Average Investing

Appropriate asset allocation is a key component of investing. It tailors a portfolio to an individual’s investment goals, timeframe, risk appetite and risk tolerance. There are a plethora of asset classes available to the individual investor and choosing a pertinent allocation can be difficult. Investing dogma would dictate a diversified portfolio, with a higher proportion of ‘riskier’ investments initially that tapers to a more cautious allocation as retirement looms.
The expanding number of financial independence blogs represent an increasing repository of investing information for those with similar aims. Some readers might follow the investment advice of those blogging about their progress towards FI; what if they chose to use an asset allocation that represented an average of all the portfolios? And what would that look like: an all-out, total stock market equity-fest? A mind Bogle-ing three-fund portfolio? A set in stone permanent portfolio? We wanted to find out.

Finding the numbers

We generated a list of FI blogs from various resources, including Fire Hub and the FIRE-UK subreddit. We didn’t include blogs based outside the UK or portfolios that used a currency other than GBP (£). We asked the author(s) of each blog to provide their age and a breakdown of their asset allocation.
If there was no reply or no means of contacting the author directly (via blog, email or social media) we searched their site for a description of their asset allocation. If this was not available, we excluded the blog.

Figure 1. Data collection flowchart

What did we find?

Though we contacted forty-seven different bloggers, we were only able to collect data from seventeen of them (36%). The average age of those surveyed was 38yrs old (range 26yrs – 55yrs). Average (mean) asset allocation can be seen below.

Figure 2. Average asset allocation of surveyed FI bloggers. Unlabelled wedges: P2P (1.4%, cyan), commodities (0.6%, purple).

Every blogger had at least some equities in their portfolio (mean 67.6%, range 7 – 100%), making it the most commonly held asset class. This was followed by property (15.3%, 0 – 68%), bonds (8.9%, 0 – 25%) and cash (4.7%, 0 – 40%). P2P (1.4%, 0 – 10%) and commodities (0.6%, 0 – 10%) were the least popular asset classes. Indeed, only two of those surveyed held any commodities whatsoever. Other asset classes (1.5%, 0 – 10%) made up the remaining allocations and varied in their description from ‘exotic investments’ through to endowment policies.

One to rule them all

Equities are the popular choice in many portfolios for their high return, although that comes with a higher volatility too. The ‘100-age’, or even ‘120-age’, rules are ways of choosing an appropriate equity allocation for your portfolio.
Our results show that equity allocation was (weakly) negatively correlated with age (r = -0.12). I.e. the older the blogger, the lower their equity allocation. The trend approximately matched a ‘105-age’ strategy*.

Figure 3. Equity allocation plotted against current age.

Bar one outlier, no portfolio held less than 25% equities. Arguably one might have expected an overall higher equity allocation in an FI ‘accumulation’ portfolio: the better returns on equity could allow you to reach your FI number more quickly.

Figure 4. The ratio of equities to bonds in each portfolio plotted against current age. Those portfolios without a bond allocation were excluded (n=3) as their ratio was ∞.

The name’s…

Bonds. The corollary to reducing equity holdings as you age is a rising bond allocation. The lower-volatility nature of bonds is thought to make them better holdings closer to retirement, though there was no correlation between bonds and age (r = 0.001) in our data.
The ratio of equities-to-bonds in portfolios did downtrend with age, although this was a very weak correlation (r = 0.06). Overall we had expected a lower bond allocation, certainly in the portfolios of younger bloggers. The predilection for bonds may represent those nearing FI who wanted to shield their capital from market dips (and hence delay the time to FI).

Mi casa

The UK is often said to be a nation obsessed with buying houses. Although some might plan to rent long-term, the majority are likely to end up purchasing property. We hypothesised that those with no property allocation would have a high cash allocation, as they save towards a house deposit (e.g. H2B ISA, LISA, cash savings) and keep liquidity high. As being mortgage-free will be a part of many peoples’ FI plans, we also thought that property allocation would increase with age.

The ‘liquidity factor’ failed to materialise; there was no correlation between cash and property allocation (r = 0). The highest cash holding (40%) was, however, in a portfolio that held no property.
Our other housing hypothesis was borne out slightly better – no blogger under 30yrs held property but everyone over 40yrs owned some. Property allocation weakly correlated with age (r = 0.18).

Figure 5. Property allocation plotted against current age.

A pinch of salt

Generating data for only 36% of blogs was disappointing. The lack of responses probably stems from a combination of unchecked email accounts, unchecked junk/spam folders and an unwillingness to share personal financial information with a stranger (fair). Those who did respond represented some of the most popular names in UK FI blogging. Most wanted to remain anonymous, though there was a strong representation amongst our animal-based peers with data coming from both the Foxy Monkey and the FI Fox himself.

There are idiosyncrasies in the data we were provided that might also skew the results. The data is likely to represent a blend of actual and idealised asset allocation, though this may not have had a measurable impact on the results. Some will count their property as part of their portfolio as it makes up part of their net worth; others will have excluded it as it’s not part of an investment portfolio. This may partly explain the large range of property allocation (between 0% and 68%). Those who’ve just bought a first house are likely to have a higher proportion of their net worth allocated to property. Conversely those who don’t own property or have done so for a while may have more invested in other assets.

Similarly, some may have felt cash holdings (inc. emergency funds) didn’t count towards their investment portfolio and excluded this from their asset allocation. We tried to provide a broad range of asset class options, though excluded things such as cryptocurrency – this could have been part of the ‘other’ category though. Overall there’s enough small variations in the way bloggers perceive their asset allocation that this might have impacted the results.

Final thoughts

The average FI blogger we amalgamated was 38yrs old, with an equity allocation approximating to a ‘105-age’ rule and a diversified portfolio that included holdings in all major (and some alternative) asset classes. Not exactly mind-blowing stuff.
If we were to run our small experiment again we would definitely want to generate a larger data set, so that it’s more representative. We’d perhaps provide clearer instructions as to what we’d like, whether that’s asset allocation as a percentage of net worth, or of perceived ‘investment portfolio’, or some other framing of the question.
This experiment is not meant to be a methodologically robust, highly scientific analysis of the FI blogging community. Rather, we thought it’d be interesting to see how much FI bloggers stick to some of the classic investing tropes and have some fun with the numbers.

If you have a question that you’d like our data set to try to answer, comment it below or get in touch. In the near future we’ll play around with the ‘average FI portfolio’ and see how it would have fared as an investment strategy!

TTFN,

Mr. MedFI


* Trendline: y = 110-1.14x. The ‘110-age rule’ would have the trendline y = 110-x.

The NHS Pension V: Other circumstances

Welcome to the final part of our series of posts on the NHS Pension! We thought that for the finale we’d touch on some of the other circumstances that many of you will face as you journey from fledgling employee through to battle-hardened NHS veteran.

Maternity (and paternity) leave

44% of NHS employees are female and a number of them might take maternity leave at one point or another. Similarly, a proportion of the gents employed by the NHS will become new fathers and take paternity leave. Pay during maternity leave can be a bit complex as it depends whether you qualify for statutory maternity pay, NHS occupational maternity pay or both.

The NHS pension refers to both maternity and paternity leave as ‘special leave’, and the rules are the same for both. In short, your pension contributions will be as described in Part I (i.e. a percentage of your salary) for the times you are on full pay, half pay or statutory maternity pay.

When you’re on unpaid special leave you can still opt to make pension contributions (i.e. pay for scheme membership). If you do so, you contribute as if you were continuing to be paid the same salary as immediately before your unpaid leave. We contacted the NHSBSA to find out how that works in practice, i.e. how you can make contributions when you’re not actually being paid. Their answer is that:

“the employer would need to make an arrangement with [you]. Contributions can be paid up when you return to work as long as there is an agreement in place beforehand and the contributions are re-paid within a short time of returning to work.

Furthermore, even though you are contributing during this unpaid period “the pension accrual will suffer because there is no actual pay.” So the positive if you contribute is that you’ll keep your pension benefits e.g. death in service, the negative is you’ll be paying contributions without any additional pension come retirement. It will be up to you to decide whether it’s is worth it!

Time out of NHS work

An increasing number of clinicians are taking time away from the NHS; the Foundation Programme’s destination survey reveals fewer and fewer F2’s are staying in the UK to work. The number of more advanced trainees taking time out is more difficult to quantify, though some will cease NHS work temporarily through either ‘time out of training’ or ‘out-of-programme experiences’. Leaving NHS employment, even if only temporarily, can impact on your NHS Pension.

If you are on an authorised career break, there is published guidance on your pension contributions. You have the choice of continuing or discontinuing contributions. For the former, you can choose to remain pensionable for 6 months. After this, you can still remain pensionable for a further 18 months but will have to pay both employee and employer pension contributions (see Part I).

If your time out doesn’t fall into one of the above categories (special leave or authorised breaks) then we’ll point you in the direction of the guide on leaving the scheme early. This might be if you take ‘F3/4’ years after F2, or similar breaks during your training. As long as your break is less than five years, your pension will continue to be revalued (see Part II) and will ‘link up’ with your new pension once you re-start NHS work. N.B. you won’t get any ‘death in service’ benefits during these five years (see below). The guide also provides information about the various options that exist if your break will be a more permanent one, or if you wish to transfer your pension to another provider.

When you’re gone

There’ll come a time for us all when we die and it’s natural to want to know how this will leave your nearest and dearest financially. As with many facets of the NHS Pension, there are a number of permutations that exist and the outcome will vary hugely between individuals. The brusquely named Survivors Guide is the home to these different combinations, along with other resources that contain the information you need. Your relatives or nominated beneficiary will likely receive something from your NHS Pension when you die, though if you’ve been claiming your pension for >5years that may not be the case.

That’s all folks

We hope that having followed this series you have a much firmer understanding of your NHS Pension and what’ll happen when you retire. Whether you intend to retire early or not, arming yourself with information now so you can make decisions about your financial future is, in our opinion, one of the best investments you can make. As ever the path you choose will be intensely personal, so please read our disclaimer and seek professional financial advice about your NHS Pension. If you have comments or feedback on the series then please get in touch.

TTFN,

Mr. MedFI

The NHS Pension IV: More pension

Welcome back for the fourth and penultimate part in our series on the NHS Pension! Having already seen how your pension begins, grows and ends, this segment is aimed at how you can get more money from your NHS pension. There are a few ways of “boosting your pension position” and they each come with an unhelpful business-y name and associated acronym. Some options aren’t available to 2015 Scheme members. For those that are, we’ve provided a single-sentence summary of what the option means followed by a more fleshed-out explanation below.

1 – Buying Additional Pension (AP)

‘I pay the NHS Pension scheme a set amount of extra money now in exchange for a set amount of extra pension in retirement’

In this option, you choose how much additional pension you want up to a maximum of £6,500/year (and in £250 steps i.e. you can’t pay for £3,497.12, you’d have to pay for either £3,250 or £3,500). You can buy this option by either making a single payment or staggering your payments over a period of up to 20 years. How much this will cost you is incredibly variable, so we recommend checking out the additional pension calculator. Have a play with the numbers to see how much extra pension costs.

Of significant note, the additional pension you purchase does not undergo revaluation at the same rate as the rest of your pension – it is only increased by the rate of inflation each year. The additional pension you buy is also subject to reduction if you retire early. For more info. there’s advice from the NHSBSA and the BMA.

Example 1
Dr. Dave wants to have an extra £5,000/year annuity in retirement. He therefore decides to buy additional pension. This will cost him £37,200 as a one-off payment,
Or £8,304/year for 5 years,
Or £4,608/year for 10 years,
Or £2,808/year for 20 years.

2 – Making Money Purchase Additional Voluntary Contributions (MPAVC’s)

‘I pay a company extra money now that is invested, and I’ll get an unknown amount of extra money later’

AVC’s are not quite as easy as 1, 2, 3. In exercising this option, you’ll first choose which provider you’d like to give your money: Standard Life or Prudential. Next you decide how much you’d like to contribute on a monthly basis (£20 minimum with Standard Life, £1 minimum with Prudential). Finally you decide which of the company’s funds you’d like the money invested in. This method of garnering extra pension is very similar to the ‘classical pension’ we touched on in Part I. Come retirement, you can take 25% of the pot you’ve generated through MPAVC’s as a tax-free lump sum. The rest is used to generate extra annuity.

The major benefit to this option is the tax savings you gain, though you still have to wary of the annual and lifetime allowances. One downside is that, as your money is being invested, you can in theory lose money over time. Furthermore, the fees charged by both Standard Life (0.95% – 3%) and Prudential (0.6% – 1.2%) for their funds are exorbitant when compared to some of the popular all-in-one fund choices.

3 – Entering an Early Retirement Reduction Buy Out (ERRBO)

‘I pay the NHS Pension scheme a set amount of money now in exchange for more pension than I would have otherwise received when I retire early’

This is only useful if you plan on retiring early which, by virtue of reading this blog, you might very well be. As you’ll recall from Part III, claiming your pension early brings with it a percentage reduction in annuity. The ERRBO allows you to mitigate this by buying out some of the reduction that would be applied when you retire early.

The way you do this is by paying more in pension contributions. In Part I we discussed how pension contributions are a percentage of your salary. If you enter an ERRBO agreement, you simply increase this percentage. How much it increases depends on how old you are when you enter into your ERRBO and how many years early you plan on retiring. The scale can be found here. You’ll notice that you can only buy out 3 years’ worth of reductions, so if you plan on retiring earlier than that then you’ll still suffer some reduction.

Example 2
Dr. Diane is 38 and plans on retiring at 65, 3 years before her state retirement age. Her annuity would be £50,000/year if she retired at 68, but will be reduced to £42,000/year if she retires at 65. In order to mitigate this reduction she enters into an ERRBO. She therefore pays an additional 4.41% of her pensionable salary each month such that when she retires at 65 her annuity will be £50,000/year.

Options, options, options

It’s perhaps a bit difficult to pick which, if any, of the options for garnering more pension is right for you. They’re also not mutually exclusive – you can purchase additional pension and an ERRBO if you like. Part of the problem with any of them is their restrictiveness; you’ll tie up your money in a savings vehicle that you can’t access until 55 at the earliest. Our thought at MedFI is that if we want extra money in retirement there are alternative ways of saving that provide slightly better flexibility, if not the tax benefits too. As ever, whether you decide to buy more pension or not will be a personal decision and our aim is to simply make you aware of the options – now you know! Next time we’ll be releasing the final part of our series, which will cover the NHS Pension in differing circumstances.

TTFN,

Mr. MedFI

The NHS Pension III: Retiring early

Welcome back to the third instalment of our series on the NHS Pension! In Part I we detailed how our pension is built up over our years of work, before learning how that sum is revalued to keep its purchasing power in Part II. In this section we’ll be touching on some considerations for FI(RE), in particular claiming your NHS Pension early and keeping a watchful eye on your pension allowances.

Retiring early

At the end of part II we stated that you could claim your NHS Pension once you’d reached state retirement age (SRA). What if you’re keen to clock our early, sail to the Bahamas and sip piña coladas? Well you can get there by claiming your pension before the state retirement age – as young as 55yrs old. Let’s see what the impact an early retirement will have on your annual pension (and therefore your coconut cocktail purchasing power).

If you’ve decided to take your pension early, a few factors come into play:
1. Your annuity will be smaller because (compared to someone retiring at SRA) you’ll have generated pension for fewer years. 
2. Your annuity will be smaller because you’ve spent proportionally fewer years contributing at your highest salary.
3. You’ll be ‘penalised’ for taking your pension early. You’ll have spent fewer years making pension contributions and you’ll be paid your pension for longer, so there’s a percentage reduction to your annuity.

The amount your annuity is reduced by depends on when you take it; the earlier you claim it the greater the reduction. If you claim as early as possible (55yrs) you can expect a hefty 45% reduction in your pension. If you claim with one year left until SRA then the reduction is ‘only’ 6%.

Example 1
Dr. Diane started NHS work at 25 on £27,000/year and [for the sake of simplicity] continues to be on that salary until retirement age. Let’s see how her pension looks with varying amounts of early retirement:
a. 68yrs old: ~£41,000/year
b. 65yrs old: ~£30,000/year
c. 60yrs old: ~£19,000/year
d. 55yrs old: ~£13,000/year

You might be thinking that Diane’s pension at 55yrs has more than a 45% reduction compared to at 68yrs; this demonstrates factor one above (and also factor two if her salary had increased throughout her career). It’s also another illustration of compound interest. This is crucial to understand if you plan on retiring early; you’ll have to balance the many benefits of stopping or reducing work against the financial implications of doing so. The NHSBSA has helpfully published an early retirement calculator that can help you further understand the impact of such a step, whilst it’s also possible to go back to work after claiming your pension if you want the financial boost or socio-intellectual stimulation.

Lump sums

At the point of claiming your pension, you can opt to take a chunk of money out in one go. This lump sum will have a subsequent impact on your annuity – for every £12 of lump sum you decide to take, you’ll lose £1 off your annuity. There’s also a limit to how much of a wedge you can take out of your pension pie as a lump sum, which is 4.28 times your annuity. Another consideration with taking a lump sum is that, over a certain amount, you will have to pay tax on it.
Whether or not you decide to take a piece of your pension as a lump sum will hinge heavily on your circumstances as you come to the point of retirement. It’s not necessary to decide now, though it is important to understand that this option exists when the time comes.

Allowances

There’s a capped amount that you can pay into your pension each year: the annual allowance. Breaching this allowance will incur the wrath of HMRC and lead to a tax bill heading your way. This may have crossed your radar as what’s been creating a storm amongst Consultants in recent times, causing them to reduce working hours and consequently their tax bills. Thankfully this has stirred the powers that be into action, with a new consultation (and hopefully changes) on the horizon. This allowance is £40,000/year, though part of the problem is the complexity of the annual allowance and a full explanation goes beyond the scope of this post.

The second limit is on the total value of your pension: the lifetime allowance (LTA). Your pension’s value exceeding the LTA is another sure-fire way to twist the knickers of HMRC and earn a tax bill. The LTA, which is £1.055m at the time of writing, is set to increase in line with inflation. However as your pension increases by inflation + 1.5% (see Part II), you’re at risk of going over the LTA at some point.

Example 2
i)
Dr. Dave’s NHS Pension is such that he’d earn £50,000/year in retirement. The capital value of his pension is 20 x £50,000 = £1m. As this is less than £1.055m he won’t be breaching the LTA.
ii) Dr. Diane’s NHS Pension is such that she’d earn £70,000/year in retirement. The capital value of her pension is 20 x £70,000 = £1.4m. As this breaches the LTA she’ll be subject to extra tax when she claims her pension.

For a more detailed look at both the annual and lifetime allowance, see our later dedicated post on the matter!

One for all

This part of our series has a tilt towards early retirement, though the information it contains is pertinent to anyone with an NHS pension. Knowing how early retirement or taking a lump sum will affect your annuity and being mindful of staying within your allowances are all key components of making your pension work as best for you as is possible. You’re hopefully now developing a serious schema of how your NHS pension works from beginning through to the end. There’s still more handy information to come in Part IV, where we’ll look at your options for adding more money to your pension.

TTFN,

Mr. MedFI

The NHS Pension II: Battling inflation

Welcome to Part II of our series on the NHS Pension. In Part I we kept things simple, demonstrating how your salary both pays the ‘membership cost’ of belonging to the scheme and dictates how your pension grows. This time, we’ll look at how your money grows in the pension and what you can expect out at the end.

Inflation and revaluation

Do you remember eating Freddo bars when you were younger? When we were still young whippersnappers they cost 10p each. Imagine our dismay when we learned they now cost 25p. In 30-odd years, the price of a Freddo bar has risen by 150%. This is an example of inflation: the price of objects rises over time.
Put another way, the purchasing power of your money falls over time. With £1 in the early 90’s you could buy ten Freddos, but £1 now will only buy you four. In the ‘classical’ pension of Part I, the pension pot was invested to make its value grow over time – this is partly to counteract the effect of inflation. The NHS pension has a different tool to do this: revaluation. Let’s rope in Dr. Diane from Part I again to demonstrate the effect of this:

Example 1 (No revaluation)
Dr. Diane earns £54,000 in pensionable pay. In a single year (e.g. 2019) her annual pension grows by 1/54th of her pensionable earnings = £1,000.
When Diane retires in the future, the pension amount from 2019 will start to be paid out. This would be £1,000/year.
If she had worked for 40 years at the same salary, she would be paid a £40,000/year annuity.

It sounds pretty sweet, right? It is, but we’ve already seen above that money is worth less in the future because of inflation. In fact, you can work out that Diane’s £40,000 annuity in 2059 only has the equivalent purchasing power of between £15,000 and £20,000 [assumes 1.5% annual inflation]. Diane’s annuity would have to be £56,000/year in 2059 to actually have the equivalent purchasing power of £40,000.

To combat this, the annual amount you generate as pension is increased (‘revalued’) according to the revaluation rate. This rate is defined as: inflation(%) + 1.5%. Let’s see what happens when we apply that to Diane…

Example 2 (With revaluation)
Dr. Diane earns £54,000 in pensionable pay. In a single year (e.g. 2019) her annual pension grows by 1/54th of her pensionable earnings = £1,000. As the rate of inflation in 2019 is 1.5%, the revaluation rate is 1.5% + 1.5% = 3%.
Her £1,000 undergoes revaluation for the year 2019 and is thus worth £1,030. This happens to that money every year such that in 2059 that £1,000 is now £3,260.
The revaluation occurs for all 40 years’ worth of pension she generates. In 2059 her annuity is £72,230/year.

You can see the drastic difference this makes and it also beautifully demonstrates the power of compound interest. The good news is that this all happens in the background without you knowing! Don’t forget that you’ll pay tax on your annuity, so you won’t see 100% of it entering your bank account come retirement time. It’s still nice to know that your pension will be growing faster than the rate of inflation so will have maintained, if not improved, its purchasing power come retirement.

Show me the money, Jerry!

You hopefully now have a better grasp on how the annuity you can expect from your NHS pension is generated. The thing you’re probably itching to know is: how much will you get when you retire? Unfortunately, the answer to this is not as clear cut as we’d like it to be. There are so many variables that will affect the annuity for any one person: place of work (England, NI, Scotland or Wales), age at starting, inflation during your career, training programme, retirement age and lump sum value to name a few. It’s impossible to provide a one-size-fits-all answer. Even running the numbers for the predicted MedFI journey, the figure that comes out at the end has a fair variation to it. There are, however, a few things that you can do to find out a bit more.

You can see what your actual, bona fide, up-to-date pension amount is by logging on to your total reward statement. It will show you how much annuity you’ll be paid come retirement, as well as some other helpful figures. It only shows you what you’ve generated so far and, if you’re at the early stages of your career, it might seem pitifully small. It also doesn’t help you predict your future pension, though as you approach your planned retirement age it will become more useful. You can request an estimate of your hypothetical pension benefits, which may give you more of a number to hang your hat on, though it will cost you £75-£120 for the privilege.

Another helpful tool is this NHS Pension calculator. It won’t show you a total annuity for your whole career, but will show you an annual amount generated for a given salary (/stage of training). As an aside, you should check out the entire junior doctor finance website, an excellent resource for improving your financial literacy as an NHS employee. Another thing you could do is to speak to a professional financial advisor, ideally one well versed in the intricacies of the NHS Pension.

When will I get my pension?

You will be able to claim your full NHS pension when you reach State Retirement Age. This is not necessarily a fixed age, and we suggest checking using either Which?’s calculator or the government’s calculator to find out for yourself. For most it will be somewhere between 65-68yrs, although the actual age may change in the course of time. Ill health and redundancy are two circumstances in which you can claim your pension earlier. There are also differences to your pension if you voluntarily decide to claim it early – more on this in Part III!

Starting to come together

That’s a wrap on Part II of our NHS Pension series. You now know how your pension is generated from your salary and how it is revalued to outstrip the inflation rate. We’ve provided some tools to try and gauge how much you might get in retirement and also when you can start claiming your pension. In Part III, we’ll move on to some considerations for FI(RE) with regards to the NHS Pension.

TTFN,

Mr. MedFI

The NHS Pension I: The basics

If you are a past, current or even future NHS employee then the chances are that you will have some interaction with the NHS pension. Having some grasp of your pension(s) is crucial to plotting your own financial journey, especially if you have ambitions of financial independence/retiring early. Unfortunately, wrapping your head around the minutiae of the NHS pension can be difficult, especially in the context of ever-changing pension rules. With that in mind, we’ve done our best to provide an overview of the scheme for those wanting to understand their NHS pension.

We find ourselves in a sort of no-man’s land. If you are an NHS employee with enough interest in personal finance to be reading this blog, the chances are you might have done some reading about your pension already. Conversely, those who might benefit most from the information contained in this series are unlikely to be searching for it. When you add in the British taboo for speaking about personal finance, yet alone the less-than-stimulating topic of pensions, chances of disseminating the information to those who want it isn’t great. We only ask that if you find the content of our series useful, please share it with your colleagues so that they may benefit from it too. 

The information we’ll provide is up to date at the time of writing, but as always we implore you to do your own research before making financial decisions. As a final caveat before we get started, we’ve chosen to only detail the latest incarnation of the NHS Pension: The 2015 Section. This is because it applies to both us here at MedFI and 75% of NHS staff.  If you are a member of the 1995 or 2008 Sections, you can seek more information using the resources dotted throughout our series.

The ‘Classical’ Pension

Any pension is a specific way of saving money during your working years so that you have something akin to a ‘salary’ after you’ve hung up your stethoscope and retired. The goal is to provide income such that you can continue to live your post-retirement life in a way you’ve become accustomed to.

A stereotypical pension involves you diverting a percentage of your (pre-tax) salary into a ‘pension pot’.  Typically your employer will also pay into this pot. Often this money is invested in such a way as to grow its value over time. As the years roll by, your pot grows larger and larger. Once you retire that money is taken back out of the pot by you as a fixed amount per year (an annuity) and sometimes also a large chunk at the start of your retirement (a lump sum). You didn’t pay tax on the money that went into the pot so you pay it as it comes back out. The value or your annuity (and lump sum) is entirely dependent on the amount in your pot. 

The NHS Pension

The NHS pension differs from the classical pension model we’ve described above. It is known as a ‘defined benefit’ pension; although this is a descriptive term it’s not that helpful as a stand-alone statement. Each year you work for the NHS two processes automatically happen:
1. You pay a percentage of your pre-tax salary in pension contributions. This percentage changes depending on how much you earn (more on this below).
2. Your annual pension grows at a pre-set rate. This rate is fixed at 1/54th of your pensionable earnings. 

Let’s look at some examples of how these processes work:

Example 1
Dr. Dave earns £27,000 in pensionable pay. In a single year:
1. He pays 9.3% of his salary in pension contributions = £2,511.
2. His annual pension grows by 1/54th of his pensionable earnings = £500

This will happen for each and every year you work. Both of those numbers will vary with changing salary:

Example 2
Dr. Diane earns £54,000 in pensionable pay. In a single year:
1. She pays 12.5% of her salary in pension contributions = £6,750
2. Her annual pension grows by 1/54th of her pensionable earnings = £1,000

You’ve generated two different numbers and both pertain to pensions – what do they mean? The first amount (process 1) is almost irrelevant. It does not represent the value of your pension nor is it being paid into a pension pot. Rather, you could consider it the cost of membership of the pension scheme. This ‘cost’ changes depending on how much you earn as you can see below. In reality it is paying for the annuities of those who have already retired.

Your employer also pays towards the cost of your pension. Compared to your rates (see table below), the NHS pays in at a fixed rate of 20.6%, which makes the NHS Pension relatively ‘cheap’ for employees.

Annual salaryContribution rate
£0-£15,431.995.0%
£15,432-£21,4775.6%
£21,478-£26,8237.1%
£26,824-£47,8459.3%
£47,846-£70,63012.5%
£70,631-£111,37613.5%
£111,377+14.5%

The second process is relevant. For each year you work, process two will generate an amount of pension. When you retire, all of these amounts are added up to make your final annual pension (i.e. your annuity). It might seem that Dr. Diane’s getting stiffed by paying £6,750 for ‘membership’ but her annuity only grows by £1,000. She’s not though, as that £1,000 will be paid to her every year from retirement until death. Let’s look at an example of this:

Example 3
Dr. Diane earns £54,000 in pensionable pay for each of the 20 years she works for the NHS.
Year 1: her annual pension grows by 1/54th of her earnings = £1,000
Year 2: her annual pension grows by 1/54th of her earnings = £1,000
… etc. for 20 years. At the end of this time, her pension is 20 x £1,000 so is worth £20,000/year*

*More on why this number isn’t quite correct in Part II

Not so menacing after all

We’ve tried to keep this first part of the series basic to avoid an overload of detail straight away – trust us there’s more to come. Hopefully you now understand a bit more about what the “pension contribution” line on your payslip means (i.e. process 1). You can also see how your annual pension grows in relation to your salary (process 2). In Part II we’ll look at how your pension grows and what you might expect from it come retirement.

TTFN,

Mr. MedFI

The Ferrari Factor

One of the recurring pieces of advice in Financial Independence literature is the idea of curtailing discretionary spending, or reducing ‘unnecessary’ outlay. An oft provided example of such spending is purchasing coffee, or other hot beverage types if they’re your bag. There’s even a catchy phrase to describe it: ‘The Latte Factor’. Coined by David Bach, the idea is simple: a little spent often will rack up over time, compounding to an overall high amount. The viewpoint is not without its critics and comparisons can be drawn to the controversial ‘smashed avocado’ outburst of Australian millionaire Tim Gurner. 

In a Forbes article on the topic, the author explains that “The Latte Factor applies…to whether we own one car or two” and that if we shunned our “third car”, we wouldn’t miss it at all. This excessive spending on cars is what we call ‘the Ferrari Factor’.

The Cost of Cars

Cars are ubiquitous in today’s society and they can represent a large proportion of an individual’s outgoings. Depending on which source you choose, the average cost of running a car is in the range of £160 to £390/month. One article estimated the cost of buying a car and running it for a year was £1,575/month! Here at MedFI, our vehicular expenditure comes out at £170/month/person. These may not seem like staggeringly large amounts, though when you compare it to the average £671/month cost of a mortgage, it puts things nicely in perspective.

One factor influencing the amount spent on cars is the rise of car finance, including schemes such as Personal Contract Purchase (PCP*) agreements. The vast majority (8090%) of new cars are bought on finance and an increasing number of used cars are too, with 50% of used cars bought on finance in 2018. The period September 2018-2019 saw 2.4 million new and used cars purchased using such plans. The amount of credit issued by auto finance dealers more than doubled between 2011 and 2016. £37.7bn (yes, billion) of advances were issued for private car purchases in 2018-19, representing a 3% increase compared to the previous year. In all, the total growth in new and used car finance was over 200% and 175% respectively between 2008 and 2018.

Worrisome Figures

One of the concerns with the ready availability of such finance is that it encourages, or at least facilitates, people buying cars they could otherwise not afford. For example, higher-end manufacturers such as Audi are some of the most popular purchases on such plans. This is obviously part of their attraction too. As it has been eloquently stated, the “Mondeo man of 10 to 15 years ago is now….[a] BMW, Mercedes or Audi man”.

There has been a deleterious impact on personal finance as a consequence of this. Areas with higher car ownership have, perhaps unsurprisingly, demonstrated the biggest increases in personal debt. One article suggests that buying with finance cost 68% more than buying outright overall. This extra expense has seen people having to reduce their spending elsewhere, work extra hours or even voluntarily terminate their (unaffordable) agreements. Indeed both arrears and default rates are on the rise, particularly for those with high credit risk (i.e. lower credit scores). 

Furthermore, an alarmingly low proportion of those financing car purchases seem to actually understand the agreements they’re making. Indeed nearly half of those surveyed didn’t know how much they’d borrowed. The blame does not lie solely with consumers, however, and concerns over mis-selling of car finance have prompted the FCA to investigate. Their report comments on multiple issues, which include a lack of understandable information and a commission model that creates an incentive for brokers to act against customers’ interests. 

The FCA estimate that changes would save customers £165 million/year and these are due in 2019/20. Their worrying conclusion was that “the way commission arrangements are operating in motor finance may be leading to consumer harm on a potentially significant scale”. Parallels to the infamous sub-prime mortgage collapse have been made and peer-to-peer lending platform Ratesetter has withdrawn itself from these types of loans. It’s not apparent that the bubble has burst quite yet, though there remains concern that it might soon pop. 

The Ferrari Factor

Car ownership, depending on your viewpoint, could fall anywhere on a spectrum from necessity through convenience to luxury. Unlike the ‘little and often’ of the latte, flat white or even orange-mocha-frappuccino, car finance can represent a ‘large and often’ expense. Based on the statistics above, an increasing number of people are taking on high monthly outgoings for their car with a consequent hit to their finances.

We appreciate that for some there’s more to owning a car than getting from A to B. For some it’s a serious hobby or passion and, as always, a drive towards FI(RE) must strike the right balance in quality of life. Similarly, other modes of transport are not necessarily cheaper, as reliable or efficient, greener or more practical. As an example, Mr MedFI’s commute via train would take 30 mins longer each day and the annualised cost would be nearly £1500 more (minus the added depreciation cost on the car). 

The article is not designed to scaremonger; car finance can be beneficial if managed properly. As ever, we hope to encourage readers to think about their own financial journey and, in this case, the role cars and transport play in that. Perhaps next time you come to buy a car, if at all, keep the Ferrari Factor in mind. 

*Authors side-note: the initialism PCP carries notorious connotations, such as the potent hallucinogenic drug phencyclidine (“angel dust”) and the old term for a severe pneumonia of the immunocompromised, Pneumocystis carinii.

Medics and Money


The relationship between a person and their money is shaped by many factors, one of which is their ability to generate money in relation to time and energy spent doing so. For most people, this is primarily through their job. As such, what are the particular key factors in a medic’s life that will impact on their finances?

In the beginning

Going back to the halcyon days of university, medical undergraduates rack up more time at their alma mater than most. At the ‘short’ end of the spectrum, four-year ‘accelerated’ graduate programmes are still longer than most UK degrees (excluding Scotland) and you’ll already have clocked in for a whole degree beforehand. At the other end, a full blown undergraduate degree with intercalated BSc will set you back a princely six years. Only a complete architecture degree beats that for length (seven years). 

Since the government allowed a rise in the maximum chargeable tuition fee in 2012, new students can expect to pay £9,250 per year in tuition. Even with an NHS bursary covering the final one or two year’s tuition fees, new doctors can expected to be saddled with nearly £40,000 worth of tuition debt alone. Most graduate with between £50,000 and £90,000 of debt in total. Once you add in interest rates that reach 5-6%, things are off to a bad start. “Get a job at university!” is perhaps not an unfair retort, though don’t underestimate the difficulty of the degree and the requirement for some serious graft to pass. 

Another consequence of a long time studying is what one might call the ‘six-pointer effect’. In football, when two teams fighting it out in a similar position play, the value of a win over your rival is not just three points your team gets, but also the three points the opposition fail to pick up i.e. six points. For medics the extra one, two or three years spent studying compared to a standard degree length mean they have more time accruing student loan debt and less time in a job earning. A financial six-pointer, so to speak.

The working years

Pay

Pay is, as ever, a controversial topic. Are medics paid too much? Too little? Do they sit in the metaphorical Goldilocks zone of income? A full debate on this questions is beyond the scope of this initial offering, but let’s look at some numbers.

First year doctors’ basic pay is £27,689, according to the latest NHS pay circular. That falls pretty much in the middle of the Office of National Statistics‘ two ‘average’ UK salaries for 2019; £24,897 (median) and £30,629 (mean). As a source of comparison, those graduates who choose to enter the Civil Service’s fast-stream can expect a starting salary of £28,000 for three years, followed by an increase of between 61% and 96% (to £45,000-55,000).

From there it gets a bit tricky to calculate owing to the varying lengths of specialty training programmes. Assuming the longest training possible, one would experience three basic pay rises in the first five years (16%, 18% and 27% respectively). This is counter-balanced by five years of stagnant pay thereafter.

Another increase (66%) at the time of earning a consultant job is again balanced against multiple five-year blocks of unchanging salary. The increases in-between these blocks work out as annualised increases of <1.5%/year.

The Cost of Working

Income is not an isolated number, but can be related to the time and energy input to earn it. This is difficult to quantify as it will vary hugely amongst individuals and specialties. The European Working Time Directive keeps medical rotas to a 48hr week, although this doesn’t account for extra time spent staying late at work. In theory the latest junior doctor’s contract says time for the myriad of other bits and pieces (think exams, audits, portfolios etc.) that are required for career progression should be included in working hours; the reality is that most still use their free time to complete these requisite add-ons.

Similarly, the physical and emotional toll that is paid by a medical professional is nearly impossible to quantify. It’s a discussion for another post, perhaps, though a brief nod towards the GMC’s new ‘Caring for Doctors, Caring for Patients’ report is acknowledgement that there is a problem in this regard that needs addressing. 

A 2011 paper by the BMA concluded an ‘average’ UK doctor will spend ~£17,000 on post-graduate training (range £7,000-£25,000). Exams, the GMC’s licence to practice , medical indemnity, college membership subscriptions and a battery of other mandatory expenditure is required to stay on track.

The End is Nigh

As one’s time in NHS employment draws to a close, the NHS Pension comes ever-closer. Fully understanding the inner workings of the NHS Pension Scheme is a story for another time and we have planned a series on it. It’s anecdotally described as “good” and there’s probably some merit in that description. 

Recent news has been more to do with pension taxation. A new consultation regarding this, in order to prevent (more) consultants reducing their working hours to avoid hefty tax bills, is in process. Let’s not get bogged down in the nitty gritty now, but suffice to say that there’s a chance you’ll have a reasonable pension waiting at the end of the line. You might just need to keep an eye on the numbers.

What’s the point? Where’s the FI?

The aim of this initial post is not to dismay about student loan debt, whine about salary or bemoan the NHS Pension. Similarly, we hope you’ll find personal opinion scant and facts aplenty in a piece that is primarily aimed to educate those both in and outside the profession. 

Financial Independence is a personal quest that must come with a degree of introspection and understanding of the paths that one might, could or should take. Too few understand the nuance of their projected financial journey and the significant impact this will have on your life as a whole. We hope this post serves as a starting point for your own thoughts about finances, FI(RE) and ultimately the way you want your life to be.

We hope you enjoyed reading, 

TTFN,

Mr. MedFI