Curing doctors’ pension ills writes John Lowe
15 August 2010
Sunday Business Post
The recently published National Pensions Framework (NPF) makes depressing reading for medical practitioners who rely on private practice earnings to generate much - or most - of their income.
Self-employed practitioners are now limited to making pension contributions against annual income only up to €150,000. Furthermore, any pensionable HSE or GMS earnings make up the first part of this, meaning that private practice income will be zero for doctors with annual public income of €150,000 or more.
But it gets worse. The NPF confirms implementation by 2014 of the Programme for Government proposal for a single rate of tax relief of 33 per cent on all personal pension contributions. Doctors paying income tax at 41 per cent will effectively pay tax at 8 per cent on their contributions to fund their pensions.
If that’s not bad enough, we will all have to work longer before qualifying for our state contributory pension, with retirement age extended to 67 for people retiring in 2021 and age 68 from 2028.
With high - and presumably soon to be higher - personal taxation rates and income levies devouring an increasing slice of earnings, plus the dreams of alternative property-based retirement plans evaporating all around us, thoughts turn to how a private medical practice can actually fund a decent retirement lifestyle.
To find a solution, it is useful to look at how pensions are funded for professionals in the public sector and for senior executives and company directors in the private sector. Here, pension schemes are funded predominantly by employer-paid contributions.
An employer may fund annual pensions for directors and/or employees up to two thirds of pre-retirement earnings where ten years’ service has been completed by retirement age. In addition, there may be options to convert pensions into approved retirement funds (ARFs) to avoid annuity purchase.
The benefits of employer pension funding are simple and fundamental in respect of both public sector and private sector superannuation or occupational pension schemes.
* Employer-paid pension contributions are exempt from benefit-in-kind taxation on behalf of the employee or salaried director for whom the contribution is paid. This means that a reduction in personal tax relief to 33 per cent on pension contributions will have no impact, as contributions are paid by employer.
* The €150,000 earnings ceiling does not apply to employer-paid pension contributions.
* Contributions paid by employers may be much greater than the scope allowable to an individual who is funding on a personal basis, as the employer funding rules allow catch-up for previous years of underfunding.
* Employer-funded schemes may produce much higher levels of retirement benefits. Most private medical practices are structured as sole traders or partnerships. The medical practitioner is assessed for income tax and levies on al l profits of the practice, with now very limited scope for individual tax-relieved pension funding.
On the other hand, most successful non-medical commercial businesses are structured as corporate entities run by the shareholding directors.
The director is assessed for income tax and levies only on salary as voted by the board.
The balance of corporate profits may be applied as employer pension contributions on behalf of the director or may be retained as profits liable to corporation tax.
Here, there is hugely greater scope to create a worthwhile director’s retirement fund by limiting taxation leakage in the corporate structure and transferring it to the corporate pension account.
So how can a private medical practitioner benefit from the very attractive corporate pension structures available to other professionals employed in the public and private sectors?
Clearly the answer is to ensure that, where possible, pension funding is made by way of employer contributions rather than by employee or self-employed funding.
One way of achieving this is to review the business structure under which the medical practice operates.
Medical practitioners are currently prohibited from forming limited companies as, under Medical Council rules, a medical practitioner must not take any steps to try and limit his liability.
However there are no restrictions on a medical practitioner in Ireland operating through an unlimited company.
The taxation regime for unlimited companies and for salaries paid to directors and employees is similar to that which applies to limited companies.
Likewise, the favourable employer-paid pension rules are no different for directors of unlimited companies.
In one example, Canada Life calculated the tax and pension options for a doctor aged 48 with private practice profits of €200,000 operating in a self-employed capacity or the same doctor operating via an unlimited company.
Using the unlimited company structure allows savings of over €50,000 in income tax and levies to be transferred into additional private pension assets.
The benefits of incorporation are substantial and can provide other commercial benefits.
The structure is new, but well researched and is being utilised. However, as in all matters of significant consequence, incorporation will not be the best answer for all practices.
Many insurance companies are experienced in the structures of pensions for unlimited companies. Check with your own adviser or email me for access to a screening service to assess the suitability of your practice for incorporation. If incorporation is not suitable for you, alternative solutions can be suggested.
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