Income vs Accumulating Funds

Joey122

Hello All,

Quick question if I may:

Some funds I ve shortlisted include different variations of "income" or "accumulation".

I ll ask a silly question : What is the difference between the two

Would it make a difference if you intended to hold this inside an ISA?

If it was outside an ISA then presumably you would always go for accululation so you have 9K of CGT relief?

Thanks

Aegis

Income units pay dividends. Accumulation shares don't.

If you're investing for growth, accumulation is the way forward. If you're investing for income, go for the income shares.

Of course, you can also automatically reinvest income units which basically makes more or less the same thing as accumulation units.

Joey122

Ah - I see - So this is not a way of being tax efficent - Rather it determines what happens to the proceeds of your return


Thanks

jem16

Income units pay out a natural income. However you don't need to take this income out of the fund - you can simply have it reinvested.

Growth units are reflected in the price of the unit so no reinvesting needed.

However regardless of accumulation or income, the yield ( i.e. dividends) from both funds count towards your taxable income and are subject to income tax. The dividends come with a tax credit which satisfies the tax for a basic rate taxpayer ( unless the dividend takes you into higher rate). Higher rate taxpayers have to pay an extra 22.5% on their gross dividends ( unless it's inside an ISA when no further tax is payable).

The CGT is applicable on the profit you make when you sell the fund. It's nothing to do with the type of fund. If you reinvested the dividends from the income units the two funds would be almost identical in performance. However if you took the dividends out as income then your fund would grow less so would be subject to less CGT.

Joey122

I just love Gordon brown and the incredibbly complicated tax process he s put in place.

By the time I spend my money its probably been taxed five times(Income/VAT/Fuel duty/)

Joey122

Hang on a sec - I just reread this :

Do these funds pay a dividend? I thought if the fund was good and did well then the price it is at would move higher. ie starts off at 100 and today is being sold for 160.

The 60 % increase is all capital gains - There s no dividends I can see so I m increddibly confused or stupid or both

dunstonh

Joey122 wrote: »

I just love Gordon brown and the incredibbly complicated tax process he s put in place.

By the time I spend my money its probably been taxed five times(Income/VAT/Fuel duty/)

Inc/Acc units have been round much longer than Gordon Brown.

Do these funds pay a dividend? I thought if the fund was good and did well then the price it is at would move higher. ie starts off at 100 and today is being sold for 160.

The 60 % increase is all capital gains - There s no dividends I can see so I m increddibly confused or stupid or both

Most funds have a dividend. Acc prices build it into the unit price but it is still there. Inc units can pay it out or they can rebuy units in the same fund (giving you almost the same return as acc units). In both cases, you still have a tax liability potentially. Acc units dont get round it. The different tax wrappers can do though (i.e. ISA, pension, onshore investment bond, offshore investment bond or unwrapped)

nrsql

With income dividends may not be reinvested immediately so you may have that amount out of the market for a while depending on how they are held.
If, at some time, you want to take income from the fund and have an accumulation fund it might mean a switch.