Accumulation fund type dividends

TrustyOven

Hi all,

I've been wondering about the difference between the accumulation and income OEIC funds with regards to dividends.

For income funds, I understand that the dividend is paid to the brokerage account (or your bank account), so that part seems easy enough to understand.

For accumulation funds, I thought that the dividend was used to purchase more units in the fund. So, while the price per unit fluctuates (as usual, and also as part of the dividend payment), the total number of units an investor owns increases.

But I thought I read (somewhere.. thought maybe Monevator but cant be sure now) that the total value of the OEIC fund increases, thus the price per unit increases, but the number of units you (as the investor) hold stays the same.

Could someone please enlighten me?

Thanks!

Eco_Miser

The unit price goes up compared with income units, you keep the same number of units.

Perhaps you were thinking of a scheme where the dividend from income units (or actual shares) is used to automatically buy more units (or shares).

RickyC_IFSWP

With accumulation units, you're right in that the dividends are directly reinvested. This results in either the unit price being boosted or additional units issued to investors. (says investopedia)

TrustyOven

The terms & conditions of the broker says this:

"Accumulation share class: You will not receive an income payment.
Any income generated will increase the share price of the fund and the
number of shares you hold will remain the same."


So that actually clears it up. I should have read that first before creating a new thread Thanks Eco Miser and RickyC!

Your_Hero

TrustyOven wrote: »

Hi all,

I've been wondering about the difference between the accumulation and income OEIC funds with regards to dividends.

For income funds, I understand that the dividend is paid to the brokerage account (or your bank account), so that part seems easy enough to understand.

For accumulation funds, I thought that the dividend was used to purchase more units in the fund. So, while the price per unit fluctuates (as usual, and also as part of the dividend payment), the total number of units an investor owns increases.

But I thought I read (somewhere.. thought maybe Monevator but cant be sure now) that the total value of the OEIC fund increases, thus the price per unit increases, but the number of units you (as the investor) hold stays the same.

Could someone please enlighten me?

Thanks!

As you have found out from the T&Cs and the previous helpful posts, normally the number of units remain the same, but the value of each unit increases.


If it is growth you are seeking, then Accumulation funds are preferable because dividends are automatically reinvested and do not have to undergo the initial charge/bid-offer spread again.


Bear in mind though, that even though your dividends are reinvested through Acc funds you may still have additional tax to pay if you are pushed into higher rate tax (HRT) or additional rate, if the said OEICs are not wrapped in ISAs or a pension.

talexuser

If you have funds outside an ISA with accumulation units, how do you work out gross income? I assume you have to subtract that income to calculate capital gains every tax year?

RickyC_IFSWP

talexuser wrote: »

If you have funds outside an ISA with accumulation units, how do you work out gross income? I assume you have to subtract that income to calculate capital gains every tax year?

You will receive a tax voucher every year from the providers, which you can add to your Self Assessment or simply inform HMRC. And it's income tax for the dividends, not CGT, so anyone above BRT will have more tax to pay basically.

bowlhead99

talexuser wrote: »

If you have funds outside an ISA with accumulation units, how do you work out gross income? I assume you have to subtract that income to calculate capital gains every tax year?

You'll get a tax voucher or statement from your platform. That shows you the income so you can pay tax on it if you're a higher rate taxpayer. And then when you sell them, if you know how much you paid for your units and you know how much they went up due to the income, you can see how much the difference is between all that and your sales price, which will give you the real capital gain or loss.

So if you're unwrapped it can make sense to do everything with income-paying funds and make the paperwork easier. Which is also handy because now all the platforms have started charging explicit platform fees, you usually need a bit of cash to be realised now and then to cover them, and the rest of the cash can be put back into whatever investment you want to rebalance into. Of course, if putting the cash back into existing or new investments has high transaction fees then you might prefer the 'just let it accumulate' approach, as the tax calculations are not really rocket science, just a bit of a pain.