A new retirement solution for doctors and other LLP professionals
With the opportunity to supplement Health Service income with consultancy work from private practice, many doctors have self-employed income to more than match the revenue available from a career in the NHS, but not a comparable pension. Yet an opportunity does exist, using a defined benefit small self-administered scheme (SSAS).
In this post A-Day environment, that old stalwart of pre A-Day pensions “employ your spouse” rears its head again. In an era when defined benefits ruled, and money purchase was the poor relation, this time it comes with a twist that works particularly well for the doctor in the house and other like minded professionals.
For illustrative purposes we will use the example of a doctor.
A little known and seldom used quirk of the small self-administered scheme is the ability to structure a scheme to provide defined benefits rather than operate on a money purchase basis. In other words, contributions are made at a level to provide a defined level of scheme pension for members at normal pension age.
When operating as a Limited Liability Partnership, provided an Employer-Employee relationship is established, if the consultant doctor were to employ their spouse, then they could choose to establish a defined benefit pension scheme, invite their spouse to join, and then join themselves.
To determine the level of income available, an actuary must be involved. Using the services of an actuary can add value in all parts of the pensions planning process, from establishing initial contribution opportunities for the scheme, to the calculation of pension benefits derived from the arrangement.
As the scheme is a defined benefit scheme, the maximum amount of benefit that can be funded in a year is based on the promised pension, not the contribution paid. A flat factor of 16:1 converts the new pension the scheme promises in that year to an amount that can be measured against the annual allowance. For example, if the defined benefit scheme promises to pay a pension of £3,000 a year from the chosen retirement age this converts into an amount of £48,000 (£3,000 times 16), which is less than the annual allowance of £50,000, and so the member would not suffer any tax charge. The opportunities do not end here.
A pension of £3,000 p.a. in a defined benefit scheme requires a contribution of much more than £48,000. This is because when assessing the cost of the pension, the actuary needs to take into account increasing life expectancy, make allowances for increasing inflation, and can factor in benefits payable to dependants. That could require a contribution of more than £100,000 depending on the doctor’s age.
This means that the amount of contribution that can be actuarially justified to provide defined benefits from the scheme is frequently more than two times higher than the amount that could be paid to a money purchase scheme.
From a technical perspective, while the contribution for the spouse will be treated as an employer contribution, the doctor’s contribution will be treated as a personal contribution, and be subject to a limit of 100% of earnings, although the overall annual allowance limit is £50,000 p.a. and pension benefits accrued under the NHS scheme will also need to be taken into account.
Clearly, the most beneficial outcome will be for any contributing spouse who has not got any pension built up in their own name, as this leaves the most scope for contribution.
When you introduce the opportunity to carry-forward contributions, even greater potential is created for increasing the initial contribution, or perhaps making larger annual contributions over the early years, depending on what suits the client circumstances.
For a 50 year old, with no carry-forward and so only £50,000 annual allowance, any single initial contribution could be over £100,000. With carry-forward, the contribution could be over £400,000. In an environment where the opportunities available to make meaningful contributions to pensions have been pruned by statute, this represents almost an epiphany. But you must remember that tax relief is still only given up to 100% of earnings, even with carry-forward.
Though the example revolves around the dual-income nature of the remuneration of the doctor, there are many other businesses that operate as Limited Liability Partnerships, with similar scope for making the most of contributing into a defined benefit arrangement in a similar manner. Particularly with the lifting of connected party restrictions post A-Day, one of the major obstacles to getting Limited Liability Partnerships to consider using their pensions as an integral part of their business plan is no longer a viable objection.
Getting solicitors, vets or other LLPs to consider moving premises to capitalise on the opportunities provided by putting their commercial property in their pension was once a show-stopper. Combining the hat-trick of employing the spouse, carry-forward, and putting property in the pension fund would appear to tick a lot of boxes for the LLP.
If you have any questions, please send them via the enquiry box on the right hand side, call 08445 440550 or email us.
