Simon Cosgrove looks at the financial landscape and how you can future proof your practice as you move from NHS to private.
It’s been a difficult 24 months for practices as part of the NHS. They face uncertainty around the anticipated NHS contract changes and increasing pressure to deliver treatment in challenging, Covid-19 compliant conditions.
As we begin another year, it may be that this is the year you look to make a change and explore your options outside of the NHS. One step, of course, is looking at introducing private care at the practice as one way of diversifying your income (or converting your practice altogether).
But when you think about moving from NHS to private, it’s important to look at the external factors. These may also impact your business finances during this change.
Outside of the exclusive NHS challenges, there’s a growing risk. Both to personal finances and those of practice funds sitting within a business savings or bank account and the overall purchasing power of money.
Breaking down the ongoing inflation crisis
There are two parts contributing to the crisis and how it might impact your practice – inflation and interest rates.
Interest rates at the moment are incredibly low. Despite the Bank of England increasing the rates by 0.15% in November from a historic low of 0.1% prior to that. This was the first rise in more than three years.
The Bank’s Monetary Policy Committee voted 8-1 in favour of the increase in the bank rate.
The move came as the result of growing concern over inflation. The exponential rise has far surpassed predictions.
The Consumer Price Index reached a staggering 5.1% in November. With driving factors including soaring energy costs. This is expected to reach 6% by spring. That is three times the Bank of England’s official target and a level not seen since the early 1990s.
Unfortunately, the rise in interest rate to combat inflation doesn’t really help cash savers because it’s not keeping pace with inflation. Even with the current market-leading business easy access account’s rate at 0.70%*, there’s a 4.4% gap for cash savings to hold their value versus inflation. If the base rate is passed on to savers, 0.15% isn’t enough to compete with inflation at 5.1%.
Low interest rates can lead to a ‘negative real return’. Business bank accounts generally don’t even offer interest on balances. And business savings accounts offer little. For the purposes of this example, even if your business savings account provides an interest rate as high as the Bank of England base rate, every pound you save is likely to be eroded over time.
For example, if a dental practice had £100,000 sitting in the earlier stated market leading account over a three-year period, the interest on this could reach £2,100. But should inflation reach and keep at 6% over the same period, that would still mean a £15,900 deficit in the fund. The erosion of your funds is significant.
How could commercial investments help?
For dental practices, there are a number of advantages.
Firstly, investing commercially is an answer to beating inflation and achieving real returns on money. This is very difficult if not impossible to do just in savings accounts.
It’s a well-known fact that investment comes with risk. But deciding not to invest your money also attracts what is known as ‘inflation risk’. The real value of your savings decreases annually because of inflation over the medium to long term, as shown in the example above.
It’s essential to remember, therefore, that having a significant balance in your business savings account over and above what you need to run your practice is not risk free. There’s a risk with everything.
As with any investment, the value can go down as well as up. You may get back less than you invested. Staying invested for the long term may improve your overall returns. It gives your money more time to grow and recover from any short-term dips.
Critically, it’s important that you invest in an environment that you are comfortable with. As an example, investing in a Wesleyan unit trust managers’ (WUTM) Unit Trust Investment account allows your practice to invest in up to six risk-rated funds as a business.
The funds see you pool your money with other commercial investors. This gives you access to assets that are difficult to buy alone.
The funds are risk rated on a scale of one to five. One represents the lowest risk (and lower potential returns) and five represents the highest risk (but potentially the greatest returns).
As specialist financial advisers, we can advise you on the most appropriate fund, or combination of funds, for your attitude to risk to ensure that you are investing in a way that you are comfortable with.
A long-term view
WUTM’s fund managers invest with a long-term view. They use periods of market volatility, such as the effect that Covid-19 has on stock markets, to find investment opportunities they believe will benefit Unit Trust funds over the longer term to yield the best possible results.
It’s looking at these alternative opportunities that could allow you to overcome risks and ultimately strengthen your financial foundation. Particularly if you are looking at introducing a significant change in the business; such as moving from NHS to private provision.
There are also tax advantages in investing business funds depending on your individual circumstances. For example, accessing the invested funds when you could potentially pay a lower rate of tax in retirement.
This information is based on our current understanding of legislation. Legislation and tax treatment can change in the future.
If in doubt, speak to a specialist.
If you’d like further advice in this area, you can speak to a specialist dental Wesleyan Financial Services adviser as part of a no obligation financial review by visiting wesleyan.co.uk/dental or call 0800 316 3784.
Remember, the value of investments and any income can go down as well as up and you may get back less than you invest. Capital at risk.
*Correct at time of publication.