Monevator: The UK's leading website for private investors

The rich person’s guide to pension contributions

by Finumus on November 23, 2023

The reason to encourage pension contributions from the government’s point of view is to get more people to save for their old age and so to not be dependent on the state.

But the reason to make pension contributions from our point of view is to minimise the amount of tax we pay over our lifetimes.

After all, we can save for old age in all manner of ways. Locking up money within a pension therefore requires an extra incentive – and the opportunity to save tax is that push.

In principle, defined contribution (DC) pensions are pretty simple:

You contribute to your pension ‘gross’ of tax (i.e. before income tax is taken off).
Your pension pot grows tax-free.
Finally, you pay tax on the withdrawals at the time you take them.

All else being equal (especially your tax rate while working and your tax rate in retirement) this is a tax deferral strategy.

Pensions only turn into a tax mitigation strategy when we get a higher rate of tax relief on pension contributions than we pay on drawing the income in retirement.

As finance nerds, we want to maximise the ‘spread’ between these two rates, with as much money as possible, with the least possible risk.

Show me the OAP money!

With the abolition of the pension Lifetime Allowance (LTA) – which we’ll come to – I sat down to work out the optimal pension contribution strategy.

It should have been easy, right?

All you need to do is:

Work out your marginal tax rate to drawdown money from your pension in retirement as a function of pension pot size.
The bigger your pot, the more income you’ll need to draw, and the higher your tax rate on drawings.
Discount those pot sizes back to today using your expected investment return in the pension.
If your current marginal tax rate is above the extraction tax rate for the pension pot size that you currently have (discounted back to today), then make contributions. Otherwise don’t.

Hence all I needed to know was: when I’ll retire, the tax regime that will be in place then, how long I’ll live, and what my investment returns will be before and during retirement.

Ahem. Perhaps not surprisingly: I failed.

However my analysis turned up some titbits that I’ll share today in the hope they’ll help some of you, too.

A recent Monevator poll showed a majority of our readers are higher- or additional-rate taxpayers.

And with income tax thresholds frozen and inflation dragging more people into higher tax brackets that number is only going to grow.

Rich people’s problems

What we’re trying to optimise with our pension contributions is this:

Now, for the purposes of this post we’re going to pretend that we live in the idealised world of finance professors.

In this textbook world we can:

Move money across time at the same discount rate.
Borrow, lend, and invest arbitrarily large amounts of money at this rate.
Afford to make tax optimal pension contributions without considering anything else.

Therefore the only consideration we are making in this article is maximising the spread between contribution tax relief and the tax rate on extraction.

This is a highly simplifying assumption. But it is a reasonable approximation for fairly rich people. For everyone else, not so much. (You can’t buy food with money you’re not going to get for 20 years.)

I’ve also sort of implicitly assumed that you’re making decisions about pension contribution rates after you’ve already filled your ISA (and your spouse’s).

This is also highly unrealistic. It’s quite an ask to come up with £40,000 of post-tax income to put in an ISA, whilst also making maximally tax-efficient pension contributions.

Happily though, that is my situation and therefore the one of most interest to me.

For most people there’s a trade-off between ISA and pension contributions. The discussion that follows might help you weigh up the balance for your own situation.

Please note and to avoid me having to repeat myself: everything I’ve written below is under the current rules. (Until we talk about future policy uncertainty, clearly.)

Also remember that the tax code is thorny and everyone’s circumstances differ hugely.

Get professional tax advice if you need it. This article is all just food for thought.

The basics: direct contributions vs salary sacrifice

Let’s start at the beginning. How do you best pay into your pension?

Direct contributions

You write a cheque to your SIPP provider for £80 and they gross it up by the basic tax amount. Which means you end up with £100 in your SIPP.

This is a ‘net contribution’ of £80 and a ‘gross contribution’ of £100.

The distinction is important when we get to the limits on contributions and so on, because what counts is the £100 number, not the £80.

Now, if you are a basic-rate taxpayer that’s it. You’re all grossed-up, so to speak.

If you’re a higher-rate taxpayer or above, however, then you report this (gross) contribution on your tax return. HMRC adjusts your (gross) income down by the amount of the (gross) contribution, and you’ll be owed a refund.

For example, if your marginal tax rate is 40%, then you’ll get a refund of £20 on your £100 gross. Which makes the effective ‘cost’ of putting £100 into your pension just £60.

You write a cheque for £80, you have £100 in your pension, and you get a cheque back from HMRC for £20. Net cost: £60.

That the contribution is used to ‘reduce’ your income from a tax point of view is important.

Crucially, if you’re in the 60% tax bracket – between £100,000 and £125,140 – then you effectively get 60% tax relief on your contributions. (Because reducing your income gets some of the annual allowance ‘taper’ back, which is the cause of the 60% rate in the first place.)

For completeness, if you’re a 45% taxpayer:

You’ll get £25 back from HMRC when you file your tax return.

Taxed from every angle

In practice, you may find you pay multiple rates of tax relief from a single contribution.

For example, if you earn £150,000 and make a £60,000 contribution, that contribution will experience tax relief in part at 45%, 60% and 40% rates:

Salary sacrifice

The other way to make pension contributions is to sacrifice some of your salary. Here you instruct your employer to pay some proportion of your pay into your pension scheme instead of to you.

The important difference with this arrangement is that there is no National Insurance (NI) due on this payment, because it is not ‘pay’.

Now nominally this might not sound like a big deal. Employees NI is only 2% (mostly).

Still every little helps, as you can see in the table below.

But you saving a few quid is not why your big-hearted employer is always sending you emails extolling salary sacrifice as a way to pay for electric cars, bikes, pensions, and goodness knows what else.

No. Your employer is motivated by the 13.8% employers’ NI that it doesn’t have to pay on whatever you salary sacrificed into your pension.

Your employer saves £13.80 per £100 of salary sacrifice. So probably the most important question in this whole post is: can you get your employer to share some of that money saved with you?

Well, can you?

It depends. Some employers do it by default. Others don’t. And some – big and small – will negotiate.

For my part I’ve successfully negotiated a sharing of these savings either firm-wide or as a special deal for me (“I won’t tell anyone else”).

You do have some leverage. After all, you can just make a direct contribution. It’s 2% more expensive for you, but 13.8% more expensive for them. When we approach the limits of maximising the amount of tax we save it turns out it’s highly sensitive to the ability to clawback some employers’ NI, so I’d encourage you to go for it.

Usually, any sharing of these savings goes into the pension contribution, rather than as (taxable+NI) cash to you – otherwise the process is a bit circular.

This makes the maths a bit weird, because we’re now ending up with £113.80 in the pension for each £100 of salary sacrifice:

If we renormalise that back to the cost of £100 in the pension we get this:

The ‘gross contribution’ if you sacrifice £100 of salary and your employer pays £113.80 into your pension is £113.80, not £100.

If we’re hitting our peak tax mitigation potential – that is, inside the 60% bracket – then we are foregoing just £33.39 in net pay to get £100 in our pension.

Employer matching

There’s a legal obligation for your employer to make pension contributions on your behalf, and to deduct a minimum contribution from you. It is usually something like they pay 4% and you pay 4%.

You can opt-out of this (I believe…) but why would you? It’s pretty much free money.

Given that your employer-matched contribution is processed as salary sacrifice, you end up with this:

There’s pretty much no extraction tax rate on drawdown that would render these contributions not worthwhile.

Indeed, during my pension wilderness years enforced by the LTA, the employer match was all I did.

Employer pension schemes vs SIPPs

A common complaint I hear about salary sacrifice (SS) is that you can only SS into your employers’ chosen pension scheme.

The scheme with poor investment choices, obscure fees, and a website unchanged since the late 1990s.

Well yes but this is trivially surmountable. Just set the investment choice in the company scheme to ‘cash’ and every six months or so transfer that cash from your company scheme to your favoured SIPP.

Your company won’t care. (Probably.)

Contribution limits

There are limits to how much you can contribute to your pension.

The limit is the lower of:

£60,000
Your total employment income

Note this limit is on the size of your gross contribution.

The £60,000 limit is ‘tapered’ (it becomes less) if you earn over £200,000 – or £260,000 because the rules are, inevitably, pointlessly complicated.

There is also a mechanism called carry back that allows you to carry forward (I know…) your unused allowance from previous years, for up to three years.

Handy if your earnings are very volatile.

Summary: getting the money in

We’ve established the cost of getting money into our pension scheme:

It’s worth noting that if you’re subject to the ‘High Income Child Benefit Charge‘, have things like childcare tax-credits, or you earn income from residential property (with a mortgage) then your marginal tax rate could be higher.

It might even exceed 100%.

An example of what not to do: what I did

The challenge is that you don’t know the future. Specifically, you don’t know your future earnings.

You want to concentrate your contributions in years when you have the highest marginal tax rate.

But when will that be?

What you really want to avoid is a situation where you’re getting tax relief at, say 40%, but you could (later) fill your pension with tax relief at, say, 60%:

This is not far from my situation actually.

High earnings and acute imposter syndrome early in my career meant I contributed large sums to get 40% tax relief.

Later on I didn’t contribute – even though I could have got 60% tax relief – because I was over the LTA.

In my defence, when I made those original contributions the maximum income tax rate was 40%. We didn’t have the 60% band. Indeed, we didn’t have the LTA!

Still, I should have been more patient.

This rather emphasises the point that over long time periods there’s enormous policy uncertainty.

The pension pot then grows tax-free…

…or does it, really?

I would argue not.

Sure, from an administrative point of view you don’t have to pay capital gains on any gains or income tax on dividends (except on some foreign dividends).

However in the end you will have to pay income tax on your gains – even if those gains only kept up with inflation.

And income tax rates are higher than both capital gains tax and dividend tax rates.

Then there’s the possibility that the government will just decide to confiscate some or all of the gains, in this supposed ‘tax-free’ wrapper. Which they have done before with the LTA.

So, I’m unconvinced.

Given there exists a perfectly good actual tax-free wrapper – the ISA – I would argue that the allegedly ‘tax-free’ growth in the pension is not, by comparison, tax-free.

The ‘tax-free’ ness of investment returns in the pension pot should be ignored when considering the spread between inbound tax relief and outbound tax paid.

This is not to ignore the impact that investment growth has on our capacity to withdraw under certain tax thresholds, or to be subject to any future LTA charge. These considerations do very much matter. They should feed into our estimates of the extraction tax rate.

Perhaps a reasonable base case is that our investments keep up with inflation, but that tax allowances do not. (Reasonable because this has been the situation for many years).

Cashing out

At last the fun bit!

Kerching! Et cetera et cetera.

Actually, while spending your pension pot is certainly more agreeable than doing without in order to fill it, in the meantime we’ve yet more maths to do.

Moreover it turns out that working out the tax relief we’ll get in on the way in was the easy bit.

Now we need to ~~guess~~ ~~estimate~~ work out our marginal tax rate in retirement, when we come to extract that cash from our pension.

The tax-free lump sum

Thanks to the pension commencement lump sum (PCLS) – sometimes just called the tax-free lump sum – you can withdraw 25% of your pension tax-free, up to a limit of £268,275.

Effectively if your pension pot is going to be worth less than £1,073,100, then you can just assume your tax rate for withdrawals is 75% of your actual tax rate.

For example, you retire with a £1,000,000 pension pot. You pull £250,000 out tax free, and pay 20% on the rest (by spreading the withdrawals over many years).

Your marginal tax rate will be 75% of 20% = 15%

Great, that’s lower than the rate of tax relief we got putting the money in, regardless of the circumstances. (See the chart above. The lowest amount of tax relief possible is 20%).

Getting a camel through the eye of a needle

The larger your pension pot though, the harder it is to drawdown at low tax rates.

In fact, given the low threshold for higher-rate tax (£50,270), your investment returns can be mediocre and yet you can still reach (non)escape velocity – where you’re only drawing down investment returns, and never ‘shrinking’ the pot.

If you do need to choose between pension and ISA savings then you also need to think about this dynamic. Don’t just pour all your savings into pension contributions. Because of the cap on the PCLS, the key inflection point is when your projected pot is on target to exceed the old LTA limit of £1,073,100.

Summing up

Putting it all together, we can calculate the ‘P&L’ in tax savings. By which I mean the number of post-tax- pounds we’re better off as a function of tax-relief on the way in and tax-rate on the way out…

…depending on if our pot is below the old LTA limit:

…or above it (LTA extraction rate at 55% included for completeness):

Avoiding over-saving

A shortcut is to think about worst case scenarios. In particular, what we’re trying to avoid is the situation where we’re paying a higher rate of tax on withdrawing than we got in tax relief:

Don’t touch it

There’s another option to consider, too.

People who are lucky enough to have lots of other assets to draw on can simply never draw their pension down at high tax rates. They can just leave it in there, growing.

Your beneficiaries can then draw it down at either 0% or their marginal tax rate, when you are gone. It’s outside your estate for IHT purposes.

We’ll discuss this a bit more below, because I believe it is very likely these rules will be changed.

For me personally – with kids, and with about a 25% chance of dying before the age of 75 (and a 100% certainty eventually) – this is quite a valuable benefit.

But won’t they change the rules again?

Yes of course they will.

So what tinkering might we anticipate in advance?

Reintroduction of the Lifetime Allowance

Bringing back the LTA is an odds-on favourite because the Labour Party immediately committed to its reintroduction when the Tories abolished it. (At least, for everyone who doesn’t work for the NHS.)

With that said, they’ve not been particularly vocal about it since. Perhaps now that the detail about the limit on the tax-free lump sum has sunk in it seems less of a priority?

After all, if you’re constraining the amount of tax-relief that high earners can get on the way in, and the amount they can get out tax-free, it’s not obvious that the LTA justifies its considerable complexity.

On balance I think it’s likely that a long period of ‘consultation’ about pensions will ensue. If they don’t re-introduce the LTA then that consultation is likely to include at least one of the other possibles I’ll get to.

Countermeasures

Don’t save too much in your pension. Focus on those very high tax rate years.
Only contribute if your tax relief on contributions is so high that you’ll still come out ahead even if you’re subject to the LTA charge .
Historically there have been ‘protection’ regimes available if the value of your pension is above the LTA when they introduce it. This is so they can pretend that the LTA is not, effectively, retrospective taxation. (Although of course it is, even if you’re below the LTA limit when it gets introduced).
Have the lower return assets in your pension and higher return assets in your ISA. (You should do this anyway.)

Changes to inheritance tax treatment / beneficiaries pensions

As we’ve seen, one of the major benefits of getting money into your pension is that, under the current rules, it’s outside of your estate for IHT purposes.

I have discussed previously how wealthy families are already using this as an inheritance tax avoidance strategy. (That earlier post also goes into the mechanics of how). For those who are still working and whose estates would likely be subject to IHT, this is a very attractive planning vehicle. It enables them to get very high rates of tax relief. The result is a highly tax-efficient ‘trust fund’-like pot, which either they or their heirs can access.

It’s unlikely, for legislative reasons, that pensions will be brought inside the IHT net. The most likely change is that full tax-free withdrawal by beneficiaries if the benefactor dies under the age of 75 will be removed, and the same rules apply regardless of their age at death.

Indeed this might actually happen anyway as part of the LTA abolition.

Pensions would still remain very useful from an IHT planning point of view. The beneficiaries can drawdown when their marginal tax rate is low, for example. Or they can just treat the whole thing as an emergency fund that they can get at if they really have to (and pay the tax to access it).

Over the long run I doubt having ‘beneficiary’ pension pots that can compound tax-free for decades or even centuries would survive the “So-and-so has £1bn in their pension” headlines. We are not America.

Talking of America, another proposal occasionally raised is to force beneficiaries to take a certain fraction of their pot as taxable income every year. These are called required minimum distributions.

But let’s not give our politicians any ideas by discussing that further here, eh?

Flat-rate tax relief

The tax-saving benefits of pension contributions rise with your earnings, thanks to higher rates of tax relief. Because of this, many people consider the tax planning we’re discussing today as inherently ‘unfair’.

Critics argue the purpose of tax relief is to try to ensure you aren’t a burden on the state in your old age.

But high earners will save for their retirement anyway. They don’t need a tax incentive.

In contrast, because they get less tax relief, lower income people have less of a motivation to save. Yet these are also precisely the people who need more encouragement to do so.

The solution often posed by left-leaning think tanks is to offer tax relief on contributions at a ‘flat’ rate. Somewhere above the 20% basic rate, but below the 40% rate. Typically 30% is proposed.

Such a flat rate would give less tax relief to the rich and more to the poor.

Full disclosure: I’m quite sympathetic to this argument.

There would be quite a lot of complexity involved in implementing it – especially for those in Defined Benefit (DB) schemes. However, since the remaining DB schemes are pretty much all in the public sector, there’s no reason (other than fairness) as to why there shouldn’t be a different (more generous) tax regime for them.

If we can have a different tax system for people in the NHS, why not for all government employees?

Countermeasures

If you think flat relief is coming, your action depends on the tax relief you currently get on contributions:

Are you a higher / additional / 60% rate taxpayer? Then you should max out contributions that get tax relief at those rates because in the future tax relief would be lower.
Are you a basic-rate taxpayer? You should make minimal contributions now. Aim to increase your contributions when the flat rate is introduced.

Elimination of the income tax allowance taper (60% rate)

We can all agree that having a 60% rate in between the 40% and 45% rates is ridiculous, yes? So it’s not completely impossible that some future government will agree.

Labour has committed to not raising income taxes when they form the next government. I imagine they shan’t be lowering them either!

But in a second parliament they might eliminate the taper as a quid-pro-quo for increasing additional rate tax to 50%, for example.

Countermeasures

If you’re a 60% taxpayer then pay the 60% slice into your pension, because that relief might not be available in the future. The same slice might only attract relief at 40%, 45% or 50% someday.

Generally higher income tax rates

A penny on income tax to “save the NHS”. Another one for “care”. Another one for our “brave boys and girls fighting in some foreign war”. Oh, and another one to send some poor sods to Rwanda.

You know the drill. Taxes pretty much only go up, as state expenditure increases faster than the size of the economy. I believe this is is best tackled by increasing the size of the economy. But growth seems to be even less popular with voters than high taxes, that are, anyway, mostly paid by someone else.

If income taxes are going up over the long term, then the last thing you want to do is defer your income tax until later. You’d be better off paying tax now.

Countermeasures

Don’t save into your pension except at very high tax relief rates.

Crazy things that a government might consider

All those potential revisions to the pension system seem somewhat feasible to me.

But the longer you’ve got until retirement the crazier it could get.

Here’s just a random assortment of crazy ideas you see kicked about:

Means testing of the state pension – based on private pension ‘income’. This would favour ISA savings (which likely wouldn’t be counted) over pension income (which would).
Means testing of the state pension – based on ‘wealth’. Possible that pensions wouldn’t be counted, but ISAs would (as they are for some wealth-based benefits, such as unemployment benefit). Favours pensions contributions over filling the ISA.
The integration of NI and income tax. This obviously makes sense, because they are both just a form of income tax. A properly brave government would wrap employers’ NI in too. (Although if people really knew how high tax rates are…) The pay-off for this bravery would be much higher income tax rates which could also be applied to ‘unearned’ income such as income from pensions. Favours ISAs over pension saving.
ISA lifetime allowance. I wish John Lee in the FT would stop banging on about how much he has in his ISA. Because seriously, why draw attention to it? Some sort of cap on the value in an ISA that’s eligible to be tax-free would be retrospective and highly complex to administer – but when has that ever stopped them? Obviously favours pension saving over ISA saving.
ISA allowance cut (or a real terms cut through fiscal drift). Favours getting cash in your ISA while you can and leaving pension savings until later. Perhaps when you’re on a higher marginal tax rate?
Special tax rates for pension income / an ‘Unearned Income Surcharge’. Factor in employers’ and employees’ NI, and people in employment pay much higher tax rates than the retired. This is unfair. Rather than rolling NI into income tax, you could address this by taxing pension income at a higher rate than employment income. This has less behavioural impact, because while employed people will work less if you tax them more, retirees have no choice but to live off their pensions. Favours ISA saving over pension saving.

How to model all these risks? We can’t really. You will have to make your own assessment.

The best insurance policy is to focus your contributions where you get very high rates of tax relief. That way you will probably come out ahead in most circumstances.

Tips and tricks with pension contributions

There’s always something more to do with a tax code as complicated as ours!

Keep it in the family

Make sure you plan your pension savings holistically with your spouse. Let’s say you stop working for a decade while the kids are small, but your partner keeps working. Once you go back to work you are both higher-rate taxpayers. You have a pension pot of £200,000 and your partner has one of £800,000.

Clearly, because of the PCLS cap, as a couple your pension contributions should take priority over that of your partner’s.

Similarly, if both your pension pots are small and one of you can get your employers’ NI through salary sacrifice and the other can’t… you know which one to prioritise.

Maybe you should even think about pensions from the perspective of your whole family, as we showed previously.

How to get 60% tax relief if you’re a 45% rate taxpayer

You earn £190,000 a year. You make the maximum gross contribution of £60,000 a year. This brings your taxable pay down to £130,000.

So you’re only getting 45% tax relief on the contribution. And you are paying 60% on most of that £30,000 above £100,000:

Is there something we can do to improve this situation? Well, yes, of course, otherwise I wouldn’t have brought it up.

By using ‘fallow’ years – where we don’t make a pension contribution – we can use ‘carry back’ to carry forward the unused allowance from the fallow year to make a contribution that eats into our 60% tax rate.

Voila:

This saves us £22,626 of tax over a nine-year period – £2,514 per annum – just for being organised.

Fill your ISA with your PCLS / tax-free amount

You want to max out your pension contributions in the last few years before age 55? This doesn’t leave you enough cash to fill your ISA?

Then you can do something like the trick I showed previously. But beware of the ‘pension recycling rule’.

The pension recycling rule

Not targeted at my trick linked to above particularly, but if you increase your pension contributions ‘significantly’ prior to taking your tax free-amount, then HMRC has a special rule aimed at clawing back your tax relief.

Called the recycling rule, it’s designed to… stop you using pension contributions in exactly the way that Parliament intended you use them.

Scaling salary sacrifice

Is your employer paying its NI savings into your pension? Make sure that the amount you’re reducing your salary by (to get into a lower tax bracket, for example) is less than what’s going into your pension (as used to calculate the annual contribution allowance).

For example, let’s say you earn £160,000 and you salary sacrifice £60,000.

Your employer will be paying £68,280 into your pension, including the NI savings. This is £8,280 over the annual allowance – unless you’re using carry back.

The maximum salary you can sacrifice within the annual allowance is: £60,000/1.138 = £52,724.07.

This will leave some of your earnings exposed to the 60% tax rate. Be careful.

Summary

There are almost no circumstances where contributions to your pension that attract 60% or higher tax relief or employer matching contributions will leave you worse off in the long run. That’s true even if the LTA is re-introduced in its old form.
Capturing some of the employer NI as part of your tax relief can make a big difference.
The larger your pension pot, the more you need to think about policy risks.
Once your pension pot is over four-times the PCLS limit, there’s little point in making direct contributions at 20% tax relief.

Made it this far?

Want more Finumus magic? Follow him on Twitter or read his other articles on Monevator.

{ 73 comments }

Accumulation units – tax on reinvested dividends UK

Updated by The Accumulator on November 21, 2023

Are reinvested dividends taxable in the UK? Sadly, yes. Fund accumulation units attract income tax on dividends and interest at the same rates as their more transparent ‘income unit’ cousins.

Which means that you owe dividend income tax (or income tax on interest in the case of bond funds) even though you don’t physically receive a payout to your bank account.

Indeed the taxman still wants his cut despite many accumulation class funds showing zero dividend distributions on their webpages.

But it gets worse. Some investors are probably paying tax twice on their accumulation unit income! That’s because they don’t properly account for the effect of dividends on their capital gains tax bill.

Let’s sort this mess out with a quick summary of the reinvested dividend tax rules.

++ Monevator minefield warning ++ Everything below applies equally to dividends and interest but we’ll mostly only refer to dividends because life is short. It also equally applies to accumulating / capitalising ETFs, as well as the accumulation units of OEIC and Unit Trust funds. We’ll pick out the occasional exception where it exists.

What are accumulation units again? And how do they reinvest dividends?

Many investment funds come in two varieties (or share classes) that differ only in the way they treat dividend payments:

Accumulation units are the share class that automatically reinvests dividends or interest straight back into your investment fund.
In contrast, income units cough up dividends directly, paying you cash like three cherries on a fruit machine.

You can tell how a fund deploys its dividends by checking its name:

A fund name that includes the abbreviation Acc indicates you’re looking at accumulation units.
A fund that features Inc in its name comprises of income units.

Reinvesting dividends increases the capital value of a fund composed of accumulation units. That has implications for capital gains tax. We’ll show you how to work this out below.

At the same time, dividends reinvested into your fund’s accumulation units are known as a ‘notional distribution’.

The notional distribution is taxable – in just the same way as income units.

Tax on accumulation funds – HMRC’s view

Some people think you don’t have to pay tax on reinvested dividends in accumulation units. And some claim you don’t owe taxes on accumulating fund distributions until you sell.

However, here’s the HMRC proof that shows you owe tax on accumulation funds just the same as if they were income funds:

Amounts reinvested are taxed as income accruing to investors in the same way as if they had been distributed.

The reason for this treatment is to ensure that tax is not a factor which might distort investors’ choices and it prevents investors delaying payment of income tax through long-term accumulation of income.

Tax on accumulation funds – when do you not have to pay?

You owe income tax on ‘accumulated’ dividends unless:

Your (notional) dividend income is covered by your tax-free dividend allowance. Any dividend earnings above the allowance are subject to dividend income tax, regardless of the fact they’re rolling up in an ‘Acc’ fund.

Dividend income can also be reduced by your personal allowance. HMRC should use your personal allowance to effect the maximum reduction reduction in income tax. My thanks to helfordpirate for sharing this example from HMRC that makes this clear. Dividend tax is indeed a form of income tax.

Interest income can be sheltered by your personal allowance, your ‘starting rate for savings’ and your ‘personal savings allowance’. (Ever wondered why accountants like our convoluted tax code?)

If your accumulation unit funds are held within an ISA or SIPP then they’re legally off the taxman’s radar.

Any investment vehicle that has over 60% of its assets in fixed income or cash at any point in its accounting year counts as paying interest, not dividends.

Meanwhile anything less than 60% means distributions count as dividends.

Do you pay capital gains tax on reinvested dividends in the UK?

You do not have to pay capital gains tax on reinvested dividends in accumulation units. You’re already paying income tax on those.

So when you come to fathom the capital gain on your accumulation funds (and as your resultant psychic scream reverberates around the universe), make sure you deduct any notional distributions from the total gain. Otherwise, the reinvested dividends inflate the value of your fund and you’ll overpay CGT.

Here’s the formula to correctly calculate capital gains tax on accumulation funds:

Capital gain = Net proceeds1 minus original acquisition cost minus accumulation income2 plus equalisation payments

Here’s a worked example for an acc fund sold for £20,000. It’s accumulated £500 income over the years since it was purchased for £10,000:

Net proceeds: £20,000

Less acquisition cost: £10,000

Less accumulation income: £500

Plus equalisation payments: £100

Capital gain = £9,600

If you haven’t received any equalisation payments from your fund then ignore that step. See below for more on equalisation.

Equalisation payment effect on accumulation units

You’ll notice in the example above that accumulation income reduces your capital gains tax bill. Meanwhile, equalisation payments raise it.

Equalisation payments may be made by your fund when you purchase units between dividend payment dates.

They’re paid because part of your purchase price included dividends that inflated the capital value of the fund – before those dividends were distributed (or reinvested).

You weren’t entitled to the dividends that accrued before you invested. The equalisation payment is effectively a return of your capital. It cancels out the extra you paid on the purchase price due to the embedded dividends.

So you don’t owe income tax on equalisation payments.

With accumulation units, treat equalisation as per the capital gains tax formula above.

The effect of dividends you weren’t entitled to is then cancelled out from your fund’s capital value.

Where are my equalisation payments?

Equalisation payments should show up on your fund’s dividend statements via your broker – after the distribution or at the end of the tax year.

You’ll receive multiple equalisation payments if you invest regularly in a fund with an equalisation policy.

Note: not all funds make equalisation payments.

Vanguard has published a guide on how to work out equalisation payments on its funds.

Also, please see Monevator reader @londoninvestor’s excellent comment on the confusing way that some brokers layout the relevant information on their statements.

Accumulation unit dividends – how to find them

Of course you can only make the necessary accumulation fund tax calculations if you’ve been recording the dividends you’ve received over the years.

And who doesn’t do that…? Right?

The problem is accumulation unit distributions are more stealthy than income unit payouts. You don’t get to do a little dance every time those dividends turn up in your trading account.

So where can you find out about them?

In your dividend statements from your broker, if you receive them. You’ll only get these if you hold your accumulation funds in a taxable account – that is not in an ISA or SIPP. Many brokers provide this information as an annual tax certificate.

Trustnet keeps a good account of accumulation unit distributions. Put your accumulation fund’s name in the ‘Find A Fund‘ search box. Then click the dividends tab.

In your fund’s annual report. Or its income report if it’s an offshore reporting fund. See our post on excess reportable income.

Using Investegate’s advanced search. Set categories to ‘dividends’. Set the timespan to ‘twelve months’ or whatever suits you. Search for the company name of your fund. Enjoy!

Note down the amounts you’ve received in accumulation unit dividends on your tax form. Don’t include any equalisation amounts.

The date you received the dividends determines which tax year they fall into.

Are accumulation units worth the hassle?

The main advantage of accumulation funds compared to the Income variety is to skip the cost and effort of reinvesting dividends.

This cost saving is rendered superfluous if your fund isn’t saddled with trading fees or a high regular investing minimum. In that case you can just reinvest the dividends yourself.

With that said, accumulating funds mean that your income is reinvested straightaway, without time out of the market or you having to lift a finger. So they might still be worth your while if you prefer the hands-off approach.

Some people prefer to hold income units when investing outside of a tax shelter for other reasons, too. The dividend payouts can be used to rebalance, or to pay tax bills without you having to sell units and trigger capital gains woes if you breach your exemption allowance.

Whichever way you go, just remember that any accumulation units in your unsheltered portfolio are not immune to income tax.

As (nearly) always, making full use of tax shelters – by investing within your ISAs and pension – saves you hassle as well as money, by enabling you to sidestep all the above malarkey.

But where that’s not possible, start recording those reinvested dividends.

You could do it just for the fun of seeing what you’re earning in income. Even if you don’t have to pay tax on them!

[Note from The Investor: You might well have a different definition of ‘fun’ to The Accumulator…]

Take it steady,

The Accumulator

The amount you sold for. [↩]
i.e. dividends or interest. [↩]

{ 79 comments }

Weekend reading: tough times for those on the artisanal breadline

by The Investor on November 18, 2023

What caught my eye this week.

A new survey claiming that one-in-four six-figure earners ‘lives paycheque to paycheque’ is bound to rile three-quarters of those who read about it.

The Telegraph reports (via Yahoo Finance) that:

[Survey] respondents primarily blamed cost of living increases (90%), as well as rising mortgage payments (38%) and debt repayments (29%).

In London, 28% of the 1,700 high earners polled said they were struggling to live within their means.

That the study was conducted by RBC Brewin Dolphin – a wealth manager, rather than a poverty campaigner – might raise further hackles.

But according to Carla Morris, a financial planner at the firm:

“The findings of our survey underline just how much the cost-of-living crisis has affected every section of society in the UK.

“Even people who are among the highest earners in the country are living pay cheque to pay cheque, with almost all of them citing the rising cost of living as one of the main reasons for being in that position.”

Now, the obvious – and entirely accurate – response is that higher earners have many more options for cutting costs than those within sniffing distance of the breadline. To put downshifting from Waitrose to M&S or from London to Reading in the same bracket as getting familiar with a food bank is at the least delusional.

Generally that would be my response, too.

I’ve been collating Weekend Reading links for 17 years now. There have been tiny violins playing for the wealthy somewhere in the media in most of them.

However I do think it’s a bit different this time.

Higher and higher

The middle-class cost of living crisis is very real for starters, as I wrote a few weeks ago. Everything costs more. Particularly rents and mortgages – both soaring.

But the woes of the wealthier are being massively exacerbated by stealth taxes.

The Resolution Foundation recently calculated that the freezing of tax thresholds will see £40bn a year more paid in taxes by workers by 2028 – the biggest tax grab in 50 years.

Taxpayers in the higher bracket will by then be paying an extra £3,700 a year in taxes, following a six-year freeze.

And rather than the personal tax allowance rising to £16,200 as inflation – booked and forecast – would imply, we’ll still only be allowed to keep the first £12,570 of what we earn unmolested.

The Accumulator drafted an article last summer on all this that ultimately we didn’t publish. TA’s angle was to frame the stealth tax increases as outright hikes in the income tax rate.

I felt his workings were too convoluted to share. Possibly my mistake, in retrospect, as the direction of travel he identified was bang on.

It’s since been estimated that freezing tax brackets and allowances will have the same impact as a 6% hike in income taxes!

Harder and harder

Just on a household basis, having six-figures coming in apparently puts a family into the rarefied air of the top 5%.

Yet an analysis by Chase Bank in March showed that – with kids – it’s pretty easy to spend the lot each month without going hog wild at lap dancing bars or in a Hermes showroom.

Savings can be made. Monevator regularly features case studies from people who achieved financial success by spending and saving differently.

Fill your ISAs. Sacrifice your salary to boost pension contributions (especially around cliff edge numbers, such as where child benefit and personal tax allowances get taken away). Hope that tax rates come back down by the time you retire. Cut costs and consider moving somewhere cheaper.

It’s all getting more difficult, however.

Britain is a poorer country than it would have been absent certain terrible political choices – and a global pandemic of course. Public services are creaking, and the cost of government debt is ballooning.

Chancellor Jeremy Hunt may find the world’s tiniest rabbit to pull out of his threadbare hat in next week’s Autumn Statement, but I wouldn’t hold your breath. Ideally any tax bungs would target boosting business anyway, especially our stagnant productivity.

I wouldn’t want to start from here if I were him.

Have a great weekend.

[continue reading…]

{ 61 comments }

FIRE-side chat: high-rolling down under

by The Investor on November 16, 2023

Posts

I’m pleased to welcome one of Monevator’s many silent female readers into the Den this month! Using a pseudonym, Financial Dragon becomes the first woman in our regular series to talk about FIRE. Together with her husband, she’s aiming for a pretty FatFIRE, with homes in London and Australia and the pleasure of seeing an extended family make good use of them.

A place by the FIRE

Hello! Why did you agree to take stock of your financial life today?

Part of my motivation is the stigma around talking about money. Perhaps it’s seen as gloating if you’ve found a path that brings financial security. But I feel sharing failures, successes, and the path might help others.

Also, my story is a bit different as I’m not a ‘still got the first pound I earned’ saver. In fact, money burns a hole in my pocket. Frankly I’ve amazed myself that I have some!

Oh and I’m female, and we do seem to be less commonly found in the comments of Monevator and other Financial Independence (FI) blogs and communities than the blokes.

How old are you?

I’m 45. My partner turns 50 this year. We’ve been together for seven years, married for three.

Do you have any dependents?

I don’t have any of my own kids. My husband has two kids from his first marriage, who are in their late teens – both girls – of whom we have shared custody. Kids typically live at home where we live at least until they have finished further education. So we expect to have the girls for at least another five years.

Whereabouts do you live?

Perth, in Western Australia. I’m originally from the UK and spent time working in Asia.

Perth is one of the most remote cities on earth, in terms of proximity to other major conurbations. Western Australia as a state could comfortably fit France, Spain, Germany, and all the Nordic countries within it. Huge and mainly empty!

It’s cold and rainy in the winter, and hot and dry in the summer – 40-degree days are not unusual. We’ve invested in solar panels for economic and environmental reasons, taking advantage of Perth being the sunniest of the Australian state capitals.

It’s been interesting learning about the differences of managing finances since moving to Australia.

Have you learned anything specifically in terms of a differing investment perspectives?

Property is the big move here from an investment perspective. People with spare capital are heavily tax-incentivised to invest in property.

Most people I know in Australia have an investment property somewhere. Admittedly my circle is professional workers and business owners with decent earnings, but still – very few invest in the markets outside of Super.

When do you consider you achieved Financial Independence and why?

We could stop work and live a ‘lean FI’ life today. But we don’t want to do that, from an intellectual stimulation perspective as much as a financial one.

Also our aim isn’t ‘lean’ FI, in terms of our goals for travel, housing, and so on.

So you’re still working?

Yes, I have a senior role in a financial services organisation.

I’ve always worked in financial services and started this role two and a half years ago. To begin with the job was extremely full-on. However, having now got things in good shape I’m really starting to enjoy it. I’m fortunate to work hybrid currently, with a couple of days a week at home.

I see this as my last ‘big job’. My ambitious nature has tempered a bit as I have got older, and I don’t have the energy left for another big gig.

My husband is keen to stop work soon. His current job is very stressful, and it takes a lot out of him. I’m hoping he pulls the pin early next year. I think he sees this as a chance to take a ‘retirement tester’. I do worry though that he will need to find social meaning and hobbies, as he is a real introvert.

I keep telling my husband, he is expendable at work, but he is not expendable to us at home. I worry about the impact of work on his health, both physically and mentally. His dad passed away young, and my mum has had cancer three times since her 50s, though I’m very lucky that she is still here in her 70s.

These events weigh on us and likely contribute to our FIRE ‘why’ story. Life is precious and short.

Assets: over here, over there

What is your current net worth?

In GBP1: £2.5m.

I track our net worth on The Spreadsheet. Anyone with a basic level of accounting or Excel would be horrified at the jumble of calculations and lack of structure. It works for me though!

I track in both GBP and Aussie Dollars and we hold assets in both currencies. We are exposed to FX fluctuations, but because one of our ideas is to return to the UK to spend some time living and working there, we don’t want to consolidate everything to Australia yet.

What makes up your net worth?

Our net worth includes our home in Australia and the flat I have in London. It takes account of the outstanding mortgages remaining on both properties.

Other assets include:

Pensions – both UK and Australian for me, invested in global equities trackers and a small fixed income allocation
A legacy ISA invested in a small cap equities tracker. (I’m not allowed to invest in new ISAs as a non-tax resident of the UK)
Two individual stocks: the first from my previous organisation, as a portion of my bonus was paid in stock that took several years to vest. The second is a very small amount of Qantas stock, bought as a bit of ‘fun’ in the depths of the first weeks of Covid when my husband said we should buy when it was in the toilet. In fairness it is worth multiples of what we paid, making it my only single stock success story!
Global 100% equity trackers held in unsheltered brokerage accounts (all Vanguard).
My husband’s Defined Benefit scheme from his previous public sector job. The existence of this scheme is why we hold few fixed income assets elsewhere. It is in effect a government-backed fixed income asset with no volatility risk. These schemes are vanishingly rare these days, so we’re very lucky to have it.

What’s your plan with the mortgages?

We’re aiming to pay off the mortgage on our house in Perth at the end of this year. We are very focused on being mortgage-free, as we feel this will be psychologically important to helping to ‘give permission’ to dial back on work. We’ll also have more flexibility without a monthly mortgage payment to find.

Do you consider your home an asset, an investment, or something else?

We don’t see our family home as an asset. Most of my more detailed net worth calculations discount it.

We count the London flat as an asset. It’s rented out. We want to keep hold of it so we have a foothold in London that we can potentially live in if we want to spend time in the UK. I also like the idea of our girls or my brothers’ kids being able to experience London with an element of housing cost subsidisation.

Earning: flying high to FIRE

What‘s your job?

I’m in a senior role of a medium-sized financial services organisation. My husband works for an engineering firm, also in a senior management role. I’ve worked in financial services my whole career, starting in London in 2000, mainly in investment and wholesale banking.

I’ve always been in back office type roles, but I benefitted from the generous pay and bonuses on offer in this industry. For instance, it only took five years or so to get into the higher-rate tax bracket.

What’s your annual income?

Between us we earn a total of around £300,000 a year.

How did your career and salary progress over the years?

Even on a decent salary in London, it’s a very expensive place to live. So a big ‘why’ of FI for me was the credit card debt I racked up in my first few ‘party years’ in London.

Buying nice clothes, designer handbags, and rounds of drinks in fancy bars. Going on holiday. Generally being young and foolish! I think at its worst my debt was close to £10,000, which in 2002 was a lot of money for someone earning £20,000 a year. I scared myself with how quickly my debt built up and my calculations of how long it would take to pay off.

I asked for a pay rise, having taken on a new role, and when my then-employer said no, I moved companies. In hindsight that was a good thing, fast-tracking my earnings and skills build.

I consolidated all my debts into a personal loan to help manage them, and paid them all off, helped in part by the company move as well as pushing for multiple promotions. Those brought lump sum bonuses – finally enabling me to save, including for a deposit for a house.

When you read FI blogs, they often talk about the two ways to FI being to either save more or earn more. I took the ‘earn more’ route. I was always looking for roles to build my career and climb the ladder, while avoiding having to be super-frugal.

My parents instilled a strong work ethic in me, and I was always prepared to put in the extra time and go the extra mile so I’d be considered for the next promotion.

Not having kids, I was always on hand to do the next level up full-time job, the work trip, to work weekends and to stay in the office as late as I needed to. And this has probably led to work becoming part of my identity – to a relatively unhealthy level.

I also know though that it will have contributed to my financial stability. Aside from the ability to focus on work and always work full-time, no kids means I’ve not had nursery fees or school fees to cover.

Did you learn anything that you wished you’d known earlier?

Perhaps not so much my own learning, but a broader observation – I am surrounded by many financially successful women, often the higher-earner in their relationship, many of whom have juggled this with raising children.

I’ve reflected that it feels as though my generation of women were told we could ‘have it all’ – the high-flying career, successful relationship, and super-mum status. While many of my friends have ostensibly achieved this, I think some might say it has been at a cost to them in terms of burn-out and mental and physical health. I observe that child and home responsibilities still fall predominantly on their shoulders.

My successful friends have so many ‘tabs open’ in their heads in their attempt to do a fantastic job across every aspect of their lives, I worry there’s no time left for them as people.

Do you have any sources of income besides your main job?

I make some money from dividends on my investments, the majority of which I reinvest. The London flat washes its face but no more.

Did pursuing FIRE get in the way of your career?

No – if anything it drove and continues to drive it.

I discovered the FIRE movement in early 2017. I heard Mr Money Mustache being interviewed on the Tim Ferris Show. It truly was an epiphany. I listened again for a second time as soon as the episode ended.

Looking back, it sounds ridiculous; I give myself credit for having a modicum of intelligence, but “the shockingly simple math to early retirement” eloquently explained by Pete (the blogger behind Mr Money Mustache) really was a shocking revelation to me!

I understand now I am one of the fortunate few who can come to this realisation relatively late in life and yet was able to do something about it quickly, in terms of a financial turnaround.

That said, I feel it’s never too late to have your eyes opened to the power of FIRE. Even if you don’t reach FIRE, or that was never your intention, you will be in a better place for embracing its principles.

Your story has taken you from debt to multiple millions in net worth. Did you have any ‘gulp!’ moments along the way – perhaps as you hit seven-figures?

I think the reason for the ‘one more year’ is that I still remember the debt, and have a lingering fear, despite the numbers on the screen, that I could head back there one day.

I create milestones in my mind for when I will feel ‘financially free’ and then head past them, creating a new goal that it is critical that I meet. A therapist I am sure would have a field day with this!

Saving: better late than never

What’s your annual spending? How has this changed?

I don’t track my spending, but FIRE opened my eyes to the pointlessness of the continued acquisition of stuff.

That had been my default for years – get paid, pop to town to wander round the shops, buy new clothes because I could, repeat monthly.

I won’t say I stopped buying anything after discovering FIRE, but without effort or any feelings of deprivation I drastically reduced my consumerism.

I just didn’t see the point anymore.

Do you stick to a budget or otherwise structure your spending?

The only thing we do from a budget perspective is ‘pay ourselves first’. All the savings, investment, and mortgage payments are covered first. What is left for discretionary spending is limited.

What percentage of your gross income did you save?

From 2017 onwards I went from probably saving around 15% of my income – into pension and mortgage overpayments, with a small amount of cash as an emergency fund – to saving over 50% across cash savings – initially saving for a deposit for the house we now live in – as well as passive ETF investments and increased pension contributions.

What’s the secret to saving more money?

I reckon I’ve spent thousands of hours absorbing content, listening to stories, and digging into the dusty corners of the personal finance internet. It became, for a while, my main hobby.

I believe this rewired my brain to think saving and investing first, not spending.

Do you have any hints about spending less?

Not really. I don’t think I’m that disciplined. Perhaps I have just reached ‘peak stuff’ as I have gotten older and want fewer material possessions.

I’ve also got a lot of stuff from my pre-FI days that I still enjoy.

Do you have any passions, hobbies, or vices that eat up your income?

Travel has always been a passion that I feel justified spending on. My dad in particular always encouraged me to go and see the world. I’ve taken this to heart.

I’ve been much more frugal about how I manage these trips than I would have been pre-FIRE. But I still had the means to enjoy mid-range hotels and decent airlines, and to tick-off bucket list items, like seeing Ankor Wat at sunrise, walking among Komodo Dragons, moped-ing round the temples of Bagan, betting on horse racing at Happy Valley, walking The Great Wall of China, and admiring the blossoms in Kyoto.

I wonder what Financial Dragon sees in sun-drenched, surf-kissed Western Australia?

Investing: no edge as an edge

What kind of investor are you?

Since discovering FIRE I’ve been a passionate advocate for passive investing. I know I have no edge nor any great analytical ability, so I look for cheap trackers and feel fortunate to benefit from any market movements in my favour.

I pound-cost average in the main, and we buy monthly in our joint brokerage account. At the start of my journey I was putting larger lump sums into the market to get invested though.

What was your best investment?

My London flat will probably end up being a good investment, but more from the point of view of not having to roll the dice on the rental market if we go back to the UK for a bit.

We may sell it one day, perhaps to fund building our dream retirement home. But for now it’s just a number on a screen that I deliberately under-value, because I don’t know where the London market will end up.

Did you make any big mistakes on your investing journey?

I’ve never taken any professional advice. I have and will continue to make mistakes, like buying slightly left-field ETFs at the start of my FI journey. But I still feel overall if I keep things fairly plain and vanilla, as I’ve increasingly done, then things will be ok.

Given when we started we were very heavily weighted towards property in our portfolio, I’ve worked to diversify – and to ensure we’re not going to completely beholden to governments moving the goal posts on things like the retirement age for pensions.

Of course the biggest mistake was not finding FIRE or investing when I was 21.

What has been your overall return, as best you can tell?

Because I’ve not been a long-term tracker of our net worth and I don’t really think about returns, I don’t know. I just hope when I sell one day that our ETFs will have at least kept us on a par with inflation. No small ask these days!

I can say our net worth has increased by 70% since I started tracking in 2017.

A nice line graph in my spreadsheet shows our net worth gently tracking up over time. There’s a rollercoaster style dip from Covid in March 2020; this now looks insignificant. It’s nice to have my own personal proof point that you shouldn’t stress about market movements.

How much have you been able to fill your ISA and pension contributions?

Given where I was living when I discovered FIRE and my current country of residence, I’ve not been able to benefit from the tax shelter of ISAs. But I tell myself it’s a nice problem to have to be paying tax when we move to de-accumulation.

We both take full advantage of the tax benefits of Super – Australia’s word for pensions – and max our contributions, and I’m continuing to investigate self-managed Super Funds (SMSFs). These are somewhat similar to SIPPs and enable you to buy investment property.

There is no ISA equivalent in Australia, unfortunately – all the tax breaks are in investment property.

To what extent did tax incentives and shelters influence your strategy?

My strategy is to have control of our future, and not to be at the mercy of changes in, for example, pension or Super access ages. That has a cost, given we cannot invest in the markets in a tax-efficient way as you can in the UK. I feel it’s worth paying to be in control.

How often do you check or tweak your portfolio?

I jump into The Spreadsheet at least a couple of times a week. There are several tabs, and I’m always updating something, whether it’s with the latest value of investments, a new buy, information for my tax return, or tracking spending on a house project.

We’ve not really changed tack for the last couple of years in terms of portfolio planning. Paying off the mortgage and pound cost averaging into the market are the key activities.

Wealth management: death to the mortgages

We know how you made your money, but how did you keep it?

The plan, once I had discovered FI, was to try to get myself into as good a position as possible, as quickly as possible. That initially translated to much more proactively managing spending, cutting unnecessary costs, getting myself invested in the market outside of pensions, and putting my head down at work.

A big focus has been paying off our mortgage ASAP. We built a ‘mortgage pay-off tracker’ so we could predict when we’d hit this goal and to keep focused on it.

Investing contributions will probably pick up when the mortgage is paid off. I’ll also probably shift my attention to paying off the London flat. If we do decide to spend some time in the UK in the future, it would be nice to know we could live there without any monthly payments.

Which is more important, saving or investing, and why?

Investing, even with interest rates on cash looking healthier these days, because of the inflation hedge.

When did you think you’d achieve financial freedom?

I was originally aiming for 2025, but currently its looking more like 2028. I will be 50, and my husband 55, though he might finish work before then.

Has anything unexpected got in your way?

I didn’t expect to find a job in Australia that was similar to my previous roles in terms of seniority. This has helped our FI journey, but probably also contributed to a bit of a hedonic treadmill.

Why are you still growing your pot?

We’re the classic One More Year couple. As I said, we could be lean FI now. But given we want to travel and spend time with loved ones while we can, I’ll probably keep working at least for the next five years on a full-time basis. It would be wonderful if my husband stopped as soon as possible, even if this is more of a mini-retirement or sabbatical, to recharge his batteries and build resilience.

Perhaps when the kids are both independent of us, we might head to the UK for a couple of years and maybe pick up contracting work to pay for our adventures.

Any further financial goals?

The key for me to the whole FI journey is having the comfort to know that if we did need a big pivot – for example if one of us was forced out of work due to health or other issues – we could fall back on the savings we have accumulated. While we would not enjoy the comfortable lifestyle we currently do – or might aspire to in the future – we would be more than able to meet our obligations, keep our current home, and so on.

I know that if something unexpected happens we should be able to roll with the financial punches. This is the ‘gold’ of FI.

What would you say to Monevator readers pursuing financial freedom?

Knowing that freedom could be accessed might be all you need to feel free. You may not need or want to pull the pin when you get there. The American FI bloggers call this having ‘F-You money’…

Any other business?

When did you first start thinking seriously about money and investing?

I’ve always had it in the back of my mind that I needed to get myself to a good place financially. But that FIRE epiphany was in 2017 as mentioned.

Did any particular individuals inspire you?

When I discovered FIRE I went deep. I read every Mr Money Mustache blog post. I followed his links and discovered other bloggers like JL Collins, and books like Millionaire Expat. I found yet more bloggers, like The Mad FIentist, Of Dollars and Data, podcasts like Choose FI (US), Financial Autonomy (Australian), and Pete Matthews’ Meaningful Money (UK).

And of course, I found Monevator, as my golden source for all things personal finance, delivered free – though I now happily pay for membership – to my inbox.

Can you recommend your favourite resources for anyone chasing the FIRE dream?

Starting at the beginning with Pete Matthews’ podcasts gives you such a great base level of understanding.

Morgan Housel has such brilliant flashes of insight. I loved his book The Psychology of Money.

Oh, and Excel!

Any advice for any Monevator readers thinking of following you to Australia?

Work out what visa allows you the greatest freedom to pursue your dreams. There are some good ones for shortage skills or non-capital city living. Think about the cost of the visa, the paperwork, and the qualifications you will need to produce and the cost of getting your loved possessions and ones here.

I’m on a partner visa. This cost over £4,000, required the submission of over 70 pieces of documentary evidence of my relationship, and took nearly 18 months to be approved! (Things have got a bit simpler since I arrived though.)

Once here, shop around for a cheap Superannuation (pension) provider. Sign-up, and move that fund around with you from job to job, as you can now do in the UK, to keep all your money in one place.

If you do leave Australia permanently, you can get it back. That’s my understanding.

The Australian Taxation Office (ATO) website is pretty easy to navigate. Read up on topics that are relevant to you. If you have assets in the UK, you’ll need to keep submitting a tax return there as well as for Australia, but the tax you pay in the UK is deductible from what you pay in Australia.

The tax year for Australia runs from July to June. Keep good records to make multiple submissions on different timescales easier.

Finally, it’s very tricky to invest in Australia property if you are not tax resident here. So buying a house ahead of arrival is probably a no go.

Charity and legacy

What is your attitude towards charity and inheritance?

I don’t aspire to leave money to anyone – if that happened it would be a bonus (for them!) I am more interested in gifting what I can in life. For example to help with weddings, house purchases, and so on.

I’ve already gifted a decent amount to my nieces, asking for it to be invested to support the costs of their education. I also want to be there for my parents. I don’t think they will need my financial support, but given the complexities of funding old-age and social care – as expertly articulated in a series of Monevator articles on the topic, which I fully expect to refer to eventually – that may also be required.

As well as always wanting to support charities ad hoc, like those where friends are fundraising, we make regular donations to Give Directly. It is part of a suite of charities recommended by Give Well, an organisation dedicated to evaluating the effectiveness of charities and recommending those with the greatest impact.

Give Directly sends no strings attached cash transfers to some of the poorest people in developing countries. The principle is that cash enables individuals to invest in what they need, rather than relying on aid organisations and donors thousands of miles away to decide for them.

This charity really resonates with me from the perspective of my personal finance journey. I don’t want to be told what I should be doing. I want to feel I have the agency to decide for myself. I’d like to think we will continue to give to this charity, potentially increasing the amount over time.

From an inheritance perspective, I really like the idea of my step-girls or nieces being able to take advantage of our flat in London to experience living in what I continue to consider to be such a fantastically diverse and culturally rich global city, despite our best efforts to hamstring it via Brexit.

I feel happy, whenever I return, to note that stories of its demise do seem to be somewhat over-blown.

What will your finances ideally look like towards the end of your life?

Our finances are complicated somewhat because they cross two countries and currencies. While this gives us the optionality we want, it will certainly be part of my longer-term plan to try to simplify as much as possible. We won’t want to manage complex tax affairs in our 80s. I’m also expecting that by then we will have picked the place we want to be, so we can consolidate to a single currency.

Simplification will likely focus on those investments outside of tax wrappers. I might break my own rules and take some pay-per-hour advice on our drawdown and decumulation strategy. I’m sure there will be some areas where we can optimise that I won’t be aware of, particularly around tax.

When it comes to starting to drawdown our accumulated retirement assets, I can see us taking a couple of mini-retirements where we perhaps take some time off to travel and then pick up work again, before we actually stop working all together.

I’m not ruling out buying an annuity at some point, depending on where rates are. I want to find the sweet spot where we are no longer of a mind (or of sound mind…) to manage complexity, are probably not doing anything flash or that requires large lump sum spending (like travel), and we just need an amount to land every month.

I’ve continued my National Insurance contributions in the UK since leaving, which will mean I will be entitled to the state pension. If it’s still around!

Given there is no inheritance tax in Australia, it makes sense for us to be considered as resident here when we die.

I know life can be unpredictable. All I can hope for is that we and our loved ones are healthy and that we will have the means to make the most of the time we have. Whatever that might be for us.

Thanks Financial Dragon! Of course a £2.5m pot would put many of us well into FIRE territory already. But remember our recent poll showing more than one in five Monevator readers is an additional-rate taxpayer? We’re a broad church, and I’m sure this chat will strike a chord with our many millionaires next door. Questions and reflections welcome, but please remember Financial Dragon is just a reader, sharing her story. Constructive feedback is welcome. Personal attacks will be deleted. See all our FIRE studies.

British Pounds [↩]

{ 39 comments }

Next Posts Previous Posts