S&S ISA, Funds and Providers

dunstonh

I nearly always use inc units. It really really does not matter.

AimHigh

dunstonh wrote: »

I nearly always use inc units. It really really does not matter.

Which is how I understand it given your/bowlhead's descriptions.

I guess what I'm trying to work out is whether 5-10 years worth of putting something like £10k a year into an inc unit fund is likely to give reasonable enough dividends for it to be worth withdrawing the income.

Granted it's fairly impossible to say given it depends on what fund you use/how the market performs etc etc but having zero experience of the type of returns these things give, I don't know whether it's better to just fund an acc fund and forget about it for a few decades.

AH

Audaxer

AimHigh wrote: »

Hi all,
Finally, the idea here is that I want to be able to create multiple streams of income.

I'm not sure why you want to create multiple streams of income - at your age I'd be more concerned with growth.

I really like VLS and have invested in a VLS 40 recently, but the yield on all VLS products is low so not going to give you a lot of income if that is what you want.

AimHigh

Audaxer wrote: »

I'm not sure why you want to create multiple streams of income - at your age I'd be more concerned with growth.

I really like VLS and have invested in a VLS 40 recently, but the yield on all VLS products is low so not going to give you a lot of income if that is what you want.

I want to create multiple streams of income because that is ultimately how you create wealth. As I alluded to beforehand, I aim to get to a point where I don't have to worry about money. That's not to say I won't manage it and I'm certainly not saying I want to spend it foolishly. It's the old time/energy/age/money concept - I naturally want to have a comfortable retirement but I don't want to have to wait till I'm 65 before I get to put it to good use.

AH

AimHigh

Also - very good point about the yield on VLS, thanks. I guess I'm opting for that first until I've gained enough knowledge to take a bit more risk ergo my eagerness to learn from the MSE community who have decades more experience than myself

Audaxer

AimHigh wrote: »

I want to create multiple streams of income because that is ultimately how you create wealth.
AH

Is it? I'm a bit of a novice DIY investor as well, but from what I understand growth is the main way to create wealth. I am at the age of mainly looking for income from my investments, but that is so that I can supplement my pension and spend it.

Maybe I'm missing something but if you are looking to invest £500 per month, why would you want income streams instead of accumulations funds where any income is automatically reinvested?

AimHigh

Audaxer wrote: »

Is it? I'm a bit of a novice DIY investor as well, but from what I understand growth is the main way to create wealth. I am at the age of mainly looking for income from my investments, but that is so that I can supplement my pension and spend it.

Maybe I'm missing something but if you are looking to invest £500 per month, why would you want income streams instead of accumulations funds where any income is automatically reinvested?

Yes - multiple streams of income = active and passive income = more to invest/use in other ventures and create more income etc (my view on it anyway!).

That £500 a month is just a starting point, I'm willing to commit more once I've got a bit more experience behind me. I think this is the difference though, you want to supplement your pension and spend it once you retire whereas I want to (hopefully) get growth out of good stock picks but also receive some form of income that can be used outside of investment to supplement my younger years.

AnotherJoe

Yes you are correct the tax treatment is irrelevant because its in an ISA.

I think bh made an error in his analysis. Minor but an error or should i say omission.


The income from the inc fund will spend some time "hanging around" before its reinvested.
In that time it will not earn any dividends/interest. The money thatw as automatically reinvested in the acc version, will do. Over a long enough time with a large enough amount, that would make a difference in favour of acc.

Someone mentioned using the money to rebalance but the idea with funds like this is, you buy them because they do the rebalancing for you.

That leaves paying for the ISA, which can be done by transferring in money as needed.

If you wish to have an income stream, then VLS is not classically the right fund to choose, you should choose one that is aimed at paying interest. The best way to get an income stream from VLS, IMHO, is by selling units. (which will come to the same thing as taking income, along the lines of bh's analysis, except your "income" is always fully invested until you need it.)

bowlhead99

AimHigh wrote: »

I can't quite find the thread now but following some research, a MSE forum user called 'bowlhead99' gave a really comprehensive explanation as to the differences between inc/acc funds. It convinced me that using the inc fund made more sense given the fact you would not lose overall value if it was re-invested but you had the opportunity to take the money if it was required. Believe he/she also said it made it easier to monitor dividends from a tax perspective although this is a lesser worry given the ISA wrapper?

Heard my name...

There are a few reasons why a person might want to use Inc over Acc;

1) Tax tracking if investing outside an ISA or SIPP: receiving cash distributions means you are aware of taxable events such as receiving interest, dividends or other income. These might be taxable for you or might fit in your allowances but you'd still need to keep the records to prove that the income wasn't enough to be taxable. Also by manually investing the dividends received you can see how much you have added to your cost of investment when you use it to buy more units, which affects your capital gains calculations - again either because there may be tax to pay or because you need to keep the records. Whereas with Acc the reinvestment is done inside the fund behind the scenes and you may miss an event.

- But as others said, not relevant here

2) When you have a portfolio containing a number of funds it can be useful to use the dividends thrown off into your ISA cash account alongside your monthly contributions to reallocate cash to the other funds which are most in need (to keep your portfolio of several funds balanced in line with your target allocations).

- But in this case you are not juggling a portfolio of funds. With the amounts involved you will just have one mixed multi-asset fund. So any income generated that comes out into your cash pot within the ISA will just be destined to go right back into the same fund. So, using Inc units creates a hassle: in terms of the work involved to manually reinvest the money, the fact that you have an odd percent or two of your money 'out of the market' from time to time until you notice, and the costs of reinvesting if you're using a transaction fee-based platform. All to put the money right back where it came from.

3) If you are just 'buying and holding' with a lump sum investment and not planning to make ongoing contributions you will need money to pay the platform fees. So if you have five or ten funds you could set one or two of them to Inc mode and then the money arriving in the account from time to time will cover the ISA managers demand for fee money. Without that, i.e. if you were using Acc only, then in order to generate cash to pay fees you would need to do a few sales manually or just leave cash back dormant in the account from the time you first made the investment. And if you didn't address the issue, the ISA manager would need to sell some of your units to get cash for his fees - and might charge you for the hassle of doing that, if you are not already using a high fee platform where he does it for free.

- However in this case you are only using one fund so you can't set it for a fifth or a tenth of your dividends to be paid out and the rest accumulated. So if you go Inc then you will be generating several times more cash than you need for the 0.25%-0.45% (depending on provider) fees and will need to manually reinvest the excess income generated, so it is not a very neat solution. Also you are not just doing one fixed lump sum investment into a fund that you will then leave alone, you are adding money on an ongoing basis which should mean fees can be covered from this stream of deposits without needing to take income from the investment to do it.

4) An obvious reason to use Inc units is if you actually want to use the income generated for your day to day living costs or other opportunities (investment or otherwise).

- However in this case with your level of investing there will be no meaningful amount of income for quite some time. And over time you are going to be putting new money into the funds on an ongoing basis, moving money into tax wrappers (ISA, LISA, pension, whatever) within your annual allowances.

There is very little point moving £x into an ISA one month because you want to increase the amount of money you have invested and reduce the amount of money in your bank account... and reducing that year's precious ISA allowance by £x... buying a fund with it because you want an investment... then realising that £100 of dividends has arrived in the ISA and you don't want that to be put back into the investment... so you take it out of the ISA to get the £100 back in your hand.

You might as well have just put £x-100 into your ISA in the first place, and kept the cash in your hand. That way you have used up £100 less of your ISA allowance and have the right amount in your bank account for your ongoing spending needs.

There are probably more than just those 4 reasons why people would use Inc shares instead of Acc shares, but those 4 are to me the most immediately obvious ones and none of them are relevant to your situation. Acc is the easy option because for the moment your goal is to reinvest the income generated by the portfolio of companies held by the fund. So, just let the fund manager do the work and reinvest it without even trying to send it to you, rather than have him send it to you and then you do the work putting the money back into the fund after it sits around a few days or weeks or month until you notice it.

When you get older and have built up a significant amount of assets which are internally generating a decent amount of income, you can always switch to Inc units to take the cash out of the ISA to spend or invest elsewhere. Or, simply reduce the amount of new money you are putting into the ISA, leaving cash in your bank account to spend or invest elsewhere.

bowlhead99

AimHigh wrote: »

Audaxer wrote: »

AimHigh wrote: »

I want to create multiple streams of income because that is ultimately how you create wealth.

Is it? I'm a bit of a novice DIY investor as well, but from what I understand growth is the main way to create wealth. I am at the age of mainly looking for income from my investments, but that is so that I can supplement my pension and spend it.

Yes - multiple streams of income = active and passive income = more to invest/use in other ventures and create more income etc (my view on it anyway!).

Having a diversified set of investments working for you is how you create wealth. Some of them grow in value. Some of them send you income that you can use to reinvest in them or into something else. Some of them do both. What matters is the total return, which can be from income or growth or often a combination of the two.

I would recommend you don't get sidetracked by hearing anecdotes such as 'most of the returns of an investor in the FTSE over the last x years have come from dividends reinvested'. Each year, the companies generally make more and more profits whether you reinvest or not, as the world economy is growing. An investor in Google or Facebook or Apple or Amazon has had plenty of growth without having loads and loads of dividends.

Some of the big companies are very mature businesses that generate cash that they can't use and they will distribute quite a high proportion of those profits - if they don't need to hold on to the cash to grow their business, they give it back to their owners as dividends. Others reinvest the cash in new premises or assets - expand and grow or use it up investing in new products or new markets that make them more profitable in the longer term, and pay fewer dividends or perhaps none. But from your portfolio as a whole you will get a certain amount of dividends out of it.

Clearly if you take that money off the table and throw it in the bin or spend it on things in your day to day life, rather than sticking it back into investments, you will make much lower total returns. Because each pound of income you choose not to reinvest is a pound that could be invested in something that generates its own growth and its own dividends. But the growth is just as important as the dividends and some high growth opportunities may not pay dividends at all, and that's fine.

You don't need to necessarily take an 'income stream' from a company to become wealthier. The company has its own 'income stream' from its customers, and as you own a share of the company, you are getting wealthier each time they have a profitable month, whether or not the company distributes that income to you or does something else with it. If it doesn't distribute the cash it will generally be a more valuable business (because of the cash in its bank account or the results of spending that cash on profitable activities) and so people would pay you more to buy your share off you if you wanted to sell up.

So, it's great to have diversified income streams around the place but you don't need to physically receive the income to become wealthy. The income stream could just be earned by your company, or your fund that owns the company, and used up without ever reaching you.

You don't need to have the income coming in to your own hands to go off and do other investment opportunities; when some other opportunity comes on the horizon you could sell a bit of one of your investments to fund it, or fund it out of salary, and leave most of the investments untouched. If you pull money out of a fund by using Inc units and taking the dividends away, the money is no longer at work for you in that fund, so economically it is the same as if you had sold a bit of it. Either way, you have less money at work in that particular investment and more cash in your hand to buy a different investment.