Pension investments and dividends

NeilC1965

Hi, perhaps obvious to some and I think I understand , but want to make sure I have got the basics of how my pension investments work .
I have around £920k invested in various funds via a fund manager. The value of these funds goes up and down depending on the company performance amongst other factors. My fund value could increase by 5% pa for example, or also decrease .However these funds I am invested in also pay an annual dividend to shareholders. I understand that any dividends that my funds generate are then used to purchase more shares in the same company that generated the dividend , which then gives me, hopefully increased value in my fund holding?
Is this correct?
Also is there a way to have the dividend paid out as cash, rather than reinvested and would that be a good option?
Appreciate confirmation re the above , or correcting as appropriately!

Linton

1) There are two types of funds: INC funds pay dividends as cash, ACC funds add any dividends to the assets of the fund thereby increasing its value and price. You get a higher price increase rather than extra units from ACC funds. Most INC funds also have ACC fund equivalents.

2) If you have INC funds which pay cash, you may be able to automatically reinvest any dividends to buy extra units. That would only happen if you requested it.


It may or may not be a good idea to reinvest dividends in the fund that generated them. If you simply had the extra cash as a gift rather than as a dividend from a fund would you choose to increase your holdings in that fund rather than another or would you like the cash? One reason to keep the cash in the account is to pay any fees rather than selling units.

Novice_investor101

Dividends from income funds can be held as cash in your cash account (assuming this is a SIPP), to be reinvested as you please.

If you mean to actually have the Divi cash paid out to your bank account, then that would mean you are taking your pension income & would have tax & benefit crystallisation consequences.
If you're under 55, there's no option to take Divi's out of your pension wrapper.

[Deleted User]

Depending on the type of funds and account, the answer is “yes, you can withdraw dividends”.

The only real difference between dividends and capital growth in a taxable account is the tax treatment. Otherwise dividends are merely a fraction of your overall investment and there is no difference between withdrawing them and selling shares/units and withdrawing capital.

Some focus on “dividend investing” or “income funds” but that’s a mistake which tends to reduce diversification and lower expected returns.

cloud_dog

Deleted_User wrote: »

Some focus on “dividend investing” or “income funds” but that’s a mistake which tends to reduce diversification and lower expected returns.

But, more importantly, does it meet the individuals requirements, and might it remove the psychological considerations for the individual about when to sell down capital to meet their income requirements.

Linton

Deleted_User wrote: »

...
Some focus on “dividend investing” or “income funds” but that’s a mistake which tends to reduce diversification and lower expected returns.

It is a mistake to focus on them, but equally a mistake to reject them out of hand. That again can reduce diversification. As always the answer is the appropriate balance for your objectives.

[Deleted User]

cloud_dog wrote: »

But, more importantly, does it meet the individuals requirements, and might it remove the psychological considerations for the individual about when to sell down capital to meet their income requirements.

That’s true. Some find it psychologically easier to withdraw dividends rather than to sell shares. It’s a behavioural problem though. Very few people have enough investments to afford living of dividends alone (distributions are less than 2% in the US). Which drives them to a certain type of stock, usually in just a couple of industries. Often it’s companies with problems which pay 6 or 7% for a reason.

Linton

Deleted_User wrote: »

That’s true. Some find it psychologically easier to withdraw dividends rather than to sell shares. It’s a behavioural problem though. Very few people have enough investments to afford living of dividends alone (distributions are less than 2% in the US). Which drives them to a certain type of stock, usually in just a couple of industries. Often it’s companies with problems which pay 6 or 7% for a reason.

Err, we aren't in the US. At least the vast majority of contributors to this forum aren't. This is a foreign country, we do things differently here(to adapt a famous quote).

[Deleted User]

Linton wrote: »

Err, we aren't in the US. At least the vast majority of contributors to this forum aren't. This is a foreign country, we do things differently here(to adapt a famous quote).

But surely most Brits invest in the largest stock market in the world. Kinda dumb not to.

FTSE has an exceptionally high yield due to special circumstances and falls under the “companies with a problem” category . That’s temporary. Either the stock price will go up or dividends will go down.