The cost-of-living crisis continues to make headlines on a daily basis. With inflation reaching 9.0% in May 2022 – more than four times the Bank of England’s 2% target – this is likely to be a challenge for some time to come.
Inflation has a tangible effect on GPs’ personal finances, so it’s important practitioners take some steps to mitigate the impact.
Two key areas for consideration are savings and retirement.
Investing – giving savings the chance to achieve real-term growth
The Bank of England increased its base rate (the mechanism used to set interest rates) back in February, and again this month, in a move to help slow inflation’s rise.
However, as interest rates on easy-access accounts and savings accounts have remained well below the inflation rate, most savers won’t have seen any additional growth on savings kept in these accounts.
Keeping money in cash, or in an account with an interest rate below the rate of inflation, risks money losing value through ‘real-term’ attrition.
Effectively, each pound will gradually buy less and less, reducing its purchasing power over time.
Investing is one way that GPs can give their money a chance to grow with, or faster than, inflation itself.
Some practitioners will already have personal investments, and it will be important that they take time to review their portfolio to ensure that its composition still aligns with their personal financial objectives, appetite for risk and market conditions.
Others may be investing for the first time. And, here, there are some important factors to keep in mind.
Firstly, investing isn’t a quick win and generally means locking money away over longer periods of time – at least five years, but typically longer. If an individual knows they might need their savings sooner, investing might not be the right option.
They will also need to consider their appetite to risk. Each asset that can be invested in, whether it’s property, bonds, cash or stocks, comes with its own level of risk, as well as its own degree of reward.
Diversifying investment portfolios by spreading investments across asset classes can offer a degree of protection against a single asset’s poor performance. An easy way to do this is to put money in an investment fund that covers many different types of assets, spreading the overall risk. Each fund has a risk rating that individuals can use to see if it’s a good fit with their appetite for risk, and capacity for loss.
Keep in mind that investment values are not guaranteed, and can go down as well as up. You could get back less than you invest.
Retirement – changing plans
NHS pensions are fully index-linked to protect them against inflation. This means that if a GP is an active member of the NHS Pension Scheme, their pension will increase each year in line with the cost of living plus an extra 1.5% on top of this. If they are not a member, contributions will just rise in line with the CPI.
While this is some consolation, it is important to consider how rising inflation may affect plans for retirement in other ways.
One of the most obvious ways is in the day-to-day cost of living. Higher prices for everything from food to fuel could mean that practitioners already in retirement may need to reassess or adjust their day-to-day spending plans, while those still yet to retire may need to rethink how much they need to save into their pension to achieve a planned standard of living.
They may also need to make corresponding adjustments to retirement investments to ensure they are in the best possible position to deliver required income growth. This could mean adapting portfolios and altering drawdown plans. Stress-testing retirement strategies to anticipate a range of future inflationary scenarios can provide useful insight into what changes are needed.
In some cases, a higher cost of living may have prompted some clinicians to consider what flexibility they have for returning to work, even after they’ve already retired.
For those that retire on or after the normal retirement age there will be no impact on their pension if they choose to go back to work. The same goes for those who retire early but receive benefits after an actuarial reduction – the case for the vast majority of GPs. (Actuarial reduction means that for every year an individual retires before the scheme’s normal retirement age their pension is reduced. This can equate to around 4-5% depending on the scheme.)
It is, however, important to remember that in the 1995 NHS pension scheme a person needs to take a 24-hour break and then may only work 16 hours per week for the first month, otherwise their pension could be affected.
For those in the 2008 and 2015 schemes, it is only a 24-hour break before returning.
No matter what stage of retirement planning an individual is in, regularly requesting a Total Rewards Statement (TRS) from the NHS Pension Scheme will let a GP know exactly how much NHS pension they’ve accrued, a helpful tool when assessing incomings and outgoings, and realigning plans.
It is unclear how long inflation will continue to rise for, and how long elevated levels will persist.
It’s crucial GPs act by reviewing their savings and investment strategies, and their retirement plans to maximise the potential to meet their personal goals.