Dentists Who Invest

Podcast Episode

Full Transcript

Dr James: 

Why have I never contributed to a pension? Well, first and foremost, I should probably state that this podcast is probably going to be slightly controversial for some people. I know that a lot of people who are in the advice world out there who are listening, will say that the dogma that we should all stick to is that we should contribute as much as we can to our pensions as soon as we possibly can. I’m not saying that’s not necessarily true or not necessarily correct, but what I’m saying is that, in my opinion, it’s just a little bit more nuanced than that, for reasons that we will get into. This actually has a lot to do with the accessibility of your money, because pensions are amazing. Pensions are great. They can do a lot of cool stuff in terms of the tax benefit side of things, particularly if you’re a higher rate taxpayer, you can lock away. You can pretty much double your money. The second, that you stick it in a pension, which is flipping amazing Also. As well as that, what you can obviously do is allow it to compound continuously until you reach your retirement date and you’ll have a lovely, lovely, lovely, nasty egg. There’s also don’t quote me on this, but I do know that there is some sort of rule off top of my head that if you pass away before you are 75, then what it means is that your next of kin will receive the pension and be able to make withdrawals from it as well, which is really awesome. It’s really cool from that perspective, really cool from an inheritance perspective. An IFA will be one to ask on the specifics and details of that, of course. So very, very, very careful. I might just want to run that by your advisor or do a little bit more research in that. But let’s go back to the topic at hand. Why have I never contributed towards a pension? Well, it comes back to the two main factors that you’re going to use to decide where you invest your money. In so far as the accounts that you’re going to use, because the asset is mainly determined by the timeframe, at least if you’re using growth assets growth assets being stocks and growth assets being bonds, as in traditional paper assets, traditional assets which form the backbone of everybody’s portfolio, or at least most people’s portfolio. So let’s ensure that we’re talking about that. Let’s be specific, let’s be clear. We’re specifically referring to the accounts into which you deposit cash so that you can purchase those assets. So there’s really two main factors that you’ll use to decide which accounts you’re going to use. The first factor is tax implications and the second factor is accessibility. Really, you can use those two factors to determine which account you’ll use to invest your wealth whether that’s a nice asset, keep it in your limited company or general investment account. Those are the main four. So, off the back of that, really, whenever we have that lens or that perspective, those two, that decision-making framework, is it going to offer us an advantage from a tax perspective or is it going to offer us an advantage from an accessibility perspective and a tax perspective, those two things together? Now, if you want to be able to have full access and retain the ability to sell off your assets and access your money at any point, well, if you want to do that with all of your wealth, then really a pension is not something that’s going to allow you to do that, because the whole point is that when you put it in there, you cannot get it out until you hit retirement age, which at that point you have the option to be able to withdraw from your portfolio, withdraw from your pension. So here’s the thing if accessibility of your money is a complete non-negotiable, then really you can’t use a pension. So really, the second that we do that is the second that we were relinquishing no-transcript. The tax implications are massive for those of us who use pensions, and this is obviously something incredibly valuable and incredibly useful. However, point blank, if we want to have access to our money at any one time, well then we can’t use that Now. Certainly, a lot of the haste and a lot of the urgency there seems to be around to invest in a pension comes from the dogma that we should all do that as soon as fast as we should. But the number of times that I have used capital which I wouldn’t otherwise have had access to if I would have invested in a pension to be able to invest in other things, things that would generate me more cash flow perhaps there’s a little bit more risk associated with those things, of course. Well, that money’s been very useful to me and if I would have put it in a pension, I never would have been able to access it and that, fortunately, a few of those things some of those things have paid me back in dividends. They’ve been some of the best investments that I’ve ever made in my life, particularly investments in knowledge and how I think and skills etc. And stuff along those lines, which, to me, is one of the most underrated places that you can invest your money. And it’s also one of the places that advisors never, ever seem to flip and talk about, which, for me, is one of the ways that you can generate some of the greatest returns of all. Time you give yourself a skill and ability that will allow you to be able to generate great cash flow in the here and now. Well, that’s an asset that will pay you for the rest of your life. It’s not a tangible asset. It’s not an asset that we can measure we can, we can tangibly measure. It’s not an asset that we can just look up on a bank account balance how much is it worth instantly? But it is something that we can use day in, day out and practical sense. So, for me, some of my greatest investments have come through that and for lots of people out there, some of your greatest investments have come through that because they’ve come through your dentistry. Imagine if you could just do that over and over again continuously. Well, you can. You can upgrade your skills and knowledge infinitely. In fact, if anything, it compounds and it grows at an. It grows an exceptional exponential rate as time goes on. Well, guess what? If we’re taking all of our money and sticking it in a pension, we’ll never actually be able to do that because it’s all tucked away in there. So, while some are saying that we shouldn’t do it, what I am saying is that there is a school of thought or an argument that the earlier we are in our career is the more scope that we have to invest in things that will boost your cash flow in the here and now, whether that be a business, whether that be how we think, whether that be our, our skills and knowledge, whether that be all of those things. And it sure as hell won’t happen if we’re prioritizing, scrolling all our money away in a pension. Now, I’m not saying we shouldn’t do it. What I am saying is we just have to counterbalance that with that other knowledge or that greater wisdom, or seeing it from a wider perspective, rather than narrowly focusing on the dogma that seems to be thrown around that we should all just stick as much as we can in there as fast as we can. In fact, it’s interesting because I always used to think that every FA thought that way, or every FA thought that way and actually, as time has went on, I’ve met more and more who will actually actively say do you know what? Hey, there’s no rush, there’s no point in getting into it just ASAP, or certainly prioritizing it as much as everybody would have you think. But, of course, as well as that, what we have to remember is there’s a huge incentive at the minute to be able to deposit your money in a pension, given that the annual allowance is now 60K a year and supposedly there’s no lifetime allowance. Now, there is a school of thought to say that that’s a bit of a honey trap, because when your money’s in there, you can’t get it out and they can always bring the lifetime allowance back in an instant, in a flipping second. And, of course, anything over and above deposits in our pensions, anything over and above the lifetime allowance, well, it’s taxed very, very, very heavily and there’s nothing we can do at that point. The money’s already in there. However those rules look and however those laws look, whenever they reinstate them which for me personally, I think is a matter of time I think that the lifetime allowance to think that it’s dead and gone, it’s never coming back, that’s. I can’t see that happening. I think it’s a very, very, very slim possibility. What we have to remember is that for most of us, if we’re dealing with money in there, 10, 20, 30 years, something along those lines there’s an awful lot of time for governments to flip back and forth and be able to reinstate those laws. So that’s what you’ve got to be cost soft, that’s what you’ve got to think of, and it’s a control thing. The second we do that is the second we’re relinquishing control. Again, I’ve got to caveat everything as to what I’ve said, with the fact that maybe my setup is a bit unique as compared to everybody else. I’m hopefully in a position where there’s a little bit more fluidity in terms of where I am geographically located. I think it’s unlikely that I’m going to be in the UK terribly long, or certainly not for the rest of my life, or for me a pension on that basis. Well, it makes even less sense still, because if my money’s all locked up in a UK account, then I won’t be able to access it ultimately. So that’s another reason right there. But having said that, if you really like your career, you really like your job as a dentist and you just want to keep progressing on the career front and tuck a little bit of away every single month. Then there’s a case to be had for investing in our pension and this podcast I just want to make this hyper, hyper, hyper, super, duper clear this podcast is not by any means saying that we shouldn’t invest in a pension. All it is to say is actually there’s this whole other perspective that, in my opinion, doesn’t get that much airtime the perspective that I’ve just articulated and for the reasons that I have said and highlighted just then, there’s a case to be argued to say that really, because of all this new information, because when we see things from that light, really maybe the urgency or the fact that a lot of people insist that we should do this as much as we can invest in our pension, as much as we can do it as soon as possible, actually in this new information and then in this new light, maybe that’s not such something that we should prioritize as much as everybody makes it out Now. As to what level you prioritize it, as to what level you take on board that information and adjust your behavior because of it. Well, personally, in my opinion, my behavior says a lot about my thoughts on it, relative to my circumstances as someone who is 32 and relatively young young-ish I like to think. I like to tell myself at least anyway, and what I mean by that is there’s certainly some time between where I am and where I’m going to retire. Well, for me, there’s just not enough of an incentive there for me to prioritize that. And again, I want to say prioritize that, what I mean is prioritize investment of pension, hence why I have prioritized investing in other areas of my life. But, like I say, controversy alert, not everyone will agree with me. People will listen to this podcast and say what is he talking about? That is crazy, that is ridiculous. I can already hear them, I can already understand why they might say that and you know what. That’s fine. But what I would say is, from my perspective, those are my reasons, that is my rationale, and whilst I have come across a lot of people who would disagree with what I think, I’ve also come across a lot of people who would agree with what I think. And it’s worth noting that there’s a lot of people out there who at least share consensus with you Generally. That means there’s something to it. Good for thought.