Today Tommy and Ed are talking about 4️⃣ things you might want to consider before you turn 40!

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Introduction

Medics’ Money co-founders Tommy and Ed have just recently turned 40. They discuss how their lives began at 40 in the podcast.

40 is old 👴

If you are approaching 40 years old, congratulations, life begins at 40! But there are some essential financial tasks to take care of before this life begins. If you are nowhere near 40, congratulations also. However, the earlier you start the financial tasks mentioned today the better. If you’ve dashed past 40 don’t panic, but do think about the tasks mentioned in this post and maybe skip the section in which we detail how those under 40 can get up to £1,000 tax free from the government every year until the age of 60. 

Whether you’re approaching your 40s, or think they’re impossible far away, there’s something for everyone in this post!

1️⃣ Lifetime Individual Savings Account (LISA)

 The first thing we would suggest having a think about before you turn 40 is setting up a Lifetime ISA (also known as a LISA). Of all the suggestions we make today, this is actually the only one that must be done before you turn 40 because after this point, the opportunity to set up a LISA is gone forever.

What are LISAs?

LISAs are a special type of ISA which can be set up between the ages of 18 and 39 years of age and they offer a distinct and potentially incredibly useful bonus: each tax year you can invest up to £4,000 in a Lifetime ISA and the government will top this up with a 25% bonus, up to a maximum of £1,000 per year. Say, for instance, that I decided to put £4,000 into my LISA in any given tax year. The government would then put 25% of that amount into the account – doing some quick maths, that gives a £1,000 bonus from the government and the final amount in my LISA would be £5,000. Now it goes without saying that we cannot offer financial advice in any capacity but we would, however, suggest that all doctors, dentists, and other healthcare professionals, under the age of 40 who don’t already have a LISA consider setting one up. 

An extremely important set of conditions should be noted when it comes to withdrawing money from LISAs, as there are restrictions. Firstly, if you are a first time home buyer you can withdraw the money to help to buy your first house as long as it’s worth no more than £450,000. Aside from the housing condition, you can withdraw the money at any age if you become terminally ill, or after the age of 60. If you withdraw the money for any other reason you will incur a penalty charge at 25% of funds withdrawn.

2️⃣Wills 

The next topic on our list of endeavours to consider before turning 40 is writing a will. 

When a person dies their affairs must be finalised and their property passed to others either in accordance with the deceased’s will. Wills are especially important if you have children, or other family members, who depend on you financially. They are also essential if you want to leave something to people outside of your immediate family. 

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If a will is not in place, then the deceased’s affairs fall under the law relating to intestacy, and these special rules set out how assets are split out on death when there is no will. These rules may not be the ones you would want to dictate what happens to your estate. When a person dies intestate their estate is distributed (after the payment of debts and taxes) according to set rules. For deaths occurring on or after 1 October 2014 the rules applying in England and Wales provide that the estate is distributed as follows: 

 

Those surviving the deceased:Who is entitled to the estate:
Spouse / civil partner only (no children, parents, siblings or nieces / nephews)Spouse / civil partner gets everything
Spouse / civil partner and childrenSpouse / civil partner gets all personal items (“chattels”), £250,000 plus interest from the date of death and half of the remainder.The children receive the other half of the remainder, shared amongst them equally (if the child is under 18 it goes into a trust)
Spouse / civil partner, no children, parentsSpouse / civil partner gets everything
Spouse / civil partner, no children or parents but siblingsSpouse / civil partner gets everything
No spouse / civil partner, childrenThe children receive everything, shared amongst them equally (if the child is under 18 it goes into a trust)
No spouse / civil partner, no childrenThe whole estate goes to any parents
No spouse / civil partner, no children, no parentsThe whole estate goes to siblings, then half-siblings, then grandparents, then uncles and aunts
No spouse / civil partner, no children, no parents, no living relativesThe Crown

 

As per this final box, we believe this includes pets so if you have no relatives at all but have some cats then strictly speaking the Queen will be given your cats!

If you’ve listened to the Medics’ Money podcast episode 88, entitled ‘Our OWN family finances laid bare’, then you will know that Tommy and Jo – despite having had children for nearly eight years – only made a will last year! They thought making a will would involve face-to-face meetings in a stuffy solicitor’s office, but Tommy and Jo used Talbots Law and were so impressed that Medics’ Money have now partnered with them to offer readers of the Medics’ Money blog a £150 discount on a will when purchased with a Lasting Power of Attorney (LPA).

Make a will today here

3️⃣ Insurance

As doctors, we might be less inclined to think that we will fall ill, but what happens when it does? How do we pay our bills? 

The first answer that might spring to the sensible reader is sick pay! Let’s have a quick recap of sick pay in the NHS: for the first five years as an NHS doctor, the sick pay accrues. So in your first year as a doctor, you would typically expect to get one month full pay and two months of half pay. After five years, you get the maximum benefit that the NHS provides: six months full pay and six months half pay. Do bear in mind that GPs, locum doctors, and locum GPs’ sickness benefits will vary, and might not even get any sick pay at all! A friend of Tommy’s took a year out to work in Australia, after 10 years in the NHS and that resulted in his accrual being reset to the one month full pay. It’s important to remember that you might not be able to rely solely on sickness pay forever, if you became too sick to work. 

Have a think: if you got sick and couldn’t work, could you pay your bills without your income? 

The consensus among the Medics’ Money team is that we certainly couldn’t, so we have insurance. Tommy’s guiding philosophy is that he doesn’t insure anything he can afford to replace, which is why he doesn’t insure his iPhone, or his beloved surfboards. He does, however, insure his and his family’s future. 

What catastrophes can we insure ourselves against?

Firstly, you can insure against the inability to work due to an accident, or illness. This will usually be covered by income protection insurance. This cover will provide a regular income in such scenarios, and will continue until you are able to re-start work, or you retire. The income you may receive will likely not be equivalent to the pre-illness earnings: expect around 50-60% of your gross earnings. Any income you receive from this policy is free from tax. 

The second adverse event we can insure ourselves against is the diagnosis of a critical illness like cancer, strokes, or heart attacks. These kinds of diagnoses will be usually covered by critical illness insurance, which is paid in a lump sum. This can be a very useful supplementary piece of income in addition to any sick pay you may get from your employers.

The final thing that you might insure yourself against is an early death. This is covered by life insurance, which ensures that members of your close family – or otherwise specified – receive an agreed sum of money, so that you know that those who depend on you financially will be taken care of to some extent. 

 Again, we are in no way offering financial advice on these matters, but the combination of insurance you opt for depends on your circumstances and preferences. For example, a Junior Doctor with no mortgage and no kids is likely to have very different protection requirements to a 40-year-old consultant with three kids and a large mortgage. Have a think about which kinds of policies might be most relevant to you.

Tommy claims his biggest mistake was getting insurance too late. Some reasons he quotes for this, that might resonate with some of you, are as follows:

  1. Tommy felt invincible while he was young. This is perhaps a very common sentiment among younger people, where the vast expanse of life and possibility stretches ahead. As soon as Tommy had children, however, he took out protection. With his preference for surfing, kitesurfing, and mountain biking, this was a wise choice!
  2. Tommy is frugal and likes to minimise unnecessary expenditure. This can be partly explained, he says, by his working class background and having lots (and lots) of medical school debt in his early career. This led to him hustling everything to repay the debt and build his wealth. He’s very glad that he realised income protection was not an unnecessary expenditure, and listened to his Medics’ Money approved IFA and got protection.
  3. He didn’t know where to get the right cover for the right price, especially considering the financial circumstances of doctors, and he was also suspicious of the salespeople who targeted his naivety at medical school. This is exactly why Medics’ Money was set up: IFAs, like those who work with Medics’ Money,  can search the whole market and find the best policy for you. Restricted Financial Advisors only search a defined portion of the market, and paradoxically, the biggest firms targeting doctors are restricted. It’s hardly a secret that at Medics’ Money we match you to a trusted IFA who specialises in doctors.

Also, as a bonus topic on protection, you should think about establishing an emergency fund! We recorded a whole podcast on it, which you can listen to here

Find an Independent Financial adviser that can help you get the best income protection policy here

https://www.medicsmoney.co.uk/medical-financial-advisor/

4️⃣ Your Retirement Plan

If you just turned 40 like Tommy and Ed, retirement might seem like a long way off. And for those of us predominantly in the 2015 section of the pension, retirement is a LONG way off. 

A critical thing to take note of for doctors mostly in the 2015 Section is that the normal retirement age is linked to the state pension age, currently at 68 for Tommy. Contrasted to the 1995 scheme where the retirement age is fixed at 60 and the 2008 scheme where it’s fixed at 65, there’s a lot more uncertainty as to when you can retire. You can now take your pension before the retirement age, but it will incur actuarial reductions of approximately 4% per year.

In the opinion of Medics’ Money, and opinion alone (not advice), the NHS pension is still a great deal for the vast majority of doctors. Before making contributions to our LISAs or investing in the stock market via Stocks and Shares ISAs, we maximise our NHS pension contributions. There are some issues with the NHS pension that we talk about on the podcast often, but we still think it’s a great deal for the majority of us. If you don’t want to work until the government says you can stop, however, you’re going to need a backup plan to fill in the gap between your personal retirement age and the state retirement age. Tommy’s talked about his own plan to achieve this in the podcast episode 62, entitled ‘Early retirement strategies for doctors’, where in short he will maximise his NHS pension but also investing into a Stocks and Shares ISA. It’s worth noting that investing is not a so-called ‘quick fix’. Good investing takes time, often ten years at the minimum. The best thing to do is to start early.

As you’re approaching 40, you might ask: why invest?

Cash is trash?

30-40 years ago, interest rates were high, and inflation was low. You could have your money in the bank and the given interest rate would make you money, which sounds like a foreign concept in today’s economy. Then the 2008 financial crisis happened.

In the following years (even up to today), interest rates have been very low, and inflation is high and on the rise with the cost-of-living crisis. If we tried to do what we did 30-40 years ago, having cash sat in the bank, our cash would actually be losing value. Cash is not a safe haven, and so we turn to investing to help beat inflation.

Stop exchanging your time for money

Are you trading time for money? The chances are that you answer yes to this question. Almost all of us do! Of course, you may already be a wealthy doctor or dentist with a lucrative private practice. If so, well done; you’ve worked hard and deserve the success. But earning that money most likely requires you to do the work directly, working long hours at weekends and possibly in addition to your contracted NHS hours. 

Supplementing your retirement

Unfortunately the days of being a doctor working to age 60 and then receiving a guaranteed lump sum and an index linked pension for life without worrying about pensions tax – specifically AA and LTA are OVER. We can use investing to supplement our income later in life, especially if it’s had a lifetime to compound. 

Effort required

A sound investing strategy can earn you money while you sleep, or enjoy your hobbies or spend time with your family or friends. Investing in this way can be very passive, requiring very little input once setup, leaving you to enjoy your valuable free time. 

Investing can be tax efficient

We’ve already demonstrated why working harder may bring in less reward than you might think thanks to the high rates of tax doctors pay. So, the tax trap between £100,000 – £125,140 can result in you taking home just 38p in the pound. If you invest in an ISA, however, any gains are free from tax!

This article does not constitute advice and tax allowances are subject to change6