What with the deepening economic downturn, banks' shares crashing and savings accounts paying pitiful rates of interest, GPs with a significant sum of money to invest or spend wisely could find it difficult to decide what to do.
NHS pension lump sum
GPs might inherit from relatives, have an endowment life insurance policy that matures or even have a big Lotto win.
Often however, the biggest sum of money will be the tax-free lump sum from the NHS Pension Scheme.
For full-time GPs taking their retirement benefits at age 60, subject to factors such as length of service, lump sums can be as much as £100,000 to £150,000.
Careful planning is essential to future financial health.
Paying off mortgages or debt with a lump sum before investing may be a good idea. Then once a reasonable amount has been placed in an instant access savings account as an emergency fund, it is time to decide what to do with the rest.
A financial adviser will be able to help you choose the right investment. Remember that stock market-based investments should not be cashed for a minimum of five years. Investors need to ensure that this fits in with their income requirements and final retirement plans.
Stock market investment
Although the stock market may be volatile for the next year or so, during the past three recessions it did increase in value overall.
The FTSE100 share index is (at mid January 2008) roughly 30 per cent below its level 12 months ago. This means that when share prices do recover there is a chance of making a good profit.
Although GPs may have a lump sum to invest, regular monthly contributions, if affordable, allow investors to benefit from 'pound cost averaging'.
As the stock market moves up and down, the monthly investment means you buy at differing prices, sometimes high and sometimes low. The investor stands to benefit slightly more from this than investing a lump sum, given the difficulty of picking the perfect timing.
Individual savings account
When deciding to invest in equities (shares-based funds), the first option should always be individual savings accounts (ISA). Any person can put £7,200 per person per year into ISAs, and have no income or capital gains tax to pay when they are cashed in.
Investors have until 5 April to use up their 2008/9 allowance.
Within an ISA investors can choose from a large variety of funds, categorised according to level of risk, geography, type of stock and so on. Choices include higher risk funds, such as Far East funds, but also 'green' or ethical funds if preferred.
Once the ISA allowance is used up, investors should consider placing similar funds under the unit trust umbrella.
Unit trusts and bonds
Unit trusts are pooled investments. Money is invested in a wide range of shares along with other investors' money. This dilutes the risk of losing money, and the individual investor benefits from having an experienced fund manager.
Unit trusts are what is inside a shares-based ISA.
Unit trusts are flexible. You can stop and start saving when you want. Like ISAs, you can access the money any time although a minimum five years' investment period is recommended.
Unit trust income is taxable. There may also be a liability to capital gains tax at 18 per cent if gains (profit) of more than £9,200 are made (2008/9 tax year).
Bonds are shares-linked plans with a small amount of built-in life insurance.
Tax on the lump sum investment is normally deferred until the bond is cashed.
Bonds can provide income of 5 per cent of their value per year (and are set up to do this for 20 years) with no tax to pay at the time. It is often possible to avoid capital gains tax on them - ask a financial adviser.
Investors who want their children to inherit can gift some of any lump sum if it is surplus to their future financial needs.
Lump sum gifts will fall outside the estate for inheritance tax (IHT) purposes if, to date, they total no more than the nil rate band (NRB), currently £312,000. There are various exemptions from IHT but, if none of them apply and a gift is made above the NRB, this is called a potentially exempt transfer (PET).
With a PET no IHT will be payable if the donor survives for seven years after making the gift.
GPs regularly use their lump sums to help their children onto the property ladder. In most cases, these gifts of mortgage deposits are at a level below the NRB.
- Liz Willis is from the Medical Profession Advisory Division, St James's Place Partnership, 07900 654 401, firstname.lastname@example.org