’ve honestly learned a ton about the NHS pension. I must say you’re probably the most prepared beforehand podcast guest I’ve ever had, for anybody can see visually Luke has an essay of notes in front of him and I think that’s testament to your thorough, your, your, your thorough nature and you’ve went through this rigorous, rigorously, basically, and talked about every single linen out of the NHS pension quite clearly. And what blows me away is there’s actually more to it than this that you sort of hinted at earlier.

Luke: 1:00:23

Yeah, scratch the surface.

Dr James: 1:00:26

Yeah, that’s where you come in. I just wanted to hear a little bit more about line meet and what it is that you do to help us dentists understand the pension even more.

Luke: 1:00:33

Yeah, sure, I mean the NHS pension. Knowledge really just comes from helping dentists with their overall finances and, as you said at the start, I help. I’ve got your traditional YFA services, if you like. If somebody comes to me and they need to set up a private pension and they don’t know that, know how, and they don’t want to take the time to do the research and everything else, then for a fixed flat fee I can sort that out for them. In the same way I can set out, sort out, just a normal investment. Equally, though, the big part of my service offering is around the financial planning element, which really entails sort of auditing and optimizing someone’s financial affairs. So it’s a case of looking at where they are now, where they want to get to in the future, and then working out a plan and a strategy to help them achieve those goals. So it’s not product led, it’s planning led, and that’s the difference. I think personally to a lot of advisors your encounter who their main goal is to try and flog you and I said so and in terms of ongoing service options, there’s different, different options to suit different people. As I said, I’m moving all of my business to fix fees, not just initial advice, but also ongoing services to one. Next year, I’m going to hopefully have all clients on a fixed flat fee charging model, which effectively means I’ll be charging in a similar way to to an accountant, which, to be honest, that puts me in the minority as far as financial advisors go, who mainly charge based on a percentage of the assets that they look after.

Dr James: 1:02:07

I, what’s in your, what’s in your investment accounts, I’d be because that is why a lot of people there is their own, they’re so reticent to use financial advisors because they know of the percentage. So the fixed fee thing, that’s something I’ve never come across and I wasn’t even aware that was the thing.

Luke: 1:02:27

Yeah, I mean the percentage model is our cake came out of the. You know the industry previously used to get commission for moving products. That got stopped and in essence a lot of advisors just copied the same percentage model that was on offer and that’s their way of charging. But to be honest, my personal view, if you’re a young associate and you just want to set up a pension, you don’t necessarily need ongoing financial advice for that. You put yourself into a pension product that takes care of itself, dip into financial advice as and when you need it and let your assets grow without the drag of all these additional fees that just stack up on top of each other. Fees are one of the biggest drags on investment performance Massive drag actually, when you compound it over long time periods. But yeah, there’s very few people that are charging fixed fees out there. I think in 10, 15 years it might be the norm. It’s going to take a few of us to possibly stick our head above the parapet and take some flack, but maybe it will move that way in due course.

Dr James: 1:03:35

Hey, to make it normal you’ve got to crack some eggs.

Luke: 1:03:37

No, I mean the only other thing I’d say. I mean I’d be lying if I said I’m desperate for lots of people to call me and ask me loads of questions about the NHS pension scheme. I might, in the new year, come up with a you know, an hourly rate or something to help people if they want to call up and get some advice on that front, and I can charge them a time based charging structure. I generally think I can add value to most people’s financial affairs in one way or another, and, based on the flexibility in my service proposition, there’s something there for everybody. The only other thing to mention, though, is if anybody does want to get in touch. I do have a wife, as you mentioned, that’s 37 weeks pregnant, so I’ll be having a bit of time off, so if I don’t respond immediately, then please don’t think I’m being rude. I’m just trying to learn how to be a dad.

Dr James: 1:04:28

I think we’ll forgive you on that one. Look what are the fees that an IFA would typically charge. What percentage would we expect to look at?

Luke: 1:04:40

It varies enormously. So if you go to an IFA a traditional percentage charging model they will charge you anywhere up front the money you invest, anywhere between maybe one and even up to sort of 4 or 5%. So you go to some of those massive yeah, huge, huge. So you go somewhere. You’ve got 100,000 pounds to invest immediately you’re losing, you know, 3, 4, 5% of that. If you compound that I, you know effectively the opportunity cost, what that would translate to over long time periods. It’s absolutely enormous. And then, on an ongoing basis again, my advisor charges vary from probably 0.5 to 1% per annum on a percentage model. I’m in the middle of, exactly, you know, working out exactly what my fixed fees are going to be for the new year. But if anybody wants to get in touch, then they can just drop me a note.

Dr James: 1:05:40

I’m going to shoot from the hip a little bit with this next part. Look, we’ve got some questions from the group. I hope that’s okay with you.

Luke: 1:05:46

Sounds great. Yep, let’s go.

Dr James: 1:05:47

Let’s go. So first of all we have Mandi Burring. Good evening to Mandi Burring. He would like to know how do we know that the pension is calculated correctly? Did we correct me if I’m wrong? Look, did we sort of skirt over this earlier when you were you were referring to that checking on Google your income ban tax.

Luke: 1:06:11

Total, yeah, total reward, yeah, so Google.

Dr James: 1:06:15

The website wasn’t there or something something else.

Luke: 1:06:17

So total reward statement Google it. It’s just basically the portal they use to give you access to your pension statement, which is updated each year. So go into that, have a look at that, cross check it against your own records. That’s going to tell you how they’ve been calculating your pension and you should be able to determine whether it’s accurate or not.

Dr James: 1:06:38

Nice and simple, and Mandi could also like to know, if we realize that it’s not calculated correctly, who would we contact? Any ideas?

Luke: 1:06:45

Depends on which element I mean primarily. The only the main reason why it might not correspond to what you think it should is down to the earnings, and then the first portal call will be your whoever’s been responsible in terms of the practice you work at to try and put that right.

Dr James: 1:07:00

Good stuff. Sheila Lai, lovely lady very active on the group. She would like to know what is the advice from yourself if you leave NHS Dentistry. Do we just forget about it until retirement, or is there some sort of kind of wizardry that we can do, I suppose, to capitalize on the fact that we’ve left, get it up a little bit early? I don’t know.

Luke: 1:07:19

So if you completely leave the NHS, so you have no extra NHS earnings, then everything you’ve built up will effectively grow with inflation until you get to the normal pension age in exactly the same way. So, in essence, you’re then gonna have to come up with another vehicle to help fund your financial independence, one of which might be, as we said earlier, private pension. It’s a similar story. Actually, I’ve encountered lots of people that obviously have mixed income. So if you’re 50% NHS, 50% private, then clearly you can’t just rely on the NHS pension because you’ve only got 50% of the earnings, so you’re only gonna get 50% of the pension that you would have otherwise built up. And so the same story you need to look at other vehicles to help you get to that financial independence point. And yeah, in terms of past benefits, they’re just gonna sit there and they’re called deferred benefits. You can check in on them. So if you go, as I said, you get registered for that site, get your statements, you’ll be able to see how it’s building up over time in exactly the same way.

Dr James: 1:08:25

Smashing hope that’s helped, Jailer, when were we? So? Next we’ve got David Hoy and David would like to know how do we calculate when we have breached the lifetime alliance?

Luke: 1:08:40

Yeah, lifetime allowance annual allowance is another meaty subject, probably not for today, but I’ll touch on the main points. So, lifetime allowance simple formula to work out where you are with it you go and get your statement from the online portal, total reward statements. You multiply the annual pension figure by 20 and then you add on any lump sum entitlements. So, and whether you’ve got any lump sum entitlements depends on the section you’re in. But you’re adding up the total of the annual pension multiplied by 20 plus the lump sum entitlements. So if you, for example, you’re an older dentist and you’ve got a 1995 pension, 50,000 pounds accrued 20 times 50,000, a million plus the lump sum 150,000 is 1.15 million. Effectively, that’s your value for lifetime allowance purposes. And then you’ve got to add in the value of any of your personal pension SIPs, avcs, any other type of private pension and what you’re looking at there is actually the fund value or the investment value of that account and you’re just adding that on top. And then you’re looking at where you stand in relation to the lifetime allowance. At this moment in time in this tax year, as we’re recording now, the lifetime allowance is 1,073,100 pounds and it’s due to go up every year with inflation. So that gives you a rough idea. The figures I gave earlier 50K pension three times lump sum in the 95, 1.15 million you’re over the lifetime allowance.

Dr James: 1:10:15

Am I right in saying long story short on that one get some advice?

Luke: 1:10:19

Yeah, definitely.

Dr James: 1:10:21

Yeah, that’s what I gathered from that, because what you said, those are some rules of thumb effectively.

Luke: 1:10:26

Yeah, that’s a really very quick summary. It’s quite a detailed and complex area and there’s a lot of stake with those kind of numbers. The annual allowance is another meaty subject.

Dr James: 1:10:40

Oh, was that a question? I must have missed that one.

Luke: 1:10:43

I think it was a question on a question. So the annual allowance is a complex subject. As I said, it’s something that some people might need to get advice on, but it’s basically it’s a restriction on how much you pay into defined contribution pensions. So your contribution into things like SIPs, personal pensions, avcs, stakeholder pensions, anything like that, it’s the gross amount you pay into those Plus how much growth is the growth that you’ve had in your NHS pension. It’s got nothing to do with your contributions into the NHS pension. It’s your growth in the NHS pension. And the big problem there is you will not find those growth pensions. You will not know how much your NHS pension has grown according to these calculations by just going on and looking at that statement online. You have to request the figures manually and to do that the NHS pension will possibly take three months to come back to you with the figures. And you know most people, all of my clients I get them to write off and get those figures every year so we can keep track of how much annual allowance they’ve got, how much they’ve used If they’re paying into private pensions, how much they can pay in if they’re also in the NHS pension. It gets very complex. So the annual allowance is a bit of a beast. At the moment the limit is 40,000 pounds, but it can be reduced all the way down to 4,000 pounds for higher earners because of what’s known as the tapered annual allowance and that’s just. That’s horrible legislation, sloppy legislation. But it’s basically whether you’re tapered or not is based on your total income, so it’s not just your NHS income, it’s all of your income rental income, private income, nhs income, all of it bundled together. That will determine whether you’ve got the 40,000 allowance or you’re tapered. And, as I said, the key there is understanding. If you’re paying into NHS pension and private pensions, you really need to know where you are with the annual allowance. If you’re a high earner, you really need to know where you are with the annual allowance, because you could be walking into a bit of a tax trap.

Dr James: 1:12:43

Look, thank you so, so much for all of that. That was absolutely brilliant, I think, touch wood, we’ve just made it to the end of the podcast. Without your wife, you haven’t a run. I tend to your wife and give up.

Luke: 1:12:53

I’ll go check.

Dr James: 1:12:54

I think we got there. I think we got there smashing stuff. Congratulations once again on the incoming newborn. Thank you so much for coming on the show. I’m sure you’d like to get off now and enjoy the rest of your Saturday evening. Yeah, cheers, james, thanks for having me on Absolutely no problem at any time, and if anybody wants to get in touch with Luke, feel free to do so. He’s on the group. His name is Luke Hurley. He’ll be able to offer you more insight on the subject matter of this podcast, ie NHS pensions. Wonderful stuff, luke. I’ll let you get off now. A pleasure, as always. Cheers, mate. Nice one mate A little bit.

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