Are your accountant and financial planner talking?
Simon Bruce and medical accountant Nicholas Saxby discuss the benefits of working together.
There is a perception that your accountant and financial planner have very different roles to play in organising your finances. To some extent this is true; an accountant will be looking specifically at tax compliance and efficiency while the financial planner will be proposing how you can achieve your overall wealth objectives.
However, given the overlap between many of the key finance areas they cover and a constantly changing financial landscape, there is a greater need than ever before to have a united source of advice. Unless you have two-way communication between both parties, essential information can be missed or you can receive conflicting advice that leads to poor decision making. When dealing with large sums of money and critical life choices, doctors need to ensure their professional advisers have the complete picture of all their financial interests.
“In working together, the client gets a much more rounded solution,” explains Nick Saxby, who has run his medical accountancy practice for over 13 years. “For example, an accountant will have an accurate record of the income of the client from every source – which is usually quite complex at senior consultant level when you may have NHS and private practice investment income, or even academic work. This in depth information can be extremely useful to the financial adviser meticulously planning how to make the client’s assets work together to generate future income.”
This joined up approach is also highly beneficial to families looking to make the most of each member’s relevant income and tax allowances. Their finances need to be working constructively together so that the security of future generations can be protected.
The fact is the vast majority of doctors are too busy to spend time organising their finances and in our experience at Cavendish, appreciate expert help with important decisions. They value straight-talking, honest advice, particularly about detailed financial issues that they may not have dealt with before. The more receptive the relationship becomes, the easier it is for us to appreciate their position and in the long run, the better the outcome.
Nick adds: “It also helps to work with professionals who understand the client’s industry. For me, it is far easier to work with a financial planner with experience of the NHS remuneration package and the very complex pension scheme. Calculations for the convoluted annual allowance or ‘added years’ for pensions are all too easy to get wrong for a non NHS expert.”
Why is joint working more important now than before?
Personal finance has become much more complicated. There is a plethora of savings and investment products which may bring more opportunity for the individual but also more risk. Very recently we have had the introduction of vastly improved ISAs, so-called ‘pensions freedoms’, and a conveyor belt of changes to pensions saving limits and tax relief.
In fact, ever since 2006, when the government held ‘A-Day’ – an attempt at ‘pensions simplification’ in the UK – pensions have, ironically, become much more complex. There are new rules governing the amount you can put in and take out, and just when the industry gets on board, those rules change again.
The tax on contributions to and withdrawals from your pension is particularly challenging. The new annual allowance rate which limits yearly savings requires very specific calculations because of the way in which HMRC views the NHS pension. And many more senior doctors will find that their overall pension savings will be caught by the much reduced lifetime allowance rate, generating a harsh tax penalty of 55 per cent. We have seen new clients who have been previously poorly advised in this area because their former advisers had not duly considered the NHS element.
Nick adds: “There are also confusing marginal rates of income tax – most people understand the higher rate of 40 per cent and a top rate of 45 per cent. Less well known is that there is an effective rate of 60 per cent on the band of income between £100,000 and £120,000 which then drops back to 40 per cent for figures beyond £120,000.”
There is no doubt that life has also changed substantially. With the NHS under financial pressure, retirement options are not the same as before and you may have many more difficult choices to consider. Doctors are retiring later – no longer clocking off permanently at aged 60 and often phasing their retirement over several years. In fact, life at 60 is very different to that of past generations and these lifestyle choices, which might include ‘retire and return’ or ’24-hour retirement’ bring an extra facet to the finance discussion.
The strict lifetime allowance limits have encouraged some doctors to consider leaving the NHS pension scheme early rather than trigger large-scale tax payments – an option which is beneficial to a limited number of individuals. With a clear idea of a client’s entire financial scene we can conduct very specific modelling which could show that it might be advantageous to retire after say 37 years rather than continuing to contribute for more years of service.
Another major change is that the majority of doctors in private practice used to be sole traders. Now senior medical professionals are using company trading structures which require specialist guidance. “If you are trading as a limited company your accountant and adviser should have unified thinking over your income requirements now and your future exit strategy,” concludes Nick. “You will need to consider whether to opt for formal liquidation and hope that Entrepreneur’s Relief will apply or to maintain the company and extract dividends for a number of years post retirement.”
The decisions you take now will have a big effect on your future income. Make sure your adviser and accountant have the same objectives and put in place a coherent plan that leaves you free to get on with life.
If you work in the financial services sector and give advice to individuals as part of your day to day routine, you may want to cover yourself for financial protection in the event that a customer sues you due to recommendations or services that you have provided which has cost them financially.