A query re converting ACC funds to INC funds

Audaxer

I am retired and currently reinvesting dividends from INC funds. Rather than reinvesting the dividends manually I am wondering whether I would be better investing further lump sums in ACC funds and convert to INC funds when I need to take income. I just want to check that my understanding below is correct.

If I had ACC funds rather than INC funds I know the dividends would be automatically reinvested, so in 5 years time when I want to draw the dividends, the balance of the ACC funds should be approximately the same as the INC versions if dividends had been manually reinvested .

So in 5 years time if I sold the ACC funds and bought INC versions of the funds, even if the values had dropped significantly due to an equity crash, am I right in thinking I would get the same number of units and therefore the same value of future dividends as someone that had held the INC version for the whole 5 years?

I am fairly sure that is the case but just wanting to check that I wouldn!!!8217;t be losing out on the value of future dividends.

Alice_Holt

Would there be any cost in converting from INC to ACC and then back to ACC versions?
Bid offer spread; dealing costs?
If so, how would this affect your calculations?

An alternative would be to take income by way of selling funds. This has the advantage of fitting into your requirements - you decide when and how much capital to release.

Audaxer

Alice_Holt wrote: »

Would there be any cost in converting from INC to ACC and then back to ACC versions?
Bid offer spread; dealing costs?
If so, how would this affect your calculations?

An alternative would be to take income by way of selling funds. This has the advantage of fitting into your requirements - you decide when and how much capital to release.

No dealing costs, and I try to avoid funds with a bid/offer spread, although I agree that would be a consideration if I did buy these funds.

I could keep the ACC funds and sell units as required, but I would rather convert back to INC when I want to take income. Just want to make sure I'd be in the same position as I would be if I had the INC funds all along.

talexuser

Surely it depends on your buy/sell, and dividend reinvest costs? If you are on a platform that charges custody but offers free trading there should theoretically be no or very little difference. If it costs you to reinvest dividends then you will have less over time than the same acc fund.

ColdIron

You wouldn't get the same number of units but (ignoring transaction costs) you would get the same value. Acc units are more valuable than the Inc ones so you would have fewer of them. If you had reinvested your dividends you would have purchased more lesser value units

dunstonh

Not all platforms support fund conversions. So, if that is your plan, you should check your platform allows it. If they don't then it would be a fund switch and the usual consequences of that. So, going with income units from the start would make sense.

Audaxer

ColdIron wrote: »

You wouldn't get the same number of units but (ignoring transaction costs) you would get the same value. Acc units are more valuable than the Inc ones so you would have fewer of them. If you had reinvested your dividends you would have purchased more lesser value units

Thanks. What I meant was, if I sold the ACC fund valued at say £10k and bought an INC fund with the £10k the INC fund would have the same number of units as someone who had the INC fund from the start and reinvested the dividends?

bowlhead99

Audaxer wrote: »

Thanks. What I meant was, if I sold the ACC fund valued at say £10k and bought an INC fund with the £10k the INC fund would have the same number of units as someone who had the INC fund from the start and reinvested the dividends?

Broadly, yes. There can be some practical differences on timing of reinvestment which can mean you don't get exactly the same result (as the intention is that one class auto-reinvests the proceeds without doing a payout, and the other you get a payout which has to be manually reinvested); but you don't know which method will shake out as being the best on these minor differences, especially over a short period such as five years. Ultimately it is the same money swilling around and being invested in the same assets using the same investment strategy so you'd expect the total returns to be basically the same.

If you are using one fund and changing to the other after a number of years, the two obvious issues you introduce are

- if you change asset classes by entirely redeeming out of one and subscribing into another (rather than 'converting' via the manager, as dunstonh alludes above), you may be out of the market a short time depending on your funds platform. That could be worth a couple of percent in either direction depending on volatility of markets at the time.

- related to the above, assuming you're doing the change yourself via a platform rather than having the fund manager literally exchange/convert your holdings of one class of units for another class in their same fund, you will have a CGT event. Which may be desirable if you want to use up some annual exemption; but not desirable if you don't have enough annual exemption and were hoping to never sell them, just die with them leaving them to your heirs with no CGT to pay.

Audaxer

bowlhead99 wrote: »

Broadly, yes. There can be some practical differences on timing of reinvestment which can mean you don't get exactly the same result (as the intention is that one class auto-reinvests the proceeds without doing a payout, and the other you get a payout which has to be manually reinvested); but you don't know which method will shake out as being the best on these minor differences, especially over a short period such as five years. Ultimately it is the same money swilling around and being invested in the same assets using the same investment strategy so you'd expect the total returns to be basically the same.

Thanks, that's what I thought.

If you are using one fund and changing to the other after a number of years, the two obvious issues you introduce are

- if you change asset classes by entirely redeeming out of one and subscribing into another (rather than 'converting' via the manager, as dunstonh alludes above), you may be out of the market a short time depending on your funds platform. That could be worth a couple of percent in either direction depending on volatility of markets at the time.

One way to do that so you are not out of the market at all I would think, is to use cash to buy the INC fund at the same you are selling the ACC fund?

- related to the above, assuming you're doing the change yourself via a platform rather than having the fund manager literally exchange/convert your holdings of one class of units for another class in their same fund, you will have a CGT event. Which may be desirable if you want to use up some annual exemption; but not desirable if you don't have enough annual exemption and were hoping to never sell them, just die with them leaving them to your heirs with no CGT to pay.

Any buying and selling would be inside an S&S ISA so thankfully CGT would not be applicable.

bowlhead99

Audaxer wrote: »

One way to do that so you are not out of the market at all I would think, is to use cash to buy the INC fund at the same you are selling the ACC fund?

Yes, if you have surplus cash uninvested, you can always place a buy order for the same day you place the sell order. Likewise you can buy more Inc units the same day your existing Inc units go ex-div, without waiting for the cash to become available from the dividend distribution.

However, running your portfolio with extra uninvested cash to give you the liquidity to do that, has an implicit extra cost (the drag on performance of uninvested cash sitting around). And you mentioned doing it inside an ISA, which is less flexible than outside an ISA where cash from any source can be used to make purchases without regard to subscription limits. These issues are not 'dealbreakers' but worth being aware of. For example depending on your platform, if you process a fund switch you may be able to reinvest most or all of the cash same day, meaning you only need a portion of your ISA with that ISA manager to be in ready cash to make up the difference.

Tom99

Audaxer wrote: »

Any buying and selling would be inside an S&S ISA so thankfully CGT would not be applicable.

[FONT=Verdana, sans-serif]Will you have scope to do that in an ISA?[/FONT]
[FONT=Verdana, sans-serif]I assume it will only work if you have built up a ACC fund of not more than £20k. You could put that years £20k into the ISA do your simultaneous sell and buy then transfer £20k out to a cash ISA so as not to lose that year's ISA allowance?[/FONT]