For many people chasing financial independence, clearing the mortgage ASAP is a key early retirement milestone. And if that’s your plan, then the notion of paying off your mortgage with your pension instead might sound painfully slow.

But have you actually run the numbers?

Recently, I’ve been considering moving to a more expensive house.

There’s a snag, though: I won’t be able to pay down a larger mortgage over 25 years. Or even over 30 years. Not without stopping my ISA and pension investments, anyway.

And I’m not willing to give up on my laissez-FIRE early retirement dreams just yet.

I’ve realised though that I don’t necessarily need to pay off that bigger mortgage. I just need to service the debt while living in the house for as long as we want the extra space.

Once our kids have grown up – and their vacated rooms begin to suck in exercise bikes, old books, forgotten toys, and a ton of other clutter – then I can sell it.

At the same time, when my kids have grown up… well, I’ll also be eligible to access my pension if I want to.

Which is a slightly scary thought. But it does come with some side benefits.

It’s not the prospect of a free bus pass that I’m excited about. Rather, it’s the possibility of using my pension to pay off my mortgage.

I’ve done my sums, and I think this could potentially save me 50% on my mortgage payments.

And what old age pensioner doesn’t love a chunky discount?

The mechanics of taxation are key

Tax is simple in theory. But when you get into the weeds of gross and net payments, it can start to feel a lot more complicated.

Roughly speaking, if someone earns £60,000 gross, then they receive roughly £45,000 net into their bank account, after tax, under the current tax regime.

So if they choose to use £450 of their bank account cash to overpay their mortgage, it has actually cost them £600 of their gross earnings.

Most of the time this doesn’t matter. Feel free to stand at the counter in Costa Coffee and point out that your £4.50 coffee actually cost you £6 in gross earnings. I doubt the rest of the queue will care too much.

With pensions, though, it matters tremendously.

That’s because pensions – both defined benefit and defined contribution – allow you to mitigate and/or delay your income tax bill.

How pensions work

I won’t dive into how defined benefit pensions work, because you could easily write a book on the topic. But the principles with respect to taxation are similar.

I’ll just use defined contribution pensions as the example today.

The central point:

• If you’re in, say, the 40% income tax bracket and you decide to put £1,000 into a pension, then that money goes in free of all income tax.

That might be because your company puts money into your pension before even subtracting any tax – so-called salary sacrifice. In this case, you now have £1,000 in your pension instead of £600 in your bank account.

Alternatively, you can transfer taxed cash into a SIPP, get an automatic 20% top-up from HMRC, and then claim another 20% back on your tax return.

Either way, for now you’ve avoided paying 40% marginal income tax on that £1,000.

However it’s very hard to say precisely how much tax you’ve saved by moving money into a pension in the long run.

It’s not just income tax you need to consider

For instance, at earnings of £60,000 to £80,000, with children, you might need to pay the High Income Child Benefit Charge (HICBC):

• The HICBC could put up your effective marginal tax rate to 57%.
• At earnings of £100,000 to £125,140, you’d face a higher marginal tax rate of 60%.
• With children in nursery, the withdrawal of support can mean effective rates above 100%.

You’re also paying 2% – and your employer is paying 15% – in National Insurance.

At least until March 2029, however, you can sidestep National Insurance on earnings diverted into a salary sacrifice pension. Your employer might even be generous and share some of its 15% savings with you, too.

The point is, you can lose a lot in tax for each extra £1 that you earn.

Good things come to those who wait

Let’s set up a good old personal finance example scenario.

Meet Ingrid and Hans – a high-earning couple with children.

Ingrid earns £80,000 after matching pension contributions. Ingrid pays a marginal tax rate of 57% due to the HICBC the couple pay for their three children.

Her husband Hans earns £70,000 after matching pension contributions. His marginal tax rate is 40%.

They’ve borrowed £750,000 as a mortgage to buy their family home. Assuming a 5% rate over 35 years, they are paying £3,787 per month in repayments.

Ingrid and Hans are quite frugal elsewhere in their lives. They project that they’ll be able to put aside £40,000 this year.

What should they do with this surplus cash?

Making mortgage overpayments

Hans’s first instinct is to use the £40,000 to make an overpayment on their mortgage. That’s well within their 10% annual mortgage overpayment allowance.

After tax – and after handing over £40,000 to the mortgage lender – they’re left with £68,122 in spending money:

Making extra pension contributions

What if they instead put £40,000 into their pensions via salary sacrifice?

Now they’re left with £88,150:

In each scenario they’ve effectively invested £40,000, just in different ways:

• In the first scenario, the £40,000 went towards mortgage overpayments. (Remember, paying off a mortgage is a form of saving.)
• In the second, the money went towards pension contributions.

Due to the tax savings however, with the second strategy they also have around £20,000 more in their bank accounts.

This makes sense when you consider that they have a marginal tax rate of around 50% between them.

Later taxes paid on pension withdrawals have an impact

Before you run down to your pension provider’s office to start stuffing banknotes through the letter box, I should acknowledge it’s not all quite so simple.

This is mostly because pensions don’t completely avoid tax. Rather, they delay it and potentially reduce the rate you pay.

So yes, Ingrid and Hans now have an extra £40,000 in their pensions.

But even when they turn 55, 57, 58 or whatever the legal age of access might be at that point, they can’t just withdraw the entire pot unscathed.

Rather, at that point they must pay tax on the money they take out.

The first 25% of pension cash can be taken out tax-free (up to £268,275) thanks to the tax-free lump sum.

But on withdrawals beyond that, they’ll pay income tax at their prevailing rates.

Paying down the mortgage from a pension

Let’s imagine a slightly different scenario.

Assume Ingrid and Hans have been working on their plan for many years. They are now turning 57, and the time has come to reap the benefits.

For the last two decades, the couple had an interest-only mortgage. That meant their monthly mortgage payments were lower – simply covering the mortgage interest.

On the plus side this meant they could direct the spare cash into pensions and ISAs. As high-earners who saved hard and invested well, they each amassed seven-figure pension pots.

The downside is they still owe the full £750,000 on their mortgage.

Step 1: the lump sum

At 57, both Ingrid and Hans have access to their pension balances for drawdown. Their pensions qualify for the maximum £268,275 tax-free lump sums, which they both take.

This totals to £536,550, which they send to their mortgage lender, immediately reducing their outstanding mortgage to £213,450.

The monthly interest due drops to £890.

Step 2 – the pension drawdown

They decide to pay the remaining mortgage down over ten years. This way it will be paid off entirely by the time they are 67. 

This means they’ll need to withdraw £9,605 in the first year for the interest payments and another £21,350 each year to pay down the outstanding balance:

The first year is the toughest. They need to find almost £31,000 from their pensions. They’ll presumably have living expenses as well.

But things do get easier as their outstanding mortgage balance falls and the interest payments come down with it.

Even pensioners can be liable for tax

Unfortunately, with their tax-free pension allowances totally used up, HMRC now wants a cut of this couple’s pensions withdrawals.

However the way income tax is structured, this isn’t as painful as you might think.

The 40% band doesn’t kick in until at least one of them is withdrawing more than £50,271 from their pension. Splitting the withdrawals and mortgage payments between them means they almost certainly won’t need to pay 40% tax on any of their income.

If together they withdraw £30,000 for living costs and £31,000 to cover the mortgage and overpayments in year one, then individually they’ll be drawing down £30,500 from their pensions.

And after their personal allowances for income tax, they will each pay only around £3,600 in taxes – or approximately 12% of the money they withdraw.

The difference between tax rates is key

This example neatly illustrates why paying off your mortgage with a pension can work so well.

When this money was first directed into their pensions, they deferred paying roughly 50% in income tax.

Then, when it came time to draw it out, the lump sum incurred no tax at all, and the remaining withdrawals only cost them around 12%.

What’s more, in terms of the total money used to pay down the mortgage balance, more than 90% of this cash – pre-tax – went towards doing so.

That’s a huge difference compared to paying it down earlier in their lives, when up to 57% would have gone to HMRC before the overpayments even landed with their lender.

Risks are everywhere

Of course nothing is totally risk free, and this strategy has plenty.

A big one is that it is dependent on the current tax rules as they stand.

But the rules around the tax-free lump sum have already changed a few times. And the treatment of National Insurance for salary sacrifice pensions will alter in April 2029.

The minimum pension age could be moved up again from 57, too, delaying when you can withdraw your lump sum.

The point is there’s no guarantee that this method will still exist in the same shape by the time you come to retire.

Another issue is that interest-only mortgages are perfect for this scenario, but if they are structured in a way that at the end of the term you either pay off the full balance or you have to sell the house, then tax changes might force you into an unwanted sale.

Getting a mortgage that lasts into your 60s or even 70s can mitigate that, because you’ve got more time to come up with a plan. But that isn’t bulletproof.

Also, interest-only mortgages themselves aren’t so widely available these days.

Finally, investment returns in your pension are by no means guaranteed. If you invest the money in the stock market, then it’s possible that even over a couple of decades your returns could be lacklustre.

By contrast, paying down a mortgage delivers an immediate and certain return.

Summary of mortgage overpayments versus using your pension

The bright side

Of course you don’t have to push quite so hard as Ingrid and Hans.

For starters, not everyone can amass over £1,000,000 in a pension to max out the tax-free lump sum withdrawal.

You might instead choose to stick with a repayment mortgage, but decide that you’ll shovel spare cash into your SIPP rather than make mortgage overpayments.

And when you reach retirement age, if you can then pay off the balance with a tax-free lump sum then, well, congratulations!

But if not – perhaps because the tax-free lump sum has been done away with, you’ll just crack on – and withdraw money from the pension at 20% tax.

It’s not as good as you’d hoped for. But if you saved 50% tax on the way in then you’re still doing well.

It’s not for everybody

Some people love the freedom that a fully paid-off mortgage gives them.

No arguments from me there.

But if you’re already planning to invest heavily to build up a healthy ISA and pension balance, then it might be worth cracking out a spreadsheet.

• The Investor wrote an article on paying down your mortgage or investing. It doesn’t explicitly take taxes into account. But it’s a good place to start on the risks and the potential rewards, and there’s a spreadsheet you can duplicate for your own use.

For us, since we view our next home as a temporary venture, the pieces slot into place more neatly.

We’d be quite comfortable with needing to sell up in our fifties. If downsizing and utilising our pension lump sums lets us become mortgage-free, then that’s perfect.

Equally, if our lump sums let us take a huge bite out of the mortgage, and we can easily afford the monthly payments for a few more years whilst we decide where to move to, that’s also fine.

What if the government has eliminated the tax-free lump sum or increased tax rates on pension withdrawals by then?

Well, then we won’t benefit as much as we had originally hoped. But investing is all about taking calculated risks.

The point is that I’ll be prioritising my ISAs and SIPPs ahead of making mortgage overpayments over the next few years.

And I’ll be crossing a few fingers for a couple of decades!

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What caught my eye this week.

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I like walking. Fortunately, so does my wife.

Our longest walk is the South West Coast Path. It took us seven years to cover all 630 miles, fitting in a week here and there while we worked full-time.

Our second longest walk is the Camino Francés, a more modest 500 miles. We completed this in one go, over a leisurely couple of months earlier this year.

Why all in one go? Because we can. We don’t have to work now.

This is why I invest.

My interest in investing is not for its own sake but because it will allow me to go for long walks. Really long walks.

Against the flow

The Camino Francés runs from the French side of the Pyrenees, through northern Spain to Santiago de Compostela in the west of the country, where traditionally pilgrims would visit the shrine of St James.

But, to the surprise, amusement – and occasionally horror – of other pilgrims, we walked it in reverse. Somehow it felt more natural to be walking away from civilisation and towards the mountains.

This meant we would typically start and end our daily walk alone but meet a lot of people going the other way around the middle of the day.

There must be a contrarian investing metaphor in there somewhere. 

The cost

You don’t need the investing success of Warren Buffett to walk the Camino. It’s possible to get by on very little if you choose the right hostels.

And when your path takes you through El Bierzo, La Rioja, and Navarra you can always find a decent red to go with your paella, whatever your means.

We didn’t scrimp – I like a nice room and a decent meal after a long walk – but we still ended up spending less in those two months walking than we normally do living at home. We don’t need more money to go walking.

If my preferred pastime was motor sports or polo then I would need a very different financial plan (and probably to have worked a different career).

But it’s not. I like walking. And I’m happy about that.

The Meseta

The heart of the Camino Francés is the Meseta; a vast high plateau of beautiful monotony. If you’re going to have an epiphany on your pilgrimage, then this is where it will happen.

It took us eight days to walk across the Meseta, from León to Burgos. Plenty of time to think about life. Many of the people we met were grappling with some sort of work, relationship, or existential conundrum.

For the most part, my inner thoughts would not be of much interest to you – and may be embarrassing for me.

But I did dwell for a while on the nature of my retirement.

Retirement

I’m still uncomfortable with the word retirement. It seems too negative, like I’ve just given up. Even now, I hesitate awkwardly when people ask me what I do.

I stopped working a couple of years ago. It was the right time. I’d worked hard, done some long hours, had some success, and the joy in it was beginning to ebb.

And, of course, our investments had reached the point where paid work was optional.

I wasn’t short of advice on what I should do when I gave up work. Some of it solicited, some of it not.

One thing everyone was sure about was that I would need to keep myself busy. I should work part time, or do some consulting, or volunteer for a charity. At the very least I should keep a structured routine.

I was warned that many people became bored and depressed when they retire – and end up going back to work or spiralling down into a Cash in the Attic torpor.

But despite this advice, I didn’t take on anything new straightaway. We were already renovating a house and had just had a new grandchild. I gave myself some space (as the self-help books like to say) to think about things for a while.

I quite enjoyed that space. And then we went walking.

Out on the Meseta, I decided that I would ignore all the advice. Simply put, I really like not working. I don’t want another job, or objectives, or more dates in my diary.

The only routine I value is the simple rhythm of a long trail: walk, drink, eat, sleep.

The least important things hold my interest; the smallest things give me joy. I’m not the same person I was when I worked.

FIRE, aim, ready

Perhaps you know exactly what you’ll be doing when you finally stop work. But I’m figuring it out as I go along.

Who knows, maybe I’ll change my mind again and retrain as an accountant next year.

It’s prudent to occasionally remind yourself of your reasons for investing. It’s hard to make good investing decisions if you’re not clear on why you’re doing it.

That doesn’t mean though that you need your future mapped out in detail and set in stone.

You’ll get plenty of advice on retirement. Some you may even find useful. Feel free to discard the rest. Only you will know what’s right.

The end?

On our last day on the Camino, it rained. The beautiful views on the descent to Saint-Jean-Pied-de-Port were lost behind low cloud.

That’s part of walking. Some you win and some you lose.

The next day I started planning another walk: the Via di Francesco, from Rome to Florence through the Apennines.

I’m confident my money will last. What I don’t know is how many years of pack-carrying trail walking I’ve got left in me.

I intend to make the most of them while I can.

Buen Camino!

The post The way. (Or, why we invest) appeared first on Monevator.

Jousting over our contrasting lifestyles – “You can’t take it with you!” comes his retort – reminds me of our different visions of what we can do with our money.

After all, we will see a good deal of the stuff over our working lives. Research from the Prudential in 2014 reckoned that the average Brit would have earned a million pounds by age 46. ¹

That made for a great headline back in the day. But in truth a million wasn’t what it used to be even then. And it certainly isn’t now, after several years of especially uppity inflation.

For what it’s worth, Prudential calculated it’d take a man (I’m one of those) 28 years to notch up his millionth pound earned (assuming average wages for his age, starting at 18).

But after those 28 years, a million would only be worth around £492,000 ², as inflation got to work like woodworm on Pinocchio.

Worse, while a million pounds still sounds like – and is – a lot of money, it’s worth a lot less than it was in 2014.

You’d now need £1,428,000 to live it up like a millionaire back when Prudential ran the numbers.

Remember: inflation is the first reason why we invest.

A million through your fingers

There’s more bad news for anyone aiming to barge into the seven-figure club.

Obviously, you’ll have to pay bills along the way. This will consume much of your million pound earnings.

Food, water, a roof over your head – even the most extreme frugalists can’t avoid spending a few pennies over the course of nearly three decades.

Then there are taxes. It won’t have escaped your notice that income tax thresholds and most personal allowances have been frozen for – technically-speaking – ‘yonks’.

Chuck in a cost-of-living crisis, and it’s tougher for us to pile up our hard-earned loot than it was for would-be millionaires a decade ago.

Time to put that Ferrari catalogue back on the shelf?

How to earn a million pounds on today’s wages

Everything has gone up in price, and the value of the pound in your pocket on your banking app screen has gone down.

But the silver lining is that wages have risen, too.

Well, a bit:

• In 2014, the UK median wage for full-time employees was £27,000 a year.
• As of the latest numbers, that figure is £39,039.

Here’s the direction of travel in pretty graphical form:

Source: Sage / ONS

There are many ways to slice-and-dice earnings data. We’ll stick to full-time employees, as working a 9-to-5 for five days a week seems like the least one can do in the pursuit of millionaire status.

• On a gross income basis, it would take an employee earning £39,039 exactly 25.6 years to pass through the £1m in lifetime earnings mark.

But of course there are taxes. Very generally we can assume annually:

• Income Tax (at 20%): £5,294 (after the £12,570 personal allowance)
• National Insurance (8%): £2,118
• Annual take-home pay: £31,628 per year

On this basis it would take 31.6 years of continuous work to see £1,000,000 in take-home earnings.

Just three decades, then, on average wages, to become a millionaire. Assuming someone is paying for all your living costs so you can save every penny.

Ahem.

But, but, but…

I hear you! What about high earners? How much faster if you stashed your spare cash in a pension? What if you’d invested the lot in nVidia – would it even have taken a decade?

Clearly there are a gazillion permutations in reality. We’re just spitballing.

I will look at savings in a moment, though. (Think of it as the cavalry coming over the hill!)

The best way to earn a million pounds

Leaving out those who enjoy a leg-up from their parents, a lot of people who get very rich do it by starting a business, or otherwise operating outside the mainstream.

However as we’ve seen above, millionaire status and wage money are not incompatible these days. Albeit that’s because a million pounds is worth so much less than when everyone was writing songs about it.

Accountancy software firm Sage compiled a handy list of the highest-paying industries for all you financially-motivated wage slaves:

Source: Sage

Before you rush to Heathrow to ask about a job in the control tower, I’d take this list with a pinch of salt. It’s suspiciously short of bankers and others in finance.

If you really want to make money, go where the money is!

What does a million pounds buy these days?

The big question is what could I do with a million pounds if I had it now?

There are plenty of answers to that, but essentially I’d like to live it up, draw an income, and never work again please.

The standard rule of thumb for living off your assets in retirement is that you can withdraw 4% a year without going bust before your clock runs out.

On this basis, a million pounds equates to a £40,000 annual income:

£1,000,000 x 4% = £40,000

However many people around these parts want to retire early. And questions persist about how sustainable 4% will be going forward, given it was originally based on US investors and their dream team returns from the US stock market.

For today, let’s plump for a more cautious 3% to keep us out of harm’s way:

• Our million pounds now delivers an income of £30,000 a year.

So if you can’t live on less than £30,000 a year, you’re going to need to be a millionaire by the time you retire. ³

A real millionaire. ⁴

How to save a million

We have our roadmap. All we need now is the saving ethic of a Swedish tramp, an eye on inflation, the magic of compound interest, and a fair wind for a stock-heavy portfolio.

Well I say that, but while the average Brit may see a million pounds slip through their fingers long before they’re 50, it’s going to be a b’stard for most to become millionaires.

The key factors are:

• How much you save

• How long you save

• The growth rate you achieve

If you’ve got nothing in the bank now and we assume a growth rate of 5.5% ⁵ for your portfolio, then you’d need to save around £28,000 per year for 20 years to hit the magic million.

You can use Dinky Town’s investment return calculator to run your own numbers. Or check out Monevator’s millionaire calculator for a quick estimate.

The snag, again, is inflation.

At 2.5% a year, inflation will wear down that million to around £600,000 in today’s money after two decades. On that you could draw an equivalent income of £18,000 per year, at a 3% withdrawal rate.

So just how much do we need to put away to earn a ‘real’ million, assuming annual growth conditions of 5.5% nominal return and 2.5% inflation?

20 years to save a million

To earn the equivalent of a million pounds in today’s money, we need to invest nearly £46,000 a year for 20 years.

By that point, we’ve amassed around £1,640,000 in nominal terms. That’s just over £1 million in real terms.

Impossible you say? It would have been for me.

Let’s take a more leisurely 30-year route to Millionaire City.

30 years to save a million

Annual investments of just over £13,000 a year would balloon into a million after 30 years, given the same growth and inflation assumptions as above.

But, tragically, a cool million in our hypothetical 2056 will only be worth a very uncool £468,000 in today’s money.

You’ll need over £2m to have the same spending power as a millionaire does now, which means you’d need to invest nearly £28,000 a year to hit a real million after 30 years.

Hmm, let’s be more optimistic. Thirty years is a long time. Who knows what might happen?

What if growth was a not unreasonable 7% nominal for a 60/40 portfolio of equities, bonds, and other bits over that time?

Well, you’d still need to find almost £22,000 a year to achieve the £2m target that would make you the equivalent of a millionaire in today’s money.

My Ferrari catalogue is burning on the fire because I can’t afford central heating.

A country estate is something I’d hate

Clearly millionaire status will be beyond the reach of the average Brit for a while yet, barring a dose of Weimar inflation.

UBS estimates that just one in 29 or so Britons are US dollar millionaires – and the number would be lower in pound sterling terms.

On the other hand, the same estimate was one in 65 back in 2014, when I first wrote about this topic.

Eventually inflation will make millionaires of us all!

Pension pots of gold

The truth is even a comfortable retirement status is a steep climb for many of our fellow citizens. You’ll need a pot into six figures, as a minimum.

Going on to hit seven figures in a hurry – unless you’re already rolling in it – is a tough ask. But it can be done.

Indeed a seven-figure pension pot is arguably becoming a necessity for the typical higher-earning Monevator reader, given the latest estimates on retirement spending.

Who wants to be a millionaire, eh? Perhaps I’ll re-read The Investor’s tips on living like a billionaire in the meantime.

Take it steady,

The Accumulator

Note: We’ve updated this article with 2026 salaries and other details. Comments below may refer to the original article. Or they may be sour grapes from those still chasing that elusive seventh digit!

1. Notwithstanding a raft of exciting caveats, like losing an arm and a leg to taxes.
2. Assuming a steady rate of 2.5% p.a.
3. Not accounting for taxes or the state pension.
4. In other words, you’ll need a lot more due to inflation.
5. Nominal return after 0.5% investment costs.

The post How long to earn a million pounds? appeared first on Monevator.

What caught my eye this week.

The post Weekend reading: Vanguard goes global for 0.07% appeared first on Monevator.

Last time, Monevator guest contributor Ho Simpson explained what really happens when you currency hedge something in your portfolio – whilst simultaneously hammering our finance dictionary like an online Scrabble player who has bet their house on finding a 1,500-point word. This time he looks at the practical ramifications and tells us what he’s doing in his own portfolio and why, before concluding with an FX hedging jargon buster that should make Billions more intelligible if you ever commit to a rewatch.

The post Practical FX hedging options for retail UK investors [Members] appeared first on Monevator.

Today we’re going to look at purchasing an index tracker fund.

Next stop, the world – muhaha!

(Oops, did I say that out loud? I meant to write: ‘Next step, a globally diversified passive portfolio’…)

What is an index tracker fund?

An index tracker fund is typically an Open Ended Investment Company (OEIC).

In normal-person speak, this means a tracker fund is set-up as a company that you can buy and sell shares of.

Index trackers are ‘open-ended’ because the number of shares in the company will rise and fall when investors buy or sell them from the manager of the fund. ¹

Some tracker funds are still set up as Unit Trusts. These are structured as a trust rather than a company, and investors buy and sell units in the trust. Like OEICs these are also ‘open-ended’.

From an everyday investor’s point of view, the two flavours mostly amount to the same thing.

We’ll focus on OEICs, which we’ll refer to simply as index funds from here.

Pricing

Before buying anything, it’s important you know how the market works.

Index funds are priced by a set formula based on the value of their assets.

Unlike ETFs or shares, a single-priced index fund has one published price for buyers and sellers. The price is calculated at a set time – called the valuation point – which for most funds is once each working day.

To complete your trade on a given day, you must do so before a cut-off time:

• If you place an order before the fund’s cut-off time, you’ll normally receive the price calculated at that valuation point.
• If you place your order after the cut-off, then your trade will go through at the next valuation point.

Note this means you might mistakenly think you’re invested before your money has actually gone into your chosen fund. For example, you could put in a buy order on Tuesday afternoon. But it could be executed, say, at midday on Wednesday.

Normally being out of the market for a few hours doesn’t matter much. But if markets are making huge moves up or down, it might!

You can find an index fund’s valuation point in its documentation, or on your investment platform’s research page under ‘fund facts’ or ‘dealing deadlines’.

I’ll trade yer…

Let’s say you know what fund you want to own. For instance, you want to put £1,000 into the Fidelity Index World (Acc) fund. (Here is its webpage).

You’re ready to put your money to work.

First you need to locate the fund you want to buy into. To find a fund, search for the fund’s name or identifier – such as its ISIN, ticker, or platform fund code – on your platform.

Be persistent! Broker search tools can be shonky. A fund name can often be the easiest way to find a fund, rather than trying to hit on the required code. You might even have to resort to a Google search of your platform to find the fund page on its website, and then go from there. In all cases, triple-check the details to make certain you’ve got the fund you want.

Deal with it

Here’s that Fidelity World Index Fund located at Hargreaves Lansdown:

You can see the Buy and Sell prices are the same. That’s because Fidelity Index World is a single-priced fund ². More on that below.

Note that this quoted price is the last traded price – not the price we’ll pay.

As we saw above, an index fund is generally valued once a day, at its valuation point. Hence you’ll only know the exact price you paid when your trade completes.

Having logged into the platform and clicked through to Invest Now, we see this screen:

Notice we’re only confirming the total order value – here it’s £1,000 – and no price. Again, we won’t know the exact price we paid until the deal is done.

Because OEICs have a single published price, there isn’t a conventional bid-ask spread in the way there is with an ETF. The transaction costs are embedded in the fund’s pricing, rather than through a spread. ³

You’ll also see that Hargreaves Lansdown will charge us £1.95 to do the deal.

Who pays for all the underlying buying and selling?

Here’s some slightly geeky details.

When you buy or sell units in, say, an equity index fund, your fund manager may have to buy or sell the underlying company shares on your behalf. These transactions cost money – racked up by things like dealing spreads, commissions, and the market impact of large trades. ⁴

Now, if transaction costs were simply absorbed by the fund, then existing investors could end up paying for the trading activity of other investors.

That’s called dilution, it’s not really cricket, and so fund managers – and regulators – have devised ways to make sure the people who create the costs actually pay them.

For example, a fund might apply an explicit dilution levy.

Or, commonly with a single-priced fund, it can use swing pricing – also known as a dilution adjustment – to nudge the fund’s published price up or down to reflect the estimated costs of dealing in the underlying investments.

The point is that while an OEIC may show one price rather than an ETF-style bid-offer spread, that doesn’t mean buying and selling is costless. The costs of trading the underlying investments must still be paid somewhere.

The swing pricing mechanism is designed to protect long-term investors from subsidising other people’s trading. The FCA’s rules require any dilution adjustment or levy to be operated fairly and solely to reduce dilution – which is nice.

(Incidentally, if you Googled ‘swing pricing’ to read about the cover charges when throwing your keys into a bowl at a certain sort of party in Surbiton, well, each to their own.)

What will the trade cost you?

Many good brokers don’t charge a dealing fee for trading index funds. Historically, this usually made index funds cheaper to buy than ETFs, where dealing fees were levied.

However with today’s zero-commission platforms, ETFs can also be bought without an explicit dealing charge.

Meanwhile some platforms do charge a fee for index fund dealing, as we saw above.

Other investment costs will usually apply either way, so scrutinise fee structures before you pick your platform. Even trivial charges add up over time. Find what’s best for you.

Assuming you’re not getting badly stung some other way – be particularly wary of annual percentage-based charges on large investment pots – then paying no trading fees is a nice benefit, especially when you’re starting out.

Have a look at the Monevator broker comparison table to compare charges.

Doing the deed

Continuing our example, we click along to the final confirmation screen.

Pressing ‘Place a deal now’ will do the deed and commit your cash:

Then it’s just a matter of sitting back and waiting for our order to be fulfilled. The buying bit on our side is done.

As with our ETF purchase in the previous article, we’ll have to wait a while for the trade to settle, but in practice you’ve committed your investment into the fund.

Your broker should supply you with a contract note for your records.

That’s all folks

Buying and selling index funds can feel easier than trading ETFs, if only because there’s not the pressure of a countdown and you don’t need to worry about spreads.

True, you do have to wait to know the exact price you paid with index funds, unlike ETFs.

But for long-term passive investors putting money into broad index funds, that’s no big disadvantage.

Price fluctuations on a day-to-day basis are essentially random. We’re growing our investments for decades.

Inspired? If you’re after ideas about what index tracker funds to buy then check out The Accumulator’s overview of low-cost index trackers. Note that comments below might refer to an older version of this article.

1. In contrast, an investment trust is ‘closed-ended’. It has a fixed number of shares that you trade on a stock exchange.
2. i.e. There’s no bid/offer spread.
3. Some Unit Trusts do still have two prices, like ETFs, but most have switched to single pricing.
4. That one is more of an issue for the likes of Warren Buffet than you or me!

The post How to buy and sell index tracker funds appeared first on Monevator.

What caught my eye this week.

The post Weekend reading: Who’s Balkanised now? appeared first on Monevator.

For the best part of three decades, any idiot could make money in UK property.

And, for a while, this one certainly did.

September 2025

Agent: “It’s rent review time. The current rent is £740 pcm. We’re proposing £850.”

Me: “No. I really don’t want to go into the new rent control regime on an under-market rent. Let’s ask for £880–£890. Comparables are £1,000, but I acknowledge starting with a nine might cause sticker shock.”

Agent: “We don’t recommend that large an increase.”

Me: “Tell them £880. Doubtless they’ll negotiate down to £850 anyway.”

The agent tells the tenant we are going up to £880.

Agent: “She says she can’t afford that. She could do £777?”

Me: “WTF? Housing benefit, which I’m pretty sure she’s on, is £825. FFS. Counteroffer £810.”

Agent: “£790 is the best they can do.”

Me: “Okay then. Whatever.”

This is not a masterclass in rent optimisation. This is the tenant whose rent I went roughly 20 years without raising.

I changed it once. Downwards.

The tenant has paid on time, every month, for more than two decades. I’ve had enough experience of the other sort of tenant to know this is worth something.

And for much of that time, the mortgage cost me only £50–£80 a month. The rent covered the bills. House prices went up. Why stir things?

The tenant quite reasonably has me down as a soft touch.

Unfortunately, the government has decided to cure me.

Previously, on Finumus Does Property (Badly)

In the first article in this series, I explained how buy-to-let was a wonderful trade if you bought early enough, borrowed enough, and then mistook falling interest rates for signs of your genius.

In the second, we saw how Section 24 turned mortgage interest into a fiscal practical joke. Meanwhile Tower Hamlets decided my normal house was an HMO because three unrelated adults lived in it.

I explained in part three how my remaining non-London property produced a real post-tax return that was acceptable only if you put a heroic value on learning about mould.

Since then, the policy risks long floating about in the distance have moved into the building.

The Renters’ Rights Act is live. Making Tax Digital has arrived. Property income tax is going up. And London property has spent another couple of years looking less like an unstoppable wealth escalator and more like an expensive, illiquid, politically-managed bond, with plumbing.

The old buy-to-let dream was that your tenants bought you a house.

The new experience is that your tenants, HMRC, the council, the letting agent, the mortgage lender, and the First-tier Tribunal all hold a committee meeting in your bank account.

The good landlord tax

My arrangement with my long-standing tenant was simple.

If she paid on time, looked after the place, and the property roughly washed its face, I would not optimise every last pound of rent.

That bargain relied on two things:

• Capital growth doing the heavy lifting
• My retaining the option to move the rent towards market if the numbers stopped working

Neither of these can now be relied upon.

As already mentioned, the Renters’ Rights Act changes took effect on 1 May in England. Section 21 ‘no-fault’ evictions became a thing of the past. Assured shorthold tenancies became assured periodic tenancies. Landlords now need a statutory ground for possession.

The Act also put rent increases onto a revised Section 13 process. A landlord must use Form 4A, give at least two months’ notice, and you cannot increase the rent more than once a year. The proposed figure is supposed to be the open-market rent.

The government says this is not rent control – but it is rent control.

A £47 one-way option

A tenant who thinks the proposed increase is above market can apply to the First-tier Tribunal.

As of July 2026, the application costs £47, with help available for people on low incomes or certain benefits. The tribunal can determine a rent below the landlord’s proposal or the same as it. It cannot set a higher one.

If the decision comes after the proposed start date, the new rent will usually begin from the next payment date after the decision. The increase is not normally backdated to recover the landlord’s lost rent.

So, ignoring the value of the tenant’s time, £47 buys them a rather attractive one-way option:

• Heads: the proposed rent comes down
• Tails: the rent does not go above the landlord’s number
• Edge: any tribunal delay is largely financed by the landlord

Perhaps the system will be brilliantly staffed and ruthlessly efficient? Perhaps the First-tier Tribunal will become the Amazon Prime of residential property disputes?

Who knows?

But the path for a rational landlord is obvious. Never again allow a reliable tenant’s rent to drift materially below market. Raise it every year. Keep comparables. Preserve evidence. Behave more like the spreadsheet.

Congratulations – you have made the soft-touch landlord more commercial.

Section 24 enters its baroque period

Section 24 already made the tax treatment of an individually owned, mortgaged rental property absurd.

In the old days, rent came in, running costs and mortgage interest went out, and the remaining profit was taxed. This was quaintly known as taxing profit.

Now an individual landlord cannot deduct residential finance costs in the normal way. Instead, the rent after non-financing costs is taxed. The landlord receives a basic-rate tax reduction for qualifying finance costs.

Here is a deliberately simple example. Assume an additional-rate tax paying landlord has:

• £20,000 of rent after all non-financing costs
• £15,000 of mortgage interest
• £5,000 of actual economic profit

For 2026/27, the tax is:

The property made £5,000 before tax. It lost £1,000 after tax. The effective tax rate on the real profit was 120%.

This is not a typo. It is a policy outcome!

From 6 April 2027, England, Wales, and Northern Ireland get separate property-income rates of 22%, 42%, and 47%. For me, the relevant number is naturally 47%.

One small mercy: the final policy also raises the finance-cost tax reduction from 20% to the 22% property basic rate. The Section 24 gap therefore remains 25 percentage points instead of widening to 27.

The same example for 2027/28 becomes:

The after-tax loss is now £1,100. The effective tax rate on the £5,000 economic profit is 122%.

Because both rates rise by two percentage points, the extra £100 tax in this simple example is exactly 2% of the genuine £5,000 profit.

That is almost elegant.

Only a government could preserve a tax distortion with such immaculate symmetry.

Refinance, repay, or run away

So, as we’ve seen I still own two investment properties. Both need mortgage decisions within the next 12 months, which is far from ideal timing.

My pointless-commuter-town terrace has reached the stage where the mortgage must be replaced or paid off. Paying it off would improve the cashflow, but a 22% tax credit is better than no tax credit at all.

The London property is the ex-local-authority freehold house in Tower Hamlets, currently let to Ukrainians.

Tower Hamlets treats it as an HMO because it is occupied by three sharers, even though it is let jointly as a normal house. My existing lender tolerated this by grandfathering the loan. Ordinary best-buy lenders are not so relaxed.

This makes the refinance expensive. It also makes the sale price more theoretical than any figure suggested by Zoopla.

Problem child

Who is the natural buyer for an ex-local-authority house with licensing weirdness attached?

Not a young family wafting through the door with a scented candle and a mortgage-in-principle.

Nope – it’s another landlord.

And that landlord buyer would get today’s mortgage rates, today’s Section 24, today’s Renters’ Rights regime, today’s compliance costs, and the additional property stamp duty surcharge on entry.

Clearly the property is worth whatever price induces someone else to voluntarily inherit my problem.

I see four broad choices:

1. Refinance and accept that the house is a geared long option on London.
2. Repay the mortgage and own a low-yielding, unwrapped, politically exposed property bond with plumbing.
3. Sell, pay the tax, and buy something sensible with what little equity is left.
4. Complain, procrastinate, and call it optionality.

Reader, you know me too well.

London doubled and went nowhere

Every year in our Family Finances Annual Report, I seem to write a version of this:

The total value of property assets was marked down again, based, as usual, on the bottom of the Zoopla range. Property fell as a share of family wealth, helped by a combination of ‘property down’ and ‘other assets up’.

Whilst ‘fraction of wealth in property’ is a KPI we’re trying to manage down, I would prefer to get all of it from the ‘other assets up’ department.

According to the UK House Price Index data, the average London property cost £262,793 in April 2006.

Twenty years later in April 2026, it costs £552,655.

Excellent! London property more than doubled. Break out the prosecco and start a property podcast.

Except… the RPI measure of inflation rose from 196.5 to 414.4 over the same period. Put the April 2006 price into April 2026 pounds and we get:

So 20 years of average London capital growth, after RPI inflation: approximately minus 0.3%.

Nominally, London more than doubled. But in real terms it went slightly backwards.

British property! Now available in nominal!

At least it’s not leasehold

This is an index, not my house. It ignores rent. The April 2026 figure is provisional. RPI is not the only possible inflation measure. And individual streets, houses, and flats behave differently.

Indeed, that last point matters. In the year to April 2026, the average London terraced house rose 0.7%, whereas the average flat or maisonette fell 4.3%.

Thank God I never bought leasehold.

One of the best pieces of financial advice my father gave me 30 years ago was simply: “Never buy leasehold.”

My London house is an ex-local-authority shithole. I say that with affection, and a spreadsheet full of repairs. But it is a freehold ex-local-authority shithole.

No cladding bill. No lease extension issues. The ground rent wheeze was not my problem. There’s no mystery service charge. And no managing agent charging me £300 to reply to an email explaining why it costs £300 to reply to an email.

‘London property’ is not one asset class. A freehold house in a development constrained part of London is not the same thing as a leasehold flat in a tired block or an off-plan shoebox flogged off overseas as a portable Swiss bank account with a concierge.

That distinction is one reason I have not sold.

A long-dated option on London recovering its mind

The first decade of my investment property ownership benefitted from an enormous tailwind.

London was on a Thatcherite/Blairite tear. The City boomed. The UK was open, liberalising, financialising, and unusually good at attracting global talent and global money.

London became the de facto financial capital of Europe. We had economic growth! (Something my now-adult children have sadly never experienced.)

Alas, then came the Global Financial Crisis. Property owners ought perhaps to have learned something about leverage. Instead, interest rates collapsed and asset owners were rescued by duration.

Then came Brexit, extra stamp duty, tax creep, planning paralysis, non-dom reform, and a national agenda that shifted from ‘build, trade, and get rich’ to ‘who can we tax to pay benefits to others?’

Maybe London will eventually remember how to be London. Owning a freehold house is a long-dated option on that possibility.

It’s not my base case. It may not even be my sensible case.

But nobody is forcing the option to expire today.

Making Tax Digital: making landlords grumpy

Just when I thought one annual tax return was enough interaction with HMRC, HMRC characteristically disagreed.

Making Tax Digital for Income Tax (MTD) began on 6 April 2026 for sole traders and landlords whose qualifying gross income from self-employment and property exceeded £50,000 in 2024/25.

The threshold falls to £30,000 from April 2027 and just £20,000 from April 2028.

Affected taxpayers must keep digital records in compatible software, submit quarterly updates, and then complete their year-end tax return in that software.

HMRC has taken an annual indignity and given it seasonality.

Landlord limited

In fairness, I already keep records. I have accountants. I can use software. This will not break me.

But that is not the point.

Small landlordism increasingly resembles a business with:

• Safety and regulatory obligations
• Licensing and possession risk
• Financing risk
• Tenant risk management
• Software compliance
• Tax complexity
• Political risk

…but all without the scale, limited liability, pricing power, professional management, and/or tax treatment that could make such a business attractive.

Equity is not what Zoopla says it is

Why not sell the London house and put the proceeds into an ISA over several years?

Because I do not have the £300,000 of equity that the simple subtraction suggests.

Using the rounded numbers from last time:

• Current value: £600,000
• Mortgage: £300,000
• Apparent equity: £300,000
• Original cost: £100,000

The mortgage reduces my cash on sale. But it does not reduce the capital gain. And there’s capital gains tax (CGT) to pay.

For 2026/27, the annual exempt amount for CGT is £3,000 and the higher CGT rate is 24%.

Ignoring selling costs, capital improvements, available losses, and any reliefs, the exit looks like this:

My apparent £300,000 equity becomes about £180,720 of cash – before estate-agent and legal costs.

Past-Finumus remortgaged the property to extract cash and buy more houses. He has, in effect, already eaten a large part of the cake.

Present-Finumus is left holding the plate and HMRC’s bill.

Taxing matters

This is the difference between a good historical investment and a good prospective investment. People confuse the two all the time.

It is also why CGT creates lock-in. Selling a mediocre asset crystallises a very non-mediocre liability.

Also, because this is residential property, the disposal must generally be reported and the CGT paid within 60 days of completion.

It must then appear on Self Assessment, where HMRC’s systems can renew their acquaintance and pretend not to recognise each other.

What if CGT changes?

No increase in the CGT rate on residential property has been announced. The current higher rate is 24%.

However I own a leveraged, illiquid asset pregnant with a large nominal gain and a holding period measured in governments. Regime risk is part of the investment case, whether or not it fits into a discounted-cashflow model.

Suppose – purely as a stress test – that a future government decided to align CGT with the 45% additional rate of income tax.

How ‘fairly’ would this be implemented?

With full RPI-style indexation from 1996 to May 2026, my £100,000 cost would become roughly £272,000.

Without indexation, my cost would remain £100,000.

That difference is not cosmetic:

The indexed version is annoying. The no-indexation version is a mugging.

Here’s the maths assuming indexation was introduced:

And if not:

These are deliberately simplified scenarios. Actual CGT payable depends on ownership, dates, acquisition and sale costs, capital improvements, losses, and reliefs.

Get professional tax advice before doing anything expensive.

Under current rules, death itself is not a CGT disposal and inherited assets generally acquire a market-value base cost at the date of death. The estate may face IHT instead. That interaction is another source of lock-in – and another rule a future government could change.

I am not going to invent a combined future CGT-and-IHT bill to stress test. (I don’t want to encourage them.)

Hold, sell, or sulk?

So what am I going to do?

Probably some combination of hold and sulk.

The non-London property still has the same excellent tenant. I do not want to evict her. However I do not want to subsidise her forever, either. So the rent will therefore keep moving up, however reluctantly, because the alternative is to operate a small private welfare state with a damp problem.

My London house is more interesting. It is a poor-looking yield investment. It’s tax-inefficient. It has refinancing risk and local-authority weirdness. And it occupies mental space out of all proportion to its value in the Finumus household balance sheet.

But it is also a freehold house in London. Which may be a terrible reason to hold it. It may also be the only reason that has mattered for the past 30 years.

It doesn’t add up

The old buy-to-let equation was simple:

Tenant rent + mortgage leverage + time = wealth

The new equation is messier:

Rent − costs − Section 24 − tax − MTD − repairs − refinancing − tribunal delay − CGT anxiety + possible London comeback − guilt = shrug

I appreciate this new version may not catch on in personal finance textbooks.

If you’re thinking about starting from scratch, I wouldn’t bother. My returns came from buying before the boom, using leverage, enjoying falling interest rates, having inflation erode the debt – and not being wiped out by tenants, repairs, or policy at the wrong moment.

I was not clever. I was long houses, short sterling debt, and born at the right time.

A new buyer gets today’s price, today’s mortgage rate, today’s stamp duty, today’s tax rules, today’s regulation, no ISA or SIPP shelter, no liquidity, concentrated asset risk, and a lingering suspicion that the answer to every political question that asks “who should pay?” will eventually conclude “the landlord”.

Could buy-to-let still work? Obviously. Property is local. Some landlords buy well, add value, operate efficiently, or use companies sensibly. Circumstances and tax positions vary. This is a personal case study, not financial, tax, or legal advice.

But ‘buy any London property, gear it up, wait, and become rich’ is no longer an investment strategy. It’s now an historical anecdote.

Doubtless some readers in the comments will explain that all of this is a skill issue.

Fair!

Any idiot could make money in property once. Doing it under the new rules may require competence.

This is worrying.

If you enjoyed this, follow Finumus on X (Twitter) or read his other articles for Monevator.

The post Buy-to-Let: the landlord trap tightens appeared first on Monevator.

I don’t know about you but I breathed a sigh of relief when the cash-like asset rules for stocks and shares ISAs were announced. They were nowhere near as bad as I feared.

Money market funds (MMFs) are the only investment HMRC has defined as a cash-like asset.

The post How cash-like assets perform in a stocks and shares ISA [Members] appeared first on Monevator.

What caught Frugalist’s eye this week.

The post Weekend reading: Don’t sweat the details appeared first on Monevator.

Congratulations! You’ve just inherited £100,000 from Great Uncle Bertie.

Good old Bertie. Always liked him.

Naturally, you’re going to invest this for your future financial well-being. The pleasantly unexciting Vanguard LifeStrategy 60 will do nicely.

Your tax allowances are already spoken for. So, at least for now, you’ll need to resign yourself to paying tax on your gains in a General Investment Account (GIA).

You also know that investing everything ASAP is statistically the best approach.

However, (our hypothetical) today is the 31 March and the fund goes XD tomorrow.

Should you invest today or wait until tomorrow? What is XD? Does any of this even matter?

If you don’t want the detail, then the short answer is it matters a bit in terms of tax but for the most part you can ignore it.

But if you don’t want the detail then why are you reading Monevator?

Let’s get into it.

Dividends

Most funds generate regular dividends. They could be paid annually, bi-annually, quarterly or monthly.

The dividends are either paid out to you in cash if you hold the income (inc) unit class or are rolled up in the fund if you hold the accumulation (acc) class.

Dividend dates

There are two key dates associated with a dividend payment:

• The XD (ex-dividend) date
• The payment date

If you buy before the XD date, you are entitled to the dividend payment. Whereas if you buy on or after the XD date, you must wait for the next cycle to receive your first dividend.

The payment date, when the cash is paid out, is usually a month or so after the XD date.

The unit price of the inc class will usually drop on XD date to compensate for the cash payout. Thus, the inc and acc unit prices will gradually diverge over time – even though the total return is the same.

Vanguard’s LifeStrategy 60% fund pays a dividend just once a year, currently of around 2%. The last XD date was 1 April and the payment date was 29 May.

Tax

I’ve been liberally using the term dividends, but the specific tax classification of income distributions depends on the type of fund:

• Distributions from funds investing predominantly in equities are taxed as dividends.

• Funds holding more than 60% of their assets in interest-bearing investments, such as bonds or cash, instead pay interest distributions, which are taxed as savings income.

Your LifeStrategy 60 distributions will therefore be taxed as dividends.

The tax treatment of inc and acc classes is the same. You still pay the same amount of dividend tax – regardless of whether you get paid the dividend in cash or it gets rolled up in the fund.

Many investors choose to hold the inc class in a GIA. It’s easier to see what’s going on and, if you must pay tax, it’s nice to have some cash hitting your bank account.

Of course, if you have all your investments in ISAs and pensions then you don’t need to worry about dividend tax.

Equalisation

Now, those fair-minded fellows at HMRC recognise that if you only bought the fund just before the XD date then it would be a bit mean to charge you tax on the whole dividend payment.

In effect, you are just getting some of your own money back with the dividend – a return of capital as it’s known.

So your first dividend payment on a fund holding is part ‘equalisation’ (on which you don’t pay dividend tax) and part dividend (on which you do).

You will see this distinction in the annual consolidated tax certificate from your platform.

But you’ll need to take the equalisation amount off your purchase price when you come to calculate capital gains on any disposals.

In other words, equalisation just means you pay a bit less dividend tax but a bit more capital gains tax. The tax man will get you one way or another.

Note that equalisation applies to UK authorised funds – for example, OEICS and unit trusts – but not generally to ETFs.

Group 1 and Group 2

You may occasionally see reference to Group 1 and Group 2 units.

Group 1 units are those you bought before the current dividend period began. (The dividend period runs from one XD date to the next.)

Group 2 units are any bought inside this period.

Once the XD date is reached, your Group 2 units become Group 1 units.

The equalisation rate per unit is calculated by the fund manager based on what they reckon Group 2 holders on average paid for the accrued income versus Group 1 holders.

But this is just an average. Every Group 2 holder gets the same equalisation rate regardless of when they bought the units.

So the equalisation for investor A who bought on the last XD date is the same as the equalisation for investor B who bought the day before the current XD date.

Back to Bertie’s money

Finally, back to the original question. Does it matter if you invest pre-XD or post-XD?

The table below compares the two scenarios: buying pre-XD and buying post-XD.

We’ll assume an investment of £100,000, a distribution yield of 2%, an equalisation for Group 1 units of half the total distribution, an initial price of 100p, and a final price of 103p:

You end up with roughly the same returns in both cases: Pre-XD gets some income, but post-XD gets more capital gain.

The extra £100 gain for the post-XD case is offset in the pre-XD case by the early £2,000 distribution in dividend and equalisation, which can be reinvested elsewhere for most of the following year.

In tax terms, the difference between the scenarios looks like this:

The pre-XD taxable capital gain is £4,000 because the £1,000 equalisation must be deducted from the purchase price.

In summary then, there is negligible difference in the returns you get, but when investing pre-XD you are swapping some capital gains tax for dividend tax.

Does that make much difference? Depends on your tax situation.

Tax impact of going ex-dividend

The table below shows the approximate difference in the tax you pay for various tax situations. (There is no case for 0% capital gains tax as the £3,000 capital gains allowance is more than used up by the gains in either scenario):

I’m using the new 26/27 dividend tax rates as dividends are taxed in the tax year in which the payment falls and not necessarily the XD date.

(As an aside, who decided we needed tax rates specified to two decimal places?)

If you’d held on to the investment for longer, then there would also be a difference in when you pay the tax.

The initial dividend tax must be paid for this tax year whereas the capital gain tax could be deferred until later tax years by not selling.

Price fluctuations

There’s a lot of detail I’ve glossed over.

Most notably, I’ve assumed that, on the XD date, the unit price of the fund drops by the same amount as the dividend paid.

In reality, it will not be the same, as it will also be affected by fluctuations in the prices of the assets in the fund.

In scenario two you are buying a day later. Might the price change on that day have a bigger effect than the different tax rates? Who knows.

Or maybe the price goes down over the year, so the bigger capital gain becomes a smaller capital loss.

So what?

Some of you may enjoy the thought of saving a few quid in tax with some judicious ex-dividend timing.

I suspect that most, though, will be thinking that this is all just noise when considered against investment returns – and you’re probably right.

So whilst it’s worth knowing exactly how you’ll be taxed on dividends if you have assets outside of a tax wrapper, it’s probably not a good idea to spend time trying to game the tax system at the risk of losing investment gains.

But, looking on the bright side, I think we can all agree that stuffing all the investment fun stuff – dividends, tax, and equalisation – into just one short article is a joy to behold.

You’re welcome!

The post Pre-XD vs post-XD: Does dividend timing matter? appeared first on Monevator.