How does this time of year come around so fast! Those of us with a self-employed aspect to our professional careers must gather up our income and expenses for 2017 and file our tax returns. Then we have to see how much tax we have to pay and decide whether or not we can make a pension contribution.
GP’s are in a very different situation, particularly if they have a list of medical card patients. If this is the case, they take part in the GMS pension scheme which is best described as a type of hybrid scheme whereby even though the GP is self-employed, they are part of an occupational pension scheme more akin to large private employers such as Google or Diageo.
As most GP’s will know, in addition to the capitation fees, an additional 10% is placed into their Mercer pension account each month. Also, 5% of the fee is deducted from their payment and placed in the same Mercer account on the GP’s behalf. This 5% is treated by revenue the same way an employee contribution is made to a company scheme and as a result reduces the amount that a GP can contribute to their pension themselves to reduce their tax.
All of the contributions that are made to the scheme by the employer and the employee are automatically put into Mercers ‘Main Fund’ unless the GP advises otherwise. The Main Fund itself is made up of a mix of equities, bonds, property, alternatives and some venture capital instruments. Features of the Main Fund include:
It has a bonus (or minus adjustment) that is applied to each members account 31st December each year
This bonus is calculated using the gains and losses of the underlying assets over a 4 year period
The averaging out of good & bad periods enables the return to be less volatile than normal
This smoothing within the fund should reduce the impact of significant downward movements in markets.
Any surplus that is put by in a year will be distributed over the next three years.
If a 52 year old GP has an available allowance of €34,500 to contribute to their pension and receive tax relief, and the GMS has put €5,750 into their pension scheme, they may still be allowed contribute €28,750 to their pension as an AVC.
What many GPs may not appreciate is that they have a much larger variety of options than just the Mercer fund. While they can top that up if they wish, they may prefer to broaden their investment horizons and use other vehicles apart from the limited number of options available through the GMS AVC scheme.
If a GP wishes to diversify their funds and choose another provider they can do so by using a PRSA AVC which is a pension vehicle held separately from their fund in Mercer and is held in their own name. The principal reason why they may choose to do so is that they would have a much greater choice as to how their funds are invested in comparison to the main fund. The options are pretty limitless and too many to list, but to give an idea I have outlined some of the options below.
These are funds that fundamentally invest in stock markets around the world and go up or down in value in line with the markets the investor chooses. The options would include all of the major world indices such as the S&P in the US, the FTSE in the UK, the Eurotoxx in Europe, Nikkei in Japan, the Irish ISEQ and also the emerging markets. Investors can choose a mix of these if they wish. They can suit investors who are happy to take a long-term view.
I have written about this option in more detail in a previous edition, but essentially this covers investment in large commercial properties in major cities in Ireland or the UK. The higher the value of the buildings and rent achieved in them, the better the investor will do. The downside is that they can fall in value as well as rise so a long term view is important here.
Absolute Return Funds
Essentially a creation as a result of the global crash ten years ago, these funds attempt to give the investor a diversified and non-correlated collection of investments that should offer a limited downside if we suffer an economic collapse again. They do tend to perform better when government bonds are yielding a better return than they are at the moment.
These give the investor the opportunity to buy shares in companies such as Google, Facebook, Amazon, Diageo etc. They can also buy property if they wish.
A mix of the above can be assembled for the investor without issue if they so choose. As my conservative side always tends to say, be sure that the risk associated with your choice is appropriate to you so that in the event of a downturn you don’t feel you need to sell out of discomfort.