Best for ISA: income or accumulator fund?

gopher2

I know that dividends can't be reclaimed in an S&S ISA but understand that some bond funds pay returns as "interest" that can be reclaimed.

So should a bond fund in an ISA always be an income fund rather than an accumulator fund or doesn't it matter either way?

dunstonh

it doesnt matter. The accumulation funds still have income its just reflected within the unit price. You will still see the tax being reclaimed on the statement

gopher2

So I guess accumulator units would be the best bet rather than having the interest payments lying around doing nothing.

That makes life easier, thank you.

ozzage

There are two questions here: one is income vs accumulation, but the other is whether the fund distributes as dividends or interest.

Fixed-interest funds (eg investing mostly in gilts, bonds etc) pay out interest, on which the full 20% tax (or 40% for HRT) can be reclaimed when held in an ISA.

With dividends there is nothing to reclaim whether in an ISA or otherwise, UNLESS you are a higher rate taxpayer in which case being in an ISA helps.

So while income vs accumulation doesn't matter, dividend vs interest DOES.

dunstonh

So I guess accumulator units would be the best bet rather than having the interest payments lying around doing nothing.

They wouldnt be doing nothing unless your instruction is to have them paid into a cash holding account. The most common methods when using income units are either full distribution (as income to your bank account) or reinvest to buy more units. The latter effectively does the same as acc units.

barak

ozzage wrote: »

Fixed-interest funds (eg investing mostly in gilts, bonds etc) pay out interest, on which the full 20% tax (or 40% for HRT) can be reclaimed when held in an ISA.

I know what you mean, but higher rate tax payers don't actually reclaim 40% on interest within an ISA - it's rather that they avoid being liable for it.

ozzage

barak wrote: »

I know what you mean, but higher rate tax payers don't actually reclaim 40% on interest within an ISA - it's rather that they avoid being liable for it.

Yes I stand corrected You can reclaim the first 20% and you don't have to pay the additional 20% at all.