John O’Connor of Omega Financial Management advises how GPs can maximise benefits and best prepare for their early retirement in the face of the Covid-19 pandemic
Over the last three months there has been an increase in GPs mentioning that they are considering bringing their retirement date forward somewhat. A combination of the stresses and strains of the job, the additional pressure put on services by the coronavirus and the apparent additional health risk as people get older are all factors that seem to have contributed to questioning the long-term sense of their current workload.
In 2018 the Irish College of General Practitioners (ICGP) estimated that 660 GPs were going to retire in the subsequent seven years. It is possible that due to Covid-19 that number could increase over the short- to medium-term. So, if it is the case that a GP wishes to retire what are their pension options?
‘Can I afford to retire?’
Often the first thing a person thinks about when contemplating retirement is “Have I enough money?” It may seem obvious, but the best way to calculate if someone has enough savings to live off is to add up how much money they need to spend in a year. It is an exercise which takes considerable effort and is not as easy as people think.
Everything has to be considered from day-to-day expenditure to cars, holidays, and any major potential outgoings such as family weddings etc. Give yourself a few weeks to do it and once you have the figure you can begin to decide if you can afford it or not. In an ideal world GPs should run this exercise in their 50s so that they can begin to plan what their retirement income will need to be.
GMS Pension Scheme
If the GP has had a medical card list, he or she will have received employer pension contributions to the General Medical Services (GMS) Pension Scheme during their career. In addition, they will also have paid 5 per cent of their own capitation payments into it also and possibly some Additional Voluntary Contributions (AVCs) payments too.
To be able to retire on a GMS Pension a GP must resign their post. Once they have done that, they can drawdown the GMS Pension, 25 per cent in cash and the remainder which will provide them with an income into the future.
In addition, they may also have some Personal Pension savings relating to their private practice income. Private/Personal Pension savings can be accessed from age 60. A person does not need to physically retire from their position, and they can continue to make contributions to Personal Pensions after that up to age 75 for private income.
In 2015 the ICGP published a booklet called ‘Transitions’ which covered most angles of retirement for GPs and is worth reading. It discusses far more than just the financial side and includes an interesting point: an estimate that GPs are retiring with an average of €900k in their pension funds between GMS, AVCs and Personal Pension savings.
Finally, a GP may also have pension entitlements dating back to their time spent training in hospitals. These superannuation benefits are worth tracking down, they may have to write to the hospitals they worked in to confirm the details, but they are worth chasing. And, of course, we must not forget the Old Age Pension Entitlement, currently available at age 66.
Mary is a 66-year-old retiring GP with the abovementioned average of €900k in pension savings. Mary is able to take 25 per cent of that amount in cash of which €5k will have to be paid in tax leaving her with €220,000. The remaining amount of €675,000 will be used to give herself an income in retirement, her options are as follows:
1. Purchase an annuity: An annuity contract is a fixed income for the rest of your life which is bought from an insurance company with the money from your pension fund. As with interest rates, annuity rates are extremely low at present and so Mary will only get circa 4 per cent of her €675,000 per annum (pa). Once Mary and her husband are deceased there is no payment left to their children.
2. Invest in an Approved Retirement Fund (ARF): An ARF is an investment fund that provides a variable rate each year, similar to the fund the pension was saved in originally. There is a Revenue requirement that 4 per cent pa be taken from the fund but this is only a minimum and you can take more if you wish. Whatever remains in the fund at the time of demise of the owner is passed to their estate. The investor decides how the funds are invested and it is normally a more flexible and advisable option.
So, to summarise Mary’s position, she can estimate her pension to be the following:
State Old Age Pension €12,956
ARF income (6%) €40,500 (6% by choice)
Hospital superannuation €3,000
Total pension €56,456
The €220,000 that Mary also received in the form of cash can also be invested similarly. If she decided to take 5 per cent pa from that her income would increase to €67,456pa.
There are many variables to be considered and you will have lots of options when you do decide to retire so it is a good idea to chat through it with any colleagues who have experience of it already.
• John O’Connor is the Managing Director of Omega Financial Management, a financial services firm that focuses on the medical community. He can be reached at email@example.com.