Having a midlife crisis?
This is likely to be a time of life that has the greatest expense, high mortgage liabilities,
practice loans to pay, children in private education, a time where there is considerable strain on the highest of incomes. It is therefore important to be on top of finances.
The decisions that are made now will shape the financial well-being of the practice, the family unit and the timing of any retirement plans to name three. It can be difficult to prioritise with so many conflicting demands on income, a simple logical approach is therefore important.
Firstly, it is important to protect income in the event of ill health or other incapacity. Without ongoing income, the best-laid plans will fail.
Therefore, protecting both personal and practice income is of paramount importance. Life cover should be reviewed. Most dentists have life cover to protect mortgage or other debt, but fail to cover expenses such as private education. Any remaining capital or savings should be split into three categories:
• Short-term , for example saving for holiday, school fees and tax savings
• Medium-term such as savings towards future school or university fees or paying mortgage debt
•Long-term covers retirement planning.
Deposit accounts are the obvious choice for short-term savings, easy access and no risk, rates are low and it is poor advice to leave more than is necessary on deposit, especially as a higher rate tax payer.
Use cash ISA allowances or retain assets in the name of a lower tax rate spouse if possible. With medium- and long-term investments comes the potential of real capital growth. Investing for five years or longer allows investment into asset back rather than deposit-backed assets. Asset-backed investments are categorised as equities, property, gilt and corporate bonds. These are the only investment types that have historically produced a positive return after tax and inflation. Using ISA allowances makes sense for any tax payer.
You need a balance of investment risk and potential return; the higher the risk the greater the potential return. Equally, the shorter the investment period the greater the risk. It is possible to take a far higher risk with investments if it is possible to take the longer-term view and ride out short-term market fluctuations. This leads to long-term investments; most dentists at this stage will still have 20 years to work. This allows a greater flexibility for retirement
planning. A significant risk can be taken with pension at this stage due to the timescales involved, although for many dentists this is a risk they are unwilling to take.
For the pension-risk averse, the additional pension scheme is available for dentists with NHS contracts, this offers a low risk, if expensive, form of pension arrangement.