Mid-Year Market Review – July 2024

An Encouraging First Six Months
The continued strength in global markets has continued into the first half of 2024. The main indices continue to be driven by a handful of mainly technology stocks. The primary driver continues to be excitement around A.I., helped by some very positive earnings reports. The ‘poster child’ here (NVIDIA) rose by 31% in Q2, despite a drop of 11% in the latter part of June. This is after a rise of 84% in Q1 and having trebled in 2023. During June it briefly became the most highly valued company on world markets.

* Inflation figure based on the CPI to July 2024

Bond Returns Weakening
This does however go against the grain of weaker bond markets. The expectation for the US markets was for up to 6 interest rate cuts in 2024, this is now reduced to one or possibly two before year end. Hence it is no surprise that bond returns have been negative and also highlights the folly of following forecasters. Inflation data in the US and Europe has been the main cause of the change, with inflation relating to services proving stubborn. The ECB and the Bank of Canada however did cut rates, by 0.25% in each case.

French Election
Eurozone bond funds and indices were hit late in Q2 by changing perceptions about the composition of the next French government. The spread on French bonds over German bunds widened sharply. Interestingly, and little covered in the media, France’s sovereign debt was downgraded from AAA to AA by Standard & Poors in May. This was before the political picture changed and was based on the deteriorating budgetary position.

Geopolitical Tensions
While macroeconomic conditions have stabilized, with rate cuts aligning with falling inflation and the advent of AI and quantum computing heralding a new era of productivity, geopolitical tensions are at their highest since the Cold War. The situation in Ukraine, serving as a proxy war involving Russian clashes with US-led NATO, signals a global conflict. China’s quiet support of Putin and actions that seemingly undermine Western interests hint at an agenda that may include aspirations towards Taiwan.

European Reluctance To Face Reality
There is a noticeable hesitance among European politicians – apart from those from Finland, Sweden, the Baltic States, and Poland – to acknowledge the likelihood that Putin’s imperialist ambitions extend beyond Ukraine, with Moldova most likely next in line. The situation is complex with the conflict in Ukraine eventually stabilising into a frozen state unfortunately for the Ukrainians.

Gold Price At All Time High
The volatility of the geopolitical landscape continues to influence the gold market, with prices up by +13% in USD and +16% in EUR this year. Since 27th June 2019, before the quantitative easing that accompanied the lockdowns, gold has risen by +74.45% from €1,241 (see FT article Gold Prices Hover Near Record High). Should geopolitical risks diminish, we may be on the cusp of a long-term bull market in natural resources, including oil, gas, and coal – ironically all essential for the transition to zero carbon.

A.I. Power Market Growth
The recent domination of major index movements due to a small number of companies has been quite remarkable. Apart from the sheer scale by which these stocks have dominated returns, the legend indicates that change in valuation has accounted for the bulk of return. The scale of the growth in these stocks means that global equity indices are more concentrated than has been the case for six decades with over 21% now made up of this small number of stocks.

You Don’t Need To Pick Winners
While anyone who owned significant amounts of NVIDIA shares would have done very nicely, it’s not obvious that investors should now be buying the stock if they don’t already own it. As companies grow, the market’s expectation for continued earnings growth means that any future disappointments will be heavily punished by the market.

Owning The Worlds Major Indices
However, more importantly, it is worth remembering that you are already an NVIDIA shareholder if you are invested in a diversified global equity fund. These funds track the world’s major indices, like the S&P 500. NVIDIA was added to the S&P 500 index as far back as 2001. As it has grown over the years, global equity funds have steadily increased their ownership of NVIDIA, meaning that most investors have benefited from its meteoric rise in share price.

Reduce Your Stress Levels
Global equity funds, which include the market’s top companies, save you from the guesswork and stress of picking individual stocks. This same story is likely to play out many times in your lifetime. As new companies rise to the top, your share of them will also. Interestingly, Microsoft is the only top ten stock from 1999 still in the top ten 25 years later.

Protection Of A Diversified Portfolio
Companies that make the news for exponential growth almost always experience periods where they lose more than half of their value over short periods of time. For example, in 2022, Amazon lost close to 60% of its market value while the market as a whole only declined 25%.
A global fund gives you the growth exposure of the stocks that fly while also giving you the protection of a diversified portfolio.

Ignore The Noise
While the above good news seems common sense, you will seldom read about it in the financial media. Growing wealth slowly over time does not make for exciting headlines. A story about the latest stock to explode makes for a better story, which is why you will always wonder if you are losing out to others.

Key Benefits of Index Funds
There are numerous reasons to own index funds, and the data shows that they tend to outperform actively managed funds over meaningful periods. One key advantage of index funds is that they always include the market’s dominant companies. It’s impossible to predict which sector will dominate the top 10 spots. But the good news is, you don’t need to guess because you’ll own a small slice of it regardless.

Take The Stress Out of Your Investment Decisions
Some stocks die, some stocks fly, and some stocks really soar. Trying to pick these winners in advance is a fool’s errand. By owning a broad global equity fund, you will be a part-owner in the market’s dominant companies, even those no one could predict with foresight. This approach allows us to benefit from the growth of these global giants without the stress and uncertainty of trying to pick individual winners. It also offers the benefits of a diversified portfolio of the Great Companies of the World.

Outlook
If the geopolitical risk does calm with the beginning of real engagement between protagonists, the backdrop is favourable to gains in equities especially to lower priced regions – outside of the US. As rates are cut by Central Banks this should also help equity values. Depending on the scale and pace of cuts it is not unreasonable to expect mid to high single digit gains in bond portfolios by year-end 2024 and repeated more robustly next year. We continue to prefer passive equity exposure but with substantial tilts towards value and markets outside the US which give the benefit of diversification.

I hope you have found this update useful and as always we remain on hand to help with any queries.

Ronan McGrath
Managing Director
Oakwood Financial Advisors

7th July 2024

Address your concerns

The decision to retire brings up many questions, concerns, and indeed many doubts for lots of GP’s. The purpose of this article is to help you identify, consider, and overcome them, either now or at a future date.

Having enough money to retire

Statistics show that concerns about not having enough money in retirement are universal. For many couples who retire in their early to mid-60s (in a developed nation with modern health care facilities) it will be a 30 years plus retirement period.

Critical Issues

When planning for retirement, many GP’s struggle to comprehend the critical issues and how to deal with them. I had two calls recently, from GP clients asking to meet me, with an imminent need to retire. One was 62 year old GP with concerns for his own health. The second case was a 65 year old GP and this related to the health of their spouse. They both needed advice and guidance on how to deal with retiring in a short space of time. Luckily for both, they had been prudently planning retirement for the last several years and had the peace of mind to know financially all was well.

Financial advice and beyond

In my role as a Financial Advisor, I focus on the financial planning aspect, but in so doing, I am very cognisant of the need to be attuned to the emotional side of retirement. This I feel is crucially important. Having enough money to retire is probably everyone’s biggest question and concern. Do they have enough saved to retire is usually the first question our clients ask. It’s a scary scenario for them to ponder. In this article I want to highlight the broader list of issues.

Three scenarios to consider

Author George Kinder is widely recognized as the creator of, what he calls, Life Planning. His philosophy is centred on three questions you should ask yourself before deciding a financial plan.

1. Imagine you’re financially secure and have enough money for both now and into the future. How would this change your life?
2. Imagine your doctor tells you that you have 5-10 years left to live. You won’t feel sick but also don’t know exactly when you will go. How would this change your life?
3. Now imagine your doctor tells you that you have one day left to live. What are your biggest regrets? What do you wish you would have done differently?

Wider considerations

The idea here is that these questions can help you dig a little deeper into your retirement goals and aspirations. It starts out financially but then embraces the more human element. This exercise entices you to go beyond the typical surface-level financial goals everyone talks about and get more specific about your retirement bucket list and aspirations. For most people, these questions are theoretical in nature. But let’s delve into them more fully.

Your busy work life

GP’s have a busy, to hectic, everyday work life.  They don’t tend to have time to focus beyond their short term needs. They are working long days, running a practice, caring for patients, working with and managing staff, before getting home every evening to family life. Hopefully, there’s some downtime to squeeze in some social activities!

Continuity of patient care

Having continuity of care for their patients is very important to many of the GP’s with whom I work. Many GP’s struggle to contemplate stepping away from their practice. In many cases this is due to uncertainty as to who will take over from them and care for their patients.

When planning for retirement, there are essentially several key points to review in advance. These I have set out below.

The Most Important Retirement Decision Factors 

When thinking about what is most important when deciding to retire, the first query is pretty obvious. It’s what probably gives everyone the biggest quandary. Finance!  However, it isn’t the only consideration you should address. While the list below isn’t comprehensive, it will get you started on your retirement planning journey.

Can I fund my retirement? 

Statistics show that concerns about not having enough money in retirement are commonplace. They are mirrored in developed nations across the globe. I repeat, for many couples who retire in their early to mid-60’s it will be a three-decade retirement. The ‘funding question’ is particularly challenging for people when we are ‘in the eye of the storm’. When markets are more volatile than they usually are, your pension/investment values are fluctuating quite a lot. As a consequence, making it more difficult to plan.

Heightened inflation

Secondly, with inflation on a temporarily heightened upwards run – the thought of covering the increasing cost of living throws up a mental block for many people. However, there are other concerns when looking at your retirement preparation. Even if you’ve worked out that you can cope with this inflation, there are other matters that will influence whether you are truly ready for transition to retirement.

1. Are You Emotionally and Mentally Prepared To Retire? 

Asking yourself this question is something you need to tackle well in advance of making your decision. Not everyone takes this question as seriously as they should. Many GP’s work 12 hour days or longer. It is an abrupt change going from working such long hours, seeing familiar faces every day, and having a purpose. Are you ready to let go this routine and familiarity? With this in mind, you may need to do some thinking about what you want your life to be in retirement. Are there any interests you want to spend more time pursuing?  How will retirement affect your family dynamic?

This isn’t just about money!  You will hopefully already include hobbies, travel, education and such into your retirement budget. This question is about ensuring you can wholeheartedly enjoy your retirement and get the most out of your new stage of life.

2. Have You Tracked Spending and Made a Retirement Estimate? 

Retirement often means a change in your income. You will lose or reduce some incomes and hopefully increase or create some new ones (pensions/savings/investment incomes). It also means a change in how you spend your money. It is a good idea to work this new adjustments into your financial plan.

One way to get an informed look at what to expect, is to track your spending for at least a year before retiring. Stay strict with yourself and keep track of everything. The results of this tracking will give you a base to work from when considering the spending adjustments that you will be making on retirement. Remember, try to keep things as reflective of reality as possible, it will pay dividends!

4. Life Satisfaction 

This ties in with point 2. If you jump into retirement too hastily, be it for health reasons or you are burnt-out from your job, you face possible challenges that can affect your mental health and personal life. It is actually one of the most important factors you should think about when looking at what is most imperative when deciding to retire.

Without having thought about what you want your life in retirement to be like, it is very easy to end up feeling a bit lost. Many retirees arrive at a position where they are bored and have lost their sense of purpose. Those that retire without much preparation tend to be the ones that find the transition most challenging.

In addition to exploring some ideas, talking with the family and taking an abrupt step, some people prefer to ease themselves into retirement. Many GPs we advise reduce their sessions gradually, working 4 days a week down to 3 and then to 2. In this way slowly reducing the total hours they work. Others do some consulting to make the transition less abrupt.

5. Is Your Portfolio Ready? – Switching From Accumulating Funds To Withdrawals. 

You’ve been diligently accumulating your pension funds and assets for years but now face the question is your portfolio ready for you to start drawdowns?

This is a pretty intimidating stage for most. Are you happy with the asset allocation and the other parts of your financial plan? Now is a good time to take a look at that planning and make tweaks. Again, it is most prudent to make these tweaks based on long-term perspective as opposed to current factors such as environment/markets/inflation.

6. Know Your Tolerance For Uncertainty. 

Everyone has a different tolerance of uncertainty. This will influence whether they are correctly disposed, and mentally ready, to retire. Uncertainty tolerance isn’t just about your investment portfolio. Fund values will go up and down over time. The key thing to remember here is markets go up on average 75% of the time and down 25%.  There are other uncertainties however to do with the everyday things you will face in retirement.

• Sources of Income
• Purpose
• Filling your time
• Hobbies
• Drawdown of income
• Gifting versus Retaining

How much are you happy to keep in your rainy day bucket for unexpected expenses? Do you want to miss potentially good retirement years before your health declines? No one can predict ill-health but there are things you need to consider and make sure you are comfortable with them.

Think ahead – The Bucket Strategy

When we advise our clients who are contemplating planning for retirement, we outline an image of having their money amounts divided into 3 different buckets:

1. The safety/security bucket – short-term (less than 3 years)
2. The medium term growth bucket (3 to 5+ years)
3. The long term growth bucket (typically 7+ years)

As you can see, there is a lot to consider when thinking about retirement. With increased longevity risk (people living longer) you are more than likely looking at a 30+ years of retirement. The whole point of the growth bucket is to invest wisely funds on a longer timeframe, achieving higher growth for those later years in retirement.

Have a Plan

Choosing to retire is a luxury many people don’t get to have. It can be something pushed upon you by force of circumstance or it is dictated by health matters. Ensuring you get the right financial advice is just one aspect, which will help lead you to having an enjoyable, active retirement for many years. Looking ahead and having a prudent plan (both emotional and financial) will ensure that you make the decision to retire with confidence.

Hopefully, this article has given you a starting point when thinking about ‘what is most important when I’m considering retiring?’

Please click on the article link for more detail.

The purpose of this article is help you look at the key factors when planning your retirement, putting a retirement plan in place, and the main options available to you.

Eliminate the uncertainty

When contemplating, or reaching, a planned retirement, your concerns can be heightened, since you are moving into what we can describe as the Third Stage of your life.  In an ever changing world there is a huge degree of uncertainty. During the last three years in particular we have had a global pandemic and a land war in Europe. Many countries are still dealing with the fallout from the former while the latter shows no sign of abatement. However, historically, there has always been similar turmoil and uncertainty in the investment markets, yet life has gone on in spite of it all.

The Third Act of your life

The first act of life is mostly about youthful enthusiasm and education, the second act is mostly about career and family. In my view, the third act of life should be about your pursuit of your own fulfilment. That is enjoying your hard work and your prudent financial planning. (And in many cases leaving some kind of legacy).

A Financial Plan that is specific to a GP

I have written previously about being prudent and putting the building blocks in place for a sound retirement plan, regardless of global uncertainties. In this article I outline the factors to consider when planning your retirement. In addition, I summarise the main options available to you to provide a sound, and tax efficient income in retirement. Our first step with our clients is to have a Financial Plan. Within it we focus on simple steps towards financial security, maximising tax reliefs and the potential return from your investments.

Key factors you need to consider at retirement

Each individual’s circumstances should be assessed, in the main, under the following headings (but other factors may also need consideration):

1. Age – a GP retiring at age 72 has a reduced life expectancy, and potential income need, than a GP retiring in their early 60’s.
2. Current health – underling health issues are a key factor which need to be considered.
3. Attitude to risk – If going the ARF route, too conservative an investment approach may mean you run the risk of low growth potential over time. The annuity may be the more prudent option in such instances.
4. Taxation/Multiple Pensions – If multiple income sources and pensions – what is the most tax efficient way to structure the drawdown of your income? Which pension / retirement account should you draw on first?
5. Other income sources – Rental income/state pension/HSE pension/part-time work. At what point does the taxation and the Law of Diminishing returns kick in for part time work?
6. Spouse/Dependents – Is your spouse/partner dependent on the income – if so how do you ensure they are protected?
7. Your Will & Legacy – Is your Will up to date, and a Power of Attorney is appointed. Do you want to leave funds to family/children?

GMS Annuity

While the Approved Retirement Fund (ARF) tends to be the preferred option on retirement, the GMS scheme offers attractive annuity rates. This option needs to be carefully considered before making a decision. It is also the intention of the GMS trustees to increase the pension income (Annuity) from the GMS scheme in line with inflation. Two-thirds of the pension passes on death (if applicable) to the spouse.

Approved Retirement Fund (ARF)

An ARF allows retirees to keep control over their pension savings. Their pension fund continues to be invested, preferably in a mixture of assets but predominantly in globally equities for growth. This allows retirees to potentially benefit from investment returns and continue to grow their pension fund while taking regular withdrawals to provide an income during retirement. A key difference between the ARF and an annuity is what happens on death. The ARF option allows retirees to keep control over their pension savings. An ARF can then pass on to the deceased estate – assuming the assets outlive you under a growth orientated investment strategy.

Caveat Emptor

When it comes to retirement advice, many financial advisors have a conflict of interest when advising GP clients. It is important to point out that many advisors are financially incentivized to sell an ARF (they are usually paid a commission), whereas if a GP goes down the annuity route with Mercer there is no remuneration to the advisor. This is where it is very important to make sure that you get impartial advice with a clear understanding of both the benefits or downsides of both the Annuity and ARF option.

Delayed Maturity and Drawdown of GMS

It is also important to note, just because you have retired/resigned from the GMS, doesn’t mean you have to drawdown your GMS pension. Many GPs may have other sources of income and savings. Or, in some cases, continue to help out and cover sessions in the practice from which they have retired. You may not need to drawdown your GMS pension immediately and can delay up to age 72. This allows the funds to remain invested in a tax free growth environment and avoid paying tax on any income drawdown.

Irish State Pension – your potential entitlements

You also need to factor-in your entitlement to the State Pension. From age 66, a GP is entitled to the State pension. The current full contributory State pension (average of 48 or more PRSI stamps) is €13,843 pa plus a spouse benefit (means tested) of €12,365 if eligible (over age 66). We always recommend you review your PRSI record, and for your spouse if applicable, well in advance of retirement. The information can be requested by calling the Dept. of Social Protection at 0818 200 400.

State Pension Eligibility – unexpected obstacles

There have been some very unfortunate cases concerning GPs and their entitlement to the State pension. They apply for their State Pension only to find that they are not eligible. Some GPs were employed by the State to provide services to a district hospital or long-stay care facility. The PRSI contributions for this income, for entrants pre 6 April 1995, is Class D. This class of PRSI is not regarded when determining the State pension entitlement. Impacted GP’s can have a significantly reduced entitlement or in some cases, have lost all entitlement to the State Contributory Pension.

UK State Pension Entitlement

Many Irish doctors have spent time training or working in the UK. For those with a potential UK State Pension entitlement (minimum 3 years National Insurance credits required to qualify) the good news is the deadline for buying additional credits has been extended to April 2025.

Have clear goals

You should use your income as a tool to achieve your life goals. Although I am obviously biased, a trusted financial advisor can help you reach those goals. But only if she/he has the expertise to do what’s required. Then, together, you can define your goals clearly and identify the ways to achieve them. For many investors, emotions tend to override investment decisions. That is why a financial plan (and trusted advisor) is essential to guide you from making poor investment decisions along the way and have a disciplined approach.

Your Retirement Plan – for now, and your future

The essence of retirement planning is estimating your income needs – both now and in the years to come. A prudent financial plan, reviewed annually with your advisor, will allow you to calculate the level of capital required to maintain your desired lifestyle. You then have every chance of putting a realistic plan in place to help you achieve your goals and maximise your Third Act!

Please click on the article link for more detail.

A Bare Trust can be used by a client if they wish to gift money to children under the age of 18, who lack legal capacity to manage such assets.

The trustee(s) manage and control the funds until they are released to the beneficiary(s) at a future date.

Unlike some other trusts, a Bare Trust can’t be revoked. Once monies are paid into the trust, the beneficiary(s) becomes absolutely entitled to the assets. A transfer of money into the trust can’t therefore be reversed.

Why set up a Savings / Investment plan under a bare trust?

By setting up a savings plan under a bare trust, the client (known as the settlor) can gift money to a child under the age of 18 years (known as the beneficiary) each year by making payments into the policy and the beneficiary can avail of the Small Gift Exemption that currently applies.

Under current Revenue rules, if the total value of all gifts made by one person to another in any one year is less than or equal to €3,000, then gift tax would not apply to those gifts.

The settlor can decide who is to benefit from the amounts invested at the time of establishing the trust. It is important to remember that once a Bare Trust is established, the trust can’t be revoked and the beneficiary(s) named at the outset can’t be changed.

Investment Choices

Investing does, of course, carry its own risks. However, a well-structured and well-diversified portfolio, can be tailored to an individual’s requirements. Managed correctly, it can offer growth potential over deposits, protect capital from inflation and the decline in purchasing power over time.

On that basis we would typically recommend a portfolio based around solid global companies with a proven track record of positive returns above any other asset classes. You do have a choice of how and where funds are invested. Diversifying your investment portfolio is one of the best ways to reduce risk, and thus promote growth.

Glossary

Asset: This could be anything you own that could be worth something – for example your house, your car, the cash you have in your bank account.

Settlor: is the person who sets up the trust and supplies the money for the trustees to invest.

Beneficiary: is the person who benefits from the trust. There may be more than one beneficiary.

Trustees: are the administrators of the trust. They manage any assets of the trust for the benefit of another person.

The article delves into the intricacies of the pension implications for hospital doctors and also focuses on the new Public Only Consultant Contract 2023 (POCC23). It explores the current allowable pension limits, the nuances of the new contract, and the potential pitfalls and confusions arising from recent HSE FAQs document as they impact on pension benefits.

The article also provides some practical advice for hospital doctors who are concerned about the pension limits and how to plan for their retirement.

Some of the key points from the article are listed below.

• The current pension savings limit is €2 million (Standard Fund Threshold), unchanged since 2014.
• Exceeding this threshold results in a 40% Chargeable Excess Tax (CET) on the excess value at retirement.
• Consultants may increase their pension limit to €2.3 million under specific conditions through a Personal Fund Threshold (PFT).
• The Sláintecare Contract poses risks for consultants close to or exceeding the pension threshold as it may negatively impact public service pension benefits.
• A full three years of service under the new contract is necessary to fully benefit from the higher salary’s impact on pension benefits.
• The article advises caution for consultants approaching retirement, emphasising the importance of understanding individual circumstances and potential tax liabilities.
• It looks at the optimum retirement point for maximizing pension benefits while minimizing tax liabilities.
• To minimize risk, the article recommends obtaining accurate pension projections and consulting with qualified financial advisors.
• There is an expression of concern regarding incorrect pension benefit projections and the importance of having a clear understanding when planning for retirement.

Please click on the article link for more detail.

The finance bill of January 2023 has removed benefit-in-kind restrictions so that now an employer can make unlimited contributions to their pension. No longer is that amount dependent on one’s salary scale or length of service.

Spouse/Partner benefits
Not only can the owner/employer make personal unlimited contributions, so also can a spouse/partner have separate, unlimited contributions, from the business, into their pensions.

Previously, if an employer made a pension contribution the amount was limited by the individuals salary and number of years’ service. This is no longer the case.

An employer can now pay as much as they can afford into an employees PRSA without reference to either salary or service of the employee.

Tax relief on all employer PRSA contributions can also be claimed in the accounting period in which it is paid.

So now an employer can make any contribution to a PRSA they wish without limit.

Employees still need to consider the overall Standard Fund Threshold (SFT) of €2 million.

In summary, not only can an employer now make an unlimited contribution to a PRSA, they can also claim tax relief in the accounting period in which its paid.

While these rules are now in under current legislation they may be subject to change later this year.

The changes apply to employees and shareholding directors. They also apply to shareholding directors of Investment Companies.

Revenue’s position on salary sacrifice still needs to be considered and should not be overlooked when making an employer contribution. Extra employer payments in addition to existing remuneration are allowable but an employee reducing their salary to make the payment will be caught by the salary sacrifice provisions.

An employer can contribute to an occupational scheme and a PRSA at the same time for the same employee.

Client Note – 2021 Review & Looking Forward

2021 was another reminder that forecasts are close to worthless. After a somewhat surprisingly positive year in 2020 one could have been forgiven for predicting negative returns in 2021. Not only did that not happen, 2021 turned out to be a very strong year for global equities.

Often what concerns investors is very different from what drives market behaviour as we have seen since Covid emerged in early 2020. As a result, the last two years has seen a surprising period of positive returns in financial markets generally. The reasons for these positive returns are many. Among them the introduction of Quantitative Easing by global governments, low interest rates which have resulted in no real return from deposits and bonds, coupled with the rapid expansion of technology on multiple fronts.

The table below provides a summary of 2021 returns for several major equity, bond, commodity and currency markets/indices.

* Gold is priced in US Dollars and when converted resulted in a -3.6% real return.

Following a significant increase in queries from HSE hospital consultants concerned at the impact of pension limits on their entitlements after a recent High Court ruling, Ronan McGrath of Oakwood Financial Advisors offers advice and guidance on getting the best outcome

The 2018 High Court win resulted in the reinstatement of pre-2010 and 2013 salary cuts for Health Service Executive (HSE) hospital doctors. However, the knock on effect of this was the potential for a significant tax bill at retirement due to the 2014 reduction in pension limits (see ‘Impact of recent High Court victory for consultants’ pension limits’, IMT, 14/12/2018).

Ramifications
With the higher salary and pension limits this has led to many consultants now having significantly higher tax liabilities to pay on drawing down their pension benefits at retirement. It has also led to some hospitals trying to force consultants to pay any liability over shorter time periods.

Ombudsman’s beneficial ruling favours consultants
A recent Ombudsman ruling against a large Dublin city hospital is a significant win for those with a tax liability. The hospital tried to force the consultant to repay the tax on her pension benefits over a 10-year period. The Ombudsman upheld the complaint against the hospital and, in a legally binding ruling, determined that the consultant can write-off her tax liability over a 20-year period.

Mitigate tax liability
In our 2018 article we were concerned that too many doctors are leaving the HSE because of potential tax charges on their pensions. This is because they are not fully aware of the options available to mitigate the tax and the wider ramifications on their overall financial circumstances. Our concern has proved to be well-founded.

Improved revised pension limit available for some
Revenue have advised that those individuals who have been issued with a Personal Fund Threshold (PFT) Certificate in December 2010 and January 2014 may be eligible to reapply for a revised PFT at a higher limit:

• Consultants who have already been issued with a PFT as of December 7, 2010 may be eligible to apply on a ‘look-back’ basis for a revised PFT.
• Consultants who have already been issued with a PFT as of January 1, 2014 may be eligible to apply on a ‘look-back’ basis for a higher PFT as of December 7, 2010.
• Consultants who were not previously eligible to apply for a PFT in either 2010 or 2014 may now be eligible to apply on a ‘look-back’ basis

Current allowable limit — €2 million
Since January 2014, the Standard Fund Threshold (SFT) limit an individual can have in their accumulated pension pot at retirement is €2 million (this has reduced from €5.4m in 2010). For those with Defined Benefit schemes (HSE consultants employed pre-2013) all benefits accruing after this date are capitalised by a factor of 20, or greater, depending on an individual’s retirement age. For some, there is scope to stretch the limit to €2.15m, depending on their individual circumstances.

This limit can be easily exceeded
While €2m sounds like a hugely significant sum, the revised revenue capitalisation factors which apply mean that a consultant on a modest pension (relative to their working salary) can easily find themselves exceeding the SFT. The table to the left illustrates the point.

It may be advisable to cease future pension contributions
Pension contributions are one of the most tax-efficient means of saving. However, for many doctors who are members of the pre-2013 pension scheme with the HSE, this may not make sense. A chargeable excess tax of 40 per cent applies to pension assets over the SFT of €2m. At retirement, this portion of the assets may be taxed again at higher income tax, Universal Social Charge (USC) and potentially Pay Related Social Insurance (PRSI) when drawn as income of up to 52 per cent.

This leads to a combined effective rate of up to 71 per cent on the excess amount (i.e., 100% – [40% * 52%]). It is not efficient to continue making pension contributions once assets have reached the threshold (or are projected to reach the threshold).

Professional Added Years (PAY) — correct procedure
While PAY can push you over the Revenue limit they may also allow you to apply for a retrospective increase in your PFT as a result. If dealt with correctly, this may allow you to receive a higher PFT and reduce or negate any potential tax liability.

How to avoid paying double tax
You need to be aware of where you are from an overall limit. Otherwise, you may pay on the double at retirement. The right advice has never been more important for HSE consultants regarding their options towards retirement planning.

Investment strategy review
Once your pension assets are valued above the SFT you need to weigh up the risk versus reward. You are taking on risk where any growth is taxed at a minimum of 52 per cent and up to 71 per cent, while there continues to be full exposure to loss. Level of risk will be dependent on several factors including time horizon and risk appetite.

How to reduce your potential tax bill
The good news is that there is some scope to reduce your tax liability if you do exceed the SFT:

1. Tax on any pension lump sum (up to €200,000 paid out tax free with a balance up to €500,000 taxed at 20%) can be offset against the tax due on exceeding the limit.
2. For HSE employees the tax liability can be paid as an interest-free deduction from their pension over 20 years (no impact on spouse death in retirement entitlement and no recovery on early death) – in essence, this is an interest-free loan.
3. One can use the encashment option under Section 787 Taxes Consolidation Act, 1997. Any AVC or Private Pension benefits can be encashed from age 60 before taking HSE benefits. This option is only available to those in the Public Service.
4. Retire your benefits on a phased basis drawing your Private Pension initially to crystallise their value now so that any further growth will not impact on your PFT limit. A plus for individuals with both HSE (or General Medical Services [GMS]) Pension and Private Pension benefits is that you do not have to retire in order to drawdown your Private Pension benefits.
5. Take early retirement to keep under the €2m limit – but be aware of losing ancillary benefits as a result.

How to minimise your risk
There are a couple of strategic steps which you can take in order to ensure that you minimise the risk of a significant tax liability when in an overfunded position:

1. Request a breakdown of your current values and expected pension benefits from your pension providers or, in the case of HSE employees your relevant department. Most hospitals have a contact person for such queries.
2. Gather the information (or request your financial advisor to do so) and get an experienced financial advisor/pension specialist to review your figures.
3. Ask your advisor if they have the necessary experience in this area to provide the right advice. Most pension advisors lack the essential familiarity with the GMS and HSE Pension schemes.
4. Putting the correct plan in place is critical. Everyone’s circumstances will vary, depending on their years of service, salary level and Private Pension values.

Incorrect submissions have detrimental results on benefits
We pointed out previously, due to the sheer volume of requests being submitted to the various HSE pension sections across the country, there has been an increase in incorrect projections of pension benefit statements. Issues such as applying incorrect salary, or revenue multiples to calculate benefits, or years of service being omitted, are common. These lead to substantial losses.

Missed tax relief opportunity – Spouses’ and children’s lump sum
When retiring, a deduction may be made from your lump sum on the arrears due for spouses’ and children’s contributions. Undercurrent Revenue provisions, income tax relief is allowable on contributions towards the Spouses’ and Children’s Scheme, whether paid by deduction from salary or by deduction from retirement lump sum or death gratuity.

Phased retirement approach
For some doctors with both Private Pension and HSE Pension benefits, the phased drawdown of benefits may be an option. This may be particularly beneficial for those who have total pension benefits in excess of the SFT or their PFT:

• This facilitates the split of larger Private Pension pots into smaller pension accounts which can be drawn over different times.
• This can then facilitate the maximum tax-efficient amount only is drawn at the earliest possible time with the excess above this amount deferred, to a maximum age of 75.
• It reduces the mandatory taxable withdrawal if choosing the Approved Retirement Fund (ARF) option.
• Defers the timing of the chargeable excess tax due on exceeding the SFT.
• The potential of improved death benefits from an estate planning perspective.

Working past age 65 — pros and cons
For pre-2013 HSE employees who have a shortfall in years of service and currently buying back years, another option to consider is working past age 65. If the intention is to work on past age 65 then these years will more than likely qualify for additional years’ service to age 65 (this can be checked by reviewing the applicable scheme rules). In some cases, it may mean the purchase of notional service is not necessary.

Benefit by being aware of your options
Too many doctors are making decisions without knowing their complete options or looking at their overall financial picture. While you could face additional tax charges by staying in the HSE Pension scheme, if you leave early you may miss out on ancillary benefits, which may mitigate the possible tax charges.

Critical that you have a clear understanding
It is difficult enough to have a clear understanding of expected pension entitlements at 60 or 65 due to the various elements and rules involved. Now with salary reinstatement it is become even more complicated for some consultants. Knowing these projected benefits is a key requirement to put an informed, prudent financial plan in place.

Peace of mind is assured if you have expert advice
Getting the right advice on your retirement planning is very important. Very few financial advisors or accountants have the technical knowledge to advise on the most efficient ways to mitigate any tax liability on HSE Pension benefits especially if coupled with AVC or Private Pension benefits. Which option to consider needs careful review before deciding. Expert advice from an experienced advisor, familiar with this area, is essential. Make sure you are getting the right advice to give you peace of mind.

Information
Oakwood Financial Advisors are specialist financial advisors to the medical profession with a unique understanding of both the GMS Pension scheme and also the HSE Pension benefits.

For more information please contact Ronan at: ronan@oakwoodfinancial.ie;
or on 086 609 8615.