Investment - Accumulation vs Income

Tommohawk

Hoping for some advice please! My wife and I have inherited some cash, and are trying to decide how best to invest/save it. We will put £20k each into a shares ISA to use this years ISA allowance, and keep about £40k as cash reserve (0.65% account) leaving about £130k to invest.  

I am retiring at the end of August, and will receive state pension (about £9k pa) and some small annuities (about £4k pa) – I will be paying basic rate tax for this year and in the years ahead.

I also have another pension fund (£85k) which I plan to go to drawdown next year, probably taking the tax free lump sum and using that for next years shares ISA allowance.

For the next two years my wife will have minimal income – she hasn’t yet reached state pension age and has no significant private pension. So the plan - I think! – is to invest this £130k in her name in a general investment account so that any income tax would fall within her annual tax allowance. Any CGT liability could be offset (transfer to spouse) although I don’t think we would exceed the CGT allowance.

The main problem is I don’t quite get how income tax/CGT is paid on income vs accumulation funds, so I can’t figure whether we should go for income or accumulation class, or whether in fact it makes any difference?

I’m looking at Vanguard because they are low cost, informative, and seem user friendly. Probably Lifestrategy 40% equity or other lowish risk fund.

I’d be grateful for any input from the knowledgeable folk at MSE - sorry for the long post!

george4064

In your situation, I’d go for Income units and here’s how I think of it:

1. If you need the income - go for Income units.
2. If you don’t need the income now but will need it in the near future (next few years) - go for Income units
3. If you don’t need the income now and won’t need it for at least 10 years or more - go Accumulation.

As an overarching rule, if you are investing outside a tax efficient wrapper (I.e. General Investment Account “GIA”) for simplicity and ease with tax reporting go for Income units.

Remember, you can always manually re-invest the income if you don’t need it which is virtually (but not exactly the same, but won’t get bogged down in the details) the same as holding Acc in the first place.

JohnWinder

Why do these funds exist in two forms, rather than just a single fund in which you have the option to choose, and choose again and again, whether you want income or accumulation? Whose interest are best served by having two fund types?

eskbanker

JohnWinder said:

Why do these funds exist in two forms, rather than just a single fund in which you have the option to choose, and choose again and again, whether you want income or accumulation? Whose interest are best served by having two fund types?

Seems to me that investors' interests are served by having this choice - some will appreciate the convenience of reinvested dividends while others will prefer to choose what to do with them.  As above, the 'best' approach may be influenced by whether or not the investing is being done within a tax wrapper, and it's also likely to be pertinent whether an investor is prioritising growth or income (not that VLS in particular is likely to fit the latter)....

Tommohawk

george4064 said:

In your situation, Id go for Income units and here’s how I think of it:

1. If you need the income - go for Income units.
2. If you don’t need the income now but will need it in the near future (next few years) - go for Income units
3. If you don’t need the income now and won’t need it for at least 10 years or more - go Accumulation.

As an overarching rule, if you are investing outside a tax efficient wrapper (I.e. General Investment Account “GIA”) for simplicity and ease with tax reporting for for Income units.

Remember, you can always manually re-invest the income if you don’t need it which is virtually (but not exactly the same, but won’t get bogged down in the details) the same as holding Acc in the first place.

OK thats great thanks for that. So if I go for income, there will be an income tax liability, which if we invest in my wife's name should fall within her tax allowance and therefore no income tax due, correct? 

And presumably it's the case that having opted for income, the asset value will not appreciate so there will be no CGT liability?

BTW over the next few years I will l move everything from the GIA into share ISAs, so the income tax and CGT liabilities will no longer apply. Its just the next couple of years I need to deal with to maximise my wife personal allowance and minimise the tax liability. 

ColdIron

Tommohawk said:

george4064 said:

In your situation, Id go for Income units and here’s how I think of it:

1. If you need the income - go for Income units.
2. If you don’t need the income now but will need it in the near future (next few years) - go for Income units
3. If you don’t need the income now and won’t need it for at least 10 years or more - go Accumulation.

As an overarching rule, if you are investing outside a tax efficient wrapper (I.e. General Investment Account “GIA”) for simplicity and ease with tax reporting for for Income units.

Remember, you can always manually re-invest the income if you don’t need it which is virtually (but not exactly the same, but won’t get bogged down in the details) the same as holding Acc in the first place.

So if I go for income, there will be an income tax liability, which if we invest in my wife's name should fall within her tax allowance and therefore no income tax due, correct?

Yes. But the same is true for Acc funds. Dividends are dividends no matter what you do with them. The tax treatment is the same

And presumably it's the case that having opted for income, the asset value will not appreciate so there will be no CGT liability?

No. The value of the Inc fund may appreciate, though not as much as the Acc fund as the dividends are retained within the fund, but again the tax treatment is the same. The gain in the Acc fund will be a mixture of gains (or losses) and dividends. Once you have stripped the dividend out the gain is the same

Alexland

Have you considered if some of this money could be used for additional pension contributions subject to the relevant limits each tax year?

Tommohawk

ColdIron said:

Tommohawk said:

george4064 said:

In your situation, Id go for Income units and here’s how I think of it:

1. If you need the income - go for Income units.
2. If you don’t need the income now but will need it in the near future (next few years) - go for Income units
3. If you don’t need the income now and won’t need it for at least 10 years or more - go Accumulation.

As an overarching rule, if you are investing outside a tax efficient wrapper (I.e. General Investment Account “GIA”) for simplicity and ease with tax reporting for for Income units.

Remember, you can always manually re-invest the income if you don’t need it which is virtually (but not exactly the same, but won’t get bogged down in the details) the same as holding Acc in the first place.

So if I go for income, there will be an income tax liability, which if we invest in my wife's name should fall within her tax allowance and therefore no income tax due, correct?

Yes. But the same is true for Acc funds. Dividends are dividends no matter what you do with them. The tax treatment is the same

And presumably it's the case that having opted for income, the asset value will not appreciate so there will be no CGT liability?

No. The value of the Inc fund may appreciate, though not as much as the Acc fund as the dividends are retained within the fund, but again the tax treatment is the same. The gain in the Acc fund will be a mixture of gains (or losses) and dividends. Once you have stripped the dividend out the gain is the same

OK I think I get that. So that means that if for example the exact same fund were available as either income or acc, the income tax liability would be the same either way but the CGT liability would be greater in the acc format? Sorry to be dim but just trying to be 100% clear!

Alexland said:

Have you considered if some of this money could be used for additional pension contributions subject to the relevant limits each tax year?

Good shout, and yes I have. This year I've earned about 10k so will top up my pension with that amount (MPAA not triggered) yet) My wife's will be topped up by £2880. 

jacko74

I don't see the point of inc and acc accounts.

Anyone can still withdraw as much or as little as they choose from an acc account anyway.

eskbanker

Tommohawk said:
So that means that if for example the exact same fund were available as either income or acc, the income tax liability would be the same either way but the CGT liability would be greater in the acc format?

No, the CGT liability would be the same either way too....

dunstonh

jacko74 said:

I don't see the point of inc and acc accounts.

Anyone can still withdraw as much or as little as they choose from an acc account anyway.

Some people like to be paid the natural income to their bank account whilst not selling any units.  Indeed, that was historically, the most common way.  Nowadays, an increasing number look towards total return and will sell units to fund their withdrawals toa allow them to take a fixed regular withdrawal.  However, both methods are justifiable and suitable.