Investment - Accumulation vs Income

eskbanker

Tommohawk said:

eskbanker said:

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....

Gee I'm flummoxed! If the capital value has increased the same in either case, then over a given period of time with the income option you would have had an income of £x and a capital gain of £y on disposal. But over the same period with the acc option you would have no income and a capital gain of £y, the same capital gain on disposal as with the income class option. 

That would make the latter option a poorer deal, no? Same capital gain but no income?  I obviously have this wrong but cant see how! 

The capital value itself hasn't increased by the same in each case, but the dividends reinvested within acc units are effectively deducted from the gain that's measured for CGT purposes.

To use your notation, the capital value of the acc units increases by £(x+y) but because the £x represents incremental purchases from income, it's deducted from the CGT calculation, leaving the capital gain from both versions measured at £y for CGT purposes.

ColdIron

Tommohawk said:

eskbanker said:

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....

Gee I'm flummoxed! If the capital value has increased the same in either case,

But it hasn't. The value of the fund (or unit price) will be higher in the Acc class as it reflects the capital gain plus the dividends that have been retained within the fund (the Inc class paid them out to you as cash). Once you strip out the dividend in the Acc class the capital gain will be the same

then over a given period of time with the income option you would have had an income of £x and a capital gain of £y on disposal.

Yes

But over the same period with the acc option you would have no income and a capital gain of £y, the same capital gain on disposal as with the income class option.

No income? What happened to the dividends?

That would make the latter option a poorer deal, no?

Yes. It's just as well it doesn't work like that

Same capital gain but no income?  I obviously have this wrong but cant see how!

Same capital gain but the dividends are in different places. Retained within the fund for Acc and paid out with Inc

If Jack buys the Acc class and Jane the Inc class, Jack will have a higher value fund (or unit price) as it has the same capital gain as Jane plus the retained dividend while Jane only has the capital gain and a pile of cash from the dividends in her cash account

Same gain, same dividend (just held in a different place) so same tax

Tommohawk

Albermarle said:

Probably Lifestrategy 40% equity or other lowish risk fund.

A couple of things  maybe to ponder before going ahead.

 Although the big rise in equity markets over the last few years has been the main driver for the performance of VLS 40 ,( and many other funds ) the larger  non equity/bonds part has been performing quite well also. However there is a pretty clear consensus that bonds will struggle in the future months/years, and that VLS funds may not prove so successful as they have done until now. Or any fund with a lot of longer dated bonds in them . 

What could be a good alternative to bonds is discussed regularly on this forum with the usual variety of opinions expressed. There is no clear answer but one alternative is to invest in a high ( 100%) equity fund but keep a lot of cash back .

Or invest in more actively managed funds 

Or invest in a similar but not identical fund to VLS40 that is not fixed allocation ( 40:60 for example ) 

Diversify more into non equity or binds , like gold for example.

Not saying VLS 40 is a bad choice, but just to be aware that 'past performance is no guarantee of  future returns '

Thanks that's also a good point re bonds. I also wondered about actively managed funds and you'd think that might be a way of dealing with the bonds issue or with other uncertainties in the markets especially given I wont be that "hands on."

Tommohawk

Thanks all for your input - I'm very grateful and feel a bit more confident about my understanding of all this. 

bostonerimus

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?

It's a UK thing. They have separate accumulation and income funds and don't have the convenience of having a single fund with the option to reinvest capital gains distributions, dividends and interest or have the money deposited to a cash account if you choose. Of course they also don't have required capital gains distributions. In the US the funds must regularly distribute the capital gains, they are then taxed and the fund owner can choose whether to take the cash or buy more fund units.

I think having a a single fund type makes things a little easier when you change from the accumulation to the drawdown phase, especially if you are doing a total return approach as there's no need to change your investments, just check an online box to have the natural yield and maybe capital gains deposited into a cash account. Hopefully that will provide a bit more than just the natural yield and you won't have to sell units.

JohnWinder

bostonerimus said:

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?

It's a UK thing. They have separate accumulation and income funds and don't have the convenience of having a single fund with the option to reinvest capital gains distributions, dividends and interest or have the money deposited to a cash account if you choose.

Thanks. But why is it like this? I can't see how it's in investors' interests to need to commit to one type of fund, when an alternative would be that there is one fund, and as often as one wishes one makes an election for it to be reinvesting distributions or paying them out. Is there some interesting history behind the way it is?

EdSwippet

JohnWinder said:

bostonerimus said:

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?

It's a UK thing. They have separate accumulation and income funds and don't have the convenience of having a single fund with the option to reinvest capital gains distributions, dividends and interest or have the money deposited to a cash account if you choose.

Thanks. But why is it like this? I can't see how it's in investors' interests to need to commit to one type of fund, when an alternative would be that there is one fund, and as often as one wishes one makes an election for it to be reinvesting distributions or paying them out. Is there some interesting history behind the way it is?

Probably related to fees. When I first started investing, UK unit trusts might have had a 5% purchase fee (yes, really!), either overtly or through split pricing, and neither platforms nor ETFs existed. Accumulation units meant not losing 5% on dividend reinvestment. The move to single-priced OEICs and the creation of platforms has pretty well eliminated these outrageous purchase fees.

Interestingly, accumulating ETFs were rare until recently, but over the past few years ETF providers appear to have discovered them. This may (I'm guessing) be related to the fact that in some countries, though sadly not the UK, accumulated dividends are not taxed annually as income, but only on sale as more lightly taxed capital gain.

dunstonh

It's a UK thing. They have separate accumulation and income funds and don't have the convenience of having a single fund with the option to reinvest capital gains distributions, dividends and interest or have the money deposited to a cash account if you choose.

There are providers/platforms that will automatically reinvest distributions.  Often with the ability to reinvest into the same fund or alternative funds based on targeted weightings (i.e. reinvesting in the funds below the target weighting rather than those above).

Thanks. But why is it like this? I can't see how it's in investors' interests to need to commit to one type of fund, when an alternative would be that there is one fund, and as often as one wishes one makes an election for it to be reinvesting distributions or paying them out. Is there some interesting history behind the way it is?

History is the reason.   Before you had platforms.  Before you had software that did these things,  you had the choice of ACC if you were doing things like regular contributions and didn't want the income paid out to you.        And INC if you did.

Eco_Miser

eskbanker said:

To use your notation, the capital value of the acc units increases by £(x+y) but because the £x represents incremental purchases from income, it's deducted from the CGT calculation, leaving the capital gain from both versions measured at £y for CGT purposes.

And this is why you use INC units in a GIA, to avoid having to do this calculation, and keeping a record of all the dividends that make up £x.

JohnWinder

Thank you. Both historical reasons, front loading charges and no computers, are now history. I'm putting my hand up to vote for one fund with the convenience for investors to elect taking or reinvesting distributions according to their changing needs. And in setting it up they can make it do-able online.