Money Makeover: Prescription for a young doctor: Start thinking about retirement

Financial planning may seem unnecessary when you have just started out on your career. Making the right decisions early on in life, however, can prevent a lot of worries in the future, as one medical professional discovers.
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The Independent Online
Name: Deirdre Barton

Age: 25

Occupation: Senior house officer

Financial problem: Deirdre, who recently qualified as a doctor, works on medical rotation in a number of hospitals in the Belfast area. She currently earns pounds 22,000 after two years in the profession and hopes to become a consultant physician in the future.

Currently living in rented accommodation, she and her fiance, also a doctor, intend to buy a property ahead of their marriage next year. The couple, who are of a similar age and are embarked on a similar career path, would like to retire at about 55.

Deirdre already has an income protection plan in the event of being unable to work through illness. She needs advice on her prospective house purchase, planning for retirement and investing for her medium-term financial future.

The adviser: John Cartwright, principal of Cartwright Associates, 11 Bresagh Road, Lisburn, (01846 639228) is Northern Ireland regional chairman of DBS, a network of independent financial advisers.

The advice: Dr Barton has sensibly protected her income in the event of illness, with Friends Provident. She should also put in place a realistic amount of life assurance and critical illness cover, which pays out a lump sum should she fall victim to a number of so-called "dread diseases", including heart attack, stroke and cancer.

On her current annual income of pounds 22,000 a sensible level of benefit would be pounds 200,000 critical illness cover with a further pounds 200,000 payable on death.

A policy written so that future benefits would increase in line with inflation, on the birth of any children and on moving house - without medical evidence - would provide Dr Barton with a sound protection base. I would suggest a firm called Pegasus. Cover which pays out the above sum on death or earlier diagnosis of a terminal illness would cost about pounds 9 per month. Critical illness and disability cover for the same amount would cost a further pounds 24.42 a month.

As for the most suitable way to enter into a home purchase, the key is to consider the pattern of her senior colleagues in the medical profession. Two or three house moves in the first 10 to 15 years are not unusual.

If she and her husband were to move house often, there is a danger that only a small proportion of the mortgage capital would be repaid each time with a repayment mortgage The uncertain future of Peps, given government plans to launch separate Individual Savings Accounts two years from now, means this may not fit their needs either.

As the couple are members of occupational pension schemes, a pension mortgage is not an option. They are fairly unusual in that, as doctors, they can make contributions into the NHS pension scheme - without the tax benefits - and set up a personal pension to run alongside it, to give even greater tax advantages. This is quite a drastic step to take.

That leaves us with the low-cost endowment. The advantages are that it can be moved to each subsequent mortgage, allowing top-ups along the way. Given the couple's relative security of employment, early surrender is unlikely; the plan would repay the mortgage in the event of death or earlier critical illness. Given that Dr Barton's first house may have a mortgage of pounds 90,000, it may even be sensible to consider going for a larger low- cost endowment at the outset, which could lead to savings in the future.

A twin-plan option, offering repayment of the loan in the event of either partner's death, would provide greater flexibility. I would suggest a Norwich Union low-cost endowment, which is not the cheapest but has wider cover than other plans in relation to her profession, with premiums of pounds 140 per month for a pounds 90,000 mortgage.

Given that she is planning to get married in the near future and buy a house, perhaps she can wait a little while until she knows what her exact outgoings are likely to be.

With retirement planning in mind, Dr Barton sensibly joined the NHS superannuation scheme. This provides 1/80th of final salary for each year of service as an annual pension, plus 3/80ths for year of service as tax free cash.

Should Dr Barton retire at 55 she will have only 31 years service, which falls short of the maximum benefits. Furthermore, she will be penalised on a sliding scale for each year of retirement prior to age 60.

So how can she go about increasing her retirement income? Dr Barton currently contributes 6 per cent of her income to her occupational pension, which leaves her 9 per cent that she may use for additional funding and still get full tax relief.

She has three options. She could purchase added years in her occupational scheme. This can be done by paying a lump sum outright or by making monthly contributions throughout the rest of her career. Regular contributions can be quite inflexible and work out expensive in the longer term.

Dr Barton could contribute to her occupational scheme's additional voluntary contribution (AVC) scheme. That restricts her to one provider, which usually involves smaller annual fund management charges, but may not always offer the best future benefits.

The third option involves contributing to a free-standing additional voluntary contribution scheme (FSAVC). This can be done on a regular annual or monthly contribution or in a series of single contributions. A series of single contributions would be the most cost-effective, but requires great discipline.

In addition, there are imponderables, such as the costs of raising a family, education funding and so on, that can easily paralyse what started out in life as the perfect solution.

If you want a financial makeover, write to Nic Cicutti, Free Financial Makeover, The Independent, One Canada Square, Canary Wharf, London E14 5DL.

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