Inc. or Acc. units in Retirement?

tigerspill

Hi,

I am just looking for a bit of a steer here as to whether I should move all of my investment units to Inc. units.

A little bit about my circumstances.

I retired at 53 (nearly 4 years ago) and took my DB pension on my 55th birthday.  My wife will take her DB pension in just over 3 years when she is 60.

My DB pension will cover the basic spending and we are currently funding discretionary spend from cash savings.  This will obviously reduce when my wife takes her pension.  When we get to SP age, the total income will easily cover all spend.

We have quite a lot in cash and investments - mostly in ISAs.  I have cash to cover around 5 years of need (pension top ups).  I know that some will find this very high, but this provides a degree of comfort and I have accepted the inflation risk.

All my investments (generally in Vanguard LS funds and global trackers, some PNL and CGT).  All of my VLS and trackers are in Acc. units.  I am now wondering that now I am in a decumulation phase, should I be moving some or all of these to Inc. units.  We are not planning inheritance and hope to actually spend the majority of our assets so will sell them over time and will allow ourselves to increase our spending over time (mainly travelling while we are able).

Thanks for reading.

El_Torro

Opinions will vary but I don't see much need for Inc funds, as long as they are in a tax shelter (pension or ISA). I can see the advantage if they're unwrapped, since it's easier to calculate your tax liability when you sell. 

I know you didn't ask but: I don't think 5 years worth of cash is overly excessive. Depending on your investments of course, but that amount of cash should help you not need to sell when your investments dip.

tigerspill

El_Torro said:

Opinions will vary but I don't see much need for Inc funds, as long as they are in a tax shelter (pension or ISA). I can see the advantage if they're unwrapped, since it's easier to calculate your tax liability when you sell. 

I know you didn't ask but: I don't think 5 years worth of cash is overly excessive. Depending on your investments of course, but that amount of cash should help you not need to sell when your investments dip.

Thank you for your response.
Most are in ISAs.  My wife has a small amount of cash in an HL SIPP and we will draw this down to zero in the next few years free of income tax.  We have some unwrapped and the plan is to move these to ISAs each tax year.
My cash holding is to allow us - as you say - smooth the way.

gm0

Most impacts in either direction are fairly 2nd order.  I don't see acc vs inc as a reason to choose a fund manager/version of a fund for particular asset class and coverage. 

Sure there are slightly different dividend and witholding tax treatments for currency FX rollup sometimes with funds of multi-country and multi-currency company stocks and then dividends. 

I use both types in my drawdown setup on my different platforms - one didn't really have a lot of inc.  I am very early in drawdown so I have not noticed any notable issues with either approach as yet.  Not expecting anything that major.

Like most I will be drawing more than natural yield alone (where inc units kicking income is of course a very simple design indeed).

My take therefore is that the inc type are relatively harmless and top up the cash buffer between rebalancings.  And the acc work perfectly well as well - selling enough at rebalancing to retop any buffer for ongoing income taken.

NedS

I don't think it really matters.

As you already have large amounts of cash, you do not appear to need the extra income, so I would say keep them as ACC units and sell units if you need to raise more cash. If you feel the need to steadily replenish cash as you are spending it, then INC units can provide that steady stream of income to help replenish what you are spending from cash reserves.

Bravepants

I swapped my ACC funds for INC funds last year. It is likely that I will only take the natural yield if I need it, otherwise I will re-invest the dividends. For me it was more a question of psychology as I might still want to invest (accumulate) in retirement.

If I do continue investing in retirement, it makes some sense to me to buy INC units rather than ACC units. Because I would only be taking natural yield, I wouldn't be selling ACC units if needed to then go and buy ACC units again. Taking natural yieled is a bit like drawing out the interest in a savings account...you can still save capital if you have it, but then you can also draw the interest out without spending the capital if you don't need to. 

In summary I think INC funds provide a lot more flexibility if you only need natural yield levels of drawdown from your fund.

dunstonh

I use INC units for everyone.       The income can be reinvested when rebalancing.  It makes CGT calculations easier (on unwrapped) and it saves messing around between Acc and Inc when you move to the retirement income phase.

tigerspill

dunstonh said:

I use INC units for everyone.       The income can be reinvested when rebalancing.  It makes CGT calculations easier (on unwrapped) and it saves messing around between Acc and Inc when you move to the retirement income phase.

Thank you for this.

I think that given that I already have unwrapped Acc. units, that I will have to get to grips with the CGT calculations anyway and were I to move to Inc. units, I would have to work out the gains.  I agree, these may not be simple and I maybe should have considered this at the time of purchase. 

Fermion

Bravepants said:

I swapped my ACC funds for INC funds last year. It is likely that I will only take the natural yield if I need it, otherwise I will re-invest the dividends. For me it was more a question of psychology as I might still want to invest (accumulate) in retirement.

If I do continue investing in retirement, it makes some sense to me to buy INC units rather than ACC units. Because I would only be taking natural yield, I wouldn't be selling ACC units if needed to then go and buy ACC units again. Taking natural yieled is a bit like drawing out the interest in a savings account...you can still save capital if you have it, but then you can also draw the interest out without spending the capital if you don't need to. 

In summary I think INC funds provide a lot more flexibility if you only need natural yield levels of drawdown from your fund.

I did exactly the same with my funds a few years before retirement and similarly I only the take the natural yield. I'm with HL and I find it much easier to calculate my Nett true yield (less charges) by monitoring the cash position. Also as I'm only taking the natural yield and have income funds so that  I find that I only need 1 year's worth of cash float. I also rebalance my portfolio about every 12 months to avoid over exposure to any one particular fund - (For example, my BNY Mellon Global Income fund has grown significantly by about 150% over about 7 years)

RogerPensionGuy

I'm currently looking to make my investments SIPP, ISA, GIA vehicles to have less emotional affect on me.

I know emotions are often the biggest problem for people and after all my reading and experience, I well understand markets do go up & down.

Over the last 15 years the markets have been pretty nice for me and I do factor in a drop of maybe 50% and maybe sits thereabouts for maybe 5 or 6 years whatever.

I'm a pretty passive investor and don't rely on using or cashing in investments unless I up my spending needs as I  have a sensible DB and full state pension in just a little time, plus an extra liquid cash buffer in premium bonds and a few gilts should I need cash quickly. 

I currently hold a high % of my investments in Vanguard LS100 accumulation units and happy enough with performance and costs.

I actually switched a few Acc to Inc units last year, all vanguard LS100. 

Looking at performance I can see the Acc has grow more than Inc and think the Inc will pay out about £6 a unit in these next two weeks.

It looks very like the Acc & Inc(+div) will look very similar in value terms.

I feel switching all Acc to Inc will avoid me trying to sell Acc units mincing over the prices and getting possibly emotionally mixed up.

By having all Inc units, it just fills up the cash in the account and leave it as cash or maybe MMFs and just let the cash or MMFs build up and then if I cash out, no emotions. 

If the markets tank a bit and feel my cash/MMFs just aren't needed, possibly buy more Inc units. 

I guess if markets tank and settle low for a block of years, I'll be be happy with the cash/MMFs, however if markets go to the moon, maybe I'll feel less happy.

I'm trying to find the balance between being sensible and keeping my emotions as totally disconnected as possible. 

I can't see any big issues switching all my Acc to Inc in my head. 

Any views comments most welcome please. 

Cheers Roger. 

Triumph13

Inc for unwrapped, but for wrapped my thoughts would be:

• If you plan to sell units for drawdown, then I'd go acc so as to fight the temptation to depart from the plan and try to only spend the yield.
• If you only plan to spend the yield, then obviously inc.
• If you really don't know what you plan to do with them, then inc might be helpful in persuading you to at least spend the income.