Dental specialist financial adviser Daniel Nixon discusses what dentists should be thinking about from a financial planning perspective when transitioning from NHS to private practice.
There are a number of reasons why as an NHS dentist you may be transitioning either partially or fully to private practice. It could potentially offer an improved quality of life, as without the time constraints of having to fulfil a certain number of UDAs. Longer appointment times may enable you to offer more thorough treatment for your patients leading to better outcomes and greater job satisfaction.
Regardless of whether you fully or partially transition to private practice, moving away from NHS dentistry will result in a reduction in NHS income and subsequently a reduction or loss in NHS pension scheme (NHSPS) and employment benefits.
The NHSPS is often described as a ‘golden pension’ and there is good reason for this. It offers a comprehensive basket of benefits to its members that includes a pension, spouse’s pension, dependant’s pension, death in service benefits, ill-health retirement benefits. There are also employment benefits such as sick pay and parental leave. Any dentist considering transitioning away from the NHS should carefully think about what they will be losing and how to bridge the gap.
Sick pay
In the event of absence from work due to sickness, one important NHS employment benefit is sick pay. This is payable from week four to week 26 (there is no cover for the first month), this means when transitioning from NHS to private practice, there is a period of 22 weeks of sick pay which will be lost.
While many dentists may have already taken out income protection, it is important to review the details of the policy when transitioning, as existing income protection (IP) policies may have been deferred by 26 weeks – taking into account the cover provided by NHS sick pay. This deferred income protection cover would now need to be moved forward.
A question I always pose to my clients is if you were to become sick and unable to work as a consequence, how long would you be able to cover your monthly bills for?
To illustrate the point, let’s imagine a 28-year-old non-smoker female dentist planning to retire age 67. According to an online risk calculator, the chance of this individual being unable to work for two months or more between now and the age of retirement, is 42%. (Example used was taken using LV Adviser’s online Risk Reality Calculator, at the time of writing.)
Reducing the deferred period, may well increase the monthly cost of an income protection policy, but it would offer the peace of mind, that if any unexpected absences from practice due to sickness or injury were to occur, financial hardship wouldn’t be an additional issue.
Parental leave
Dentists employed by the NHS are also entitled to parental leave benefits, provided they meet the qualifying conditions. This includes one year of maternity leave for a pregnant dentist employed by the NHS.
Parental leave benefits can be claimed for a period of 26 weeks – payments must start between the week they are due to give birth and 11 weeks prior. (Maternity leave payments are fully pensionable and taxable). Dentists in private practice are generally self-employed and will have to consider how to cover their maternity leave.
NHSPS benefits
Replacing your pension
The NHS pension is a defined benefit scheme – this means that your pension benefits are based on your earnings over the time you are a member of the scheme. Of course, as soon as you stop working for the NHS, you are no longer contributing towards the pension. Private pensions on the other hand are typically defined contribution (DC) pensions, these are based on the amount you contribute to your pension.
Some dentists may choose to delay starting a private pension for a year or so when leaving the NHS, as they wish to take a break. Generally speaking though, the longer the delay, the longer you will typically have to save to get the pension you would like. You will be missing out on the contributions and any investment growth. Therefore, it is a good idea for any dentist leaving the NHS to start contributing towards a private pension for their future immediately, rather than leaving a gap.
Death in service
As an active NHS member, you are entitled to death in service benefit. This means that were you to die, a tax-free lump sum – typically based on two times your earnings – would be payable to whoever your nominated beneficiary may be. This is typically a spouse or children. As soon as you have been out of the NHS for longer than one year, there is a significant reduction to this benefit.
To replace the lost death in service benefits, taking out a life insurance policy may be an option. For dentists operating as a limited company, there may be even more tax efficient to replace the lost benefit.
Ill health retirement pension
As an NHS dentist, if you became ill and are never able to work as a dentist again, the NHS may provide an ill health retirement pension. This has two tiers.
Tier one is applicable when an active NHS dentist can no longer do their own job but could take another position within the NHS – they would be paid the pension they have built up to date.
Tier two applies to members who will never be able to work again in any capacity. In this case, they would be paid what they have accumulated to date, as well as a proportion of the earnings that they would have accumulated, had they carried on working until retirement age.
If you are moving to private practice, an income protection policy could offer cover for the ill health retirement pension.
The dependant’s pension
The NHSPS also provides a spouse’s pension for its active members. In the event of death, your family or other nominated individual may be eligible to receive a dependant’s pension. A surviving spouse would be paid the adult dependant pension every month. In the case of a child dependant, a pension may be payable to them until they are 23 if they are still financially dependent at this stage.
Depending on your individual circumstances, considering a family income benefit policy to bridge this gap may be an option.
Seeking specialist support
Whenever there is a change of circumstances, it is always a good idea to book a financial review. When transitioning from NHS to private, it is important to ensure you fully understand exactly what is included in your NHS pension and employment benefits and to think carefully about how they will be replaced. A dental specialist financial adviser can assess your individual situation and help you to understand your options to put you in an informed position.
Tax treatment depends on individual circumstances and may be subject to change in future.
Wesleyan Financial Services is a broker and insurance products are provided by a number of selected insurers.
Please remember that the value of your investments can go down as well as up, and you may get back less than you put in.
If you are transitioning from NHS to Private Practice and would like support or guidance on understanding your financial position, speak to a dental specialist financial adviser at Wesleyan Financial Services for a financial review by visiting wesleyan.co.uk/financial-advice/dentists or by calling 0808 149 9416. Charges may apply. Learn more about our charges here.
This article is sponsored by Practice Plan.
