Accumulation vs Income units

Rawhy

Or reinvesting my dividends vs taking it out as income...

In another thread ( https://forums.moneysavingexpert.com/discussion/5969749/new-to-funds-got-some-questions#16 ) - I said I want to accumulate until £400-500k, then sell it all off and buy income funds. A user responded with this:

AnotherJoe wrote: »

... most likely a poor / flawed strategy. I think its well understood now that you get a better total return (and thats what drives income ultimately) by a combination of taking income and selling units rather than just taking income.

I would just like to know a good strategy of accumulation vs income funds ratio. I do not know anything about this, is there something which I can read up on?

Also, I plan to do the majority of my investing in an ISA wrapper. So when I sell, say £100k worth of accumulation units, can I purchase £100k worth of income units without losing the ISA benefit? Or can I just buy up to £20k worth of income units, and I lose the ISA wrapper on the £80k? Similarly, can I sell £100k worth of shares in a stocks and shares ISA, and transfer it all into a cash ISA, or will I lose the tax benefit of £80k due to the £20k limit?

What else do I need to think about? Or be wary of?

Thank you all

dunstonh

I believe you are mixing a few things up here.

For the provision of a monthly amount. This can be achieved through income or through the total return. If you are going to use yield only then you want income units. If you are going to use total return then it doesn't matter which you use.

Restricting yourself to yield can limit your options and potentially the returns.

So when I sell, say £100k worth of accumulation units, can I purchase £100k worth of income units without losing the ISA benefit?

yes

Similarly, can I sell £100k worth of shares in a stocks and shares ISA, and transfer it all into a cash ISA,

yes

What else do I need to think about? Or be wary of?

Difficult to say without knowing what you do and dont know.

EdSwippet

Rawhy wrote: »

I would just like to know a good strategy of accumulation vs income funds ratio. I do not know anything about this, is there something which I can read up on?

It looks like you might have misinterpreted the response you got in your earlier thread. What the poster was getting at is that investing for income means you necessarily miss out on probable growth stocks. In practice, the best results will come from holding both income stocks and growth stocks, and living off both dividends and some unit sales.

However, that's distinct from a fund's distribution/accumulation unit types. All this means is that the dividends are paid out to you (distribution) or automatically reinvested (accumulation). As you noted in the other thread, both unit types hold the exact same stocks -- which could be income focused, growth focused, blend, large cap, small cap, and so on --- so their performance will be identical. The only difference is in how you receive it, either regular cash or by occasional unit sales.

Rawhy wrote: »

Also, I plan to do the majority of my investing in an ISA wrapper. So when I sell, say £100k worth of accumulation units, can I purchase £100k worth of income units without losing the ISA benefit?

Yes (although you should be able to see from the preceding paragraph that there is no point whatsoever in actually doing this!). Once you have your money inside an ISA you are free to move it around as you wish. The only time the £20k or other annual allowance comes into play is on new ISA contributions in from outside money.

MisterMotivated

I won't comment on the best strategy but, any money/shares/units already in an ISA will retain the tax benefits, regardless of the value, unless the resulting funds are taken out of the ISA. You could transfer it all to a cash ISA and the limit wouldn't be an issue, provided you complete an ISA transfer rather than just withdrawing the cash and trying to deposit it in the new ISA

bowlhead99

Rawhy wrote: »

Or reinvesting my dividends vs taking it out as income...

In another thread ( https://forums.moneysavingexpert.com/discussion/5969749/new-to-funds-got-some-questions#16 ) - I said I want to accumulate until £400-500k, then sell it all off and buy income funds. A user responded with this:

I would just like to know a good strategy of accumulation vs income funds ratio. I do not know anything about this, is there something which I can read up on?

.
Did you see my post #22 to that thread?

The overall returns of your investment will depend on what underlying investments the funds you choose to buy will actually invest in. Over the long term you probably need a mix of companies which pay out their profits as dividends each year (e.g. Shell or BAT, which pay a lot of income to the funds that own them) and companies which keep reinvesting in their business to grow it instead (e.g. Amazon or Tesla, who don't send much or any dividend income to the funds that own them). They will each do well or badly at different points in the economic cycle.

The choice of "Accumulation" vs "Income" versions of a particular fund is a an administrative choice, whether you prefer the ACC version where they internally reinvest the natural income received from the underlying investments, or the INC version where they send you the natural income which those underlying investments have sent to the fund.

Everyone is different in terms of

1) what they think their funds should be invested in, to give them a preferred mix of risk and reward; and

2) whether they would prefer to:
- a) receive the natural yield of their funds portfolio (using INC units); and then manually reinvest some of it or manually sell more units to get to their preferred personal annual cash withdrawal requirements; or
- b) receive no natural yield from the portfolio because their funds reinvest it automatically without sending it out to the fund investors (ACC units), meaning the investor has to manually sell units whenever he wants cash.

There is no perfect magic ratio which works for everybody, whether you are meaning the choice of mix in (1), or the choice whether to follow (2a) or (2b) or some mix between 2a and 2b.

(1) is pretty important because it affects your total return.

But (2a) vs (2b) is simply an admin choice; many people will want to take more spending money out of the portfolio than the natural income, so will inevitably be selling at least some units each year whatever happens; in which case perhaps it is not important whether they actually have the 'natural income' turned on (INC version) or turned off (ACC version).

Also, I plan to do the majority of my investing in an ISA wrapper. So when I sell, say £100k worth of accumulation units, can I purchase £100k worth of income units without losing the ISA benefit? Or can I just buy up to £20k worth of income units, and I lose the ISA wrapper on the £80k?

As long as the proceeds of your selling is kept in the ISA wrapper until it is invested again, it won't count as a new annual subscription. So if you sell an ACC fund, you can can choose to use the proceeds to buy exactly the same ACC fund again, or an INC version of the exact same fund, or an ACC or INC version of a similar fund, or an entirely different fund.

You can even transfer the proceeds to a different ISA manager and buy something on their platform instead. The £20k limit is just for new cash subscriptions coming in to the ISA from the outside world (e.g. from your current account).

Similarly, can I sell £100k worth of shares in a stocks and shares ISA, and transfer it all into a cash ISA, or will I lose the tax benefit of £80k due to the £20k limit?

If you *transfer* it using the approved process where you tell your cash ISA provider to go and get the money from your old S&S ISA provider while keeping the money inside the tax wrapper, there is no need to even look at the subscription limit.

If you *withdraw* the money from the old ISA to your bank account, then when you contribute it to a cash ISA from your bank account they will see it as a new subscription of money, and subject to the annual limits.