Accumulation vs distribution

dont_use_vistaprint

I think I understand the core concepts here that accumulation reinvests dividend to focus on growth and distribution pays dividends to focus on income.

But can someone explain how this works out as an example giving say Vanguard life strategy 100 with £500,000 in a SIPP within interactive investor over a 5 to 10 year period.

When and how frequently does it pay or reinvest dividend? What kind of amount of dividend are historically paid on this example amount.

With the accumulation, would there be extra fees involved if you were to access the capital during that period for drawdown ? Versus accessing just the income if it was distributed.

Is distributed income treated as crystallised drawdown ? Does it impact the 25% tax free lump sum calculation. Is it treated differently if you are under or over 55 at the time is earned?

Are there any other implications of making the choice e.g. tax returns  (SIPP only not ISA or trading).

I’ll be 55 shortly and about to invest in this fund for 5-10 years , I’m happy with the risk and volatility, but I’m not sure which of the two options to go for. How do I make the correct decision?

Thankyou 

leosayer

I think I understand the core concepts here that accumulation reinvests dividend to focus on growth and distribution pays dividends to focus on income.

They work like this:

Income / Distribution units: The funds's income (interest and dividends arising from investments within the fund) is kept within the value of the fund and that value is reflected within the calculation of the fund's unit price that you pay to buy and sell units. On a set date, that income is paid out as a dividend to unitholders and the unit price of the fund will drop by the amount of the dividend per unit. 

Accumulation units: Same as above except the income is not paid out. As a result, the unit price doesn't drop like the income unit does.

In other words, the two versions of the same fund are identical iexcept whether income is paid out.

When and how frequently does it pay or reinvest dividend? What kind of amount of dividend are historically paid on this example amount.

All this info should be available on the fund manager's website.

With the accumulation, would there be extra fees involved if you were to access the capital during that period for drawdown ? Versus accessing just the income if it was distributed.

Transaction fees for selling fund unit tend to be £5 or less. Some platforms charge nothing. Distrbutions are variable so might not be the best strategy for meeting your income needs.

Is distributed income treated as crystallised drawdown ? Does it impact the 25% tax free lump sum calculation. Is it treated differently if you are under or over 55 at the time is earned?

No. Yes, No. Distributed income is generally paid into your pension's cash account so will be included in the 25% calculation. It will also be included if you hold  Acc units because the value is within the value of your fund holding. 

Are there any other implications of making the choice e.g. tax returns  (SIPP only not ISA or trading).

Not that I can think of. Income or capital gains on a SIPP (or an ISA) are not applicable for tax returns.

I’ll be 55 shortly and about to invest in this fund for 5-10 years , I’m happy with the risk and volatility, but I’m not sure which of the two options to go for. How do I make the correct decision?

I find the simplest approach is to hold Acc units and then sell the amount I need when need the money. That way you don't have unnecessary cash sitting on your account for long periods or unnecessary reinvestment transactions.

Linton

dont_use_vistaprint said:

I think I understand the core concepts here that accumulation reinvests dividend to focus on growth and distribution pays dividends to focus on income.

But can someone explain how this works out as an example giving say Vanguard life strategy 100 with £500,000 in a SIPP within interactive investor over a 5 to 10 year period.

When and how frequently does it pay or reinvest dividend? What kind of amount of dividend are historically paid on this example amount.

With the accumulation, would there be extra fees involved if you were to access the capital during that period for drawdown ? Versus accessing just the income if it was distributed.

Is distributed income treated as crystallised drawdown ? Does it impact the 25% tax free lump sum calculation. Is it treated differently if you are under or over 55 at the time is earned?

Are there any other implications of making the choice e.g. tax returns  (SIPP only not ISA or trading).

I’ll be 55 shortly and about to invest in this fund for 5-10 years , I’m happy with the risk and volatility, but I’m not sure which of the two options to go for. How do I make the correct decision?

Thankyou 

Funds actually reinvest incoming dividends continuously but, if not sheltered, an ACC fund is taxed as if there was a dividend paid when the INC dividend is paid, so essentially in the same way as an INC fund. Though of course you dont pay tax within a pension so this is irrelevent to you. Different funds pay dividends at different times,  annually, 6 monthly, quarterly or monthly.

Within a pension there is no financial impact of dividends on the 25% tax free calculation. Nothing different happens when you are 55.There are no extra fees for ACC funds. The only implication on cost would be if you chose to reinvest the dividends from an INC fund yourself when there could be a transaction cost.

WIthin a pension the diffierence between ACC and INC funds is the amount of hassle.  It may be worthwhile to include some dividend paying investments to cover the platform charges so you dont need to keep on selling a small amount of your fund. But it really doesnt matter very much so no need to worry about getting it wrong.

One point I would make is that 5-10 years is a short time period for VLS100 if you want to withdraw all the money and perhaps buy an annuity then.

However if you mean you may retire but will drawdown, keeping the fund invested for the whole of your life, it is much less of a problem.  In that case though it would be prudent to have a number of years income in cash or a safe investment by the time you retire.

dont_use_vistaprint

Linton said:

dont_use_vistaprint said:

I think I understand the core concepts here that accumulation reinvests dividend to focus on growth and distribution pays dividends to focus on income.

But can someone explain how this works out as an example giving say Vanguard life strategy 100 with £500,000 in a SIPP within interactive investor over a 5 to 10 year period.

When and how frequently does it pay or reinvest dividend? What kind of amount of dividend are historically paid on this example amount.

With the accumulation, would there be extra fees involved if you were to access the capital during that period for drawdown ? Versus accessing just the income if it was distributed.

Is distributed income treated as crystallised drawdown ? Does it impact the 25% tax free lump sum calculation. Is it treated differently if you are under or over 55 at the time is earned?

Are there any other implications of making the choice e.g. tax returns  (SIPP only not ISA or trading).

I’ll be 55 shortly and about to invest in this fund for 5-10 years , I’m happy with the risk and volatility, but I’m not sure which of the two options to go for. How do I make the correct decision?

Thankyou 

Funds actually reinvest incoming dividends continuously but, if not sheltered, an ACC fund is taxed as if there was a dividend paid when the INC dividend is paid, so essentially in the same way as an INC fund. Though of course you dont pay tax within a pension so this is irrelevent to you. Different funds pay dividends at different times,  annually, 6 monthly, quarterly or monthly.

Within a pension there is no financial impact of dividends on the 25% tax free calculation. Nothing different happens when you are 55.There are no extra fees for ACC funds. The only implication on cost would be if you chose to reinvest the dividends from an INC fund yourself when there could be a transaction cost.

WIthin a pension the diffierence between ACC and INC funds is the amount of hassle.  It may be worthwhile to include some dividend paying investments to cover the platform charges so you dont need to keep on selling a small amount of your fund. But it really doesnt matter very much so no need to worry about getting it wrong.

One point I would make is that 5-10 years is a short time period for VLS100 if you want to withdraw all the money and perhaps buy an annuity then.

However if you mean you may retire but will drawdown, keeping the fund invested for the whole of your life, it is much less of a problem.  In that case though it would be prudent to have a number of years income in cash or a safe investment by the time you retire.

Thanks for this yes I realise 5 to 10 is considered a little short for VLS100 But I’m not ever planning to buy an annuity and I do have other income and assets , this is approx. one third of my total investments, one third cash one third other assets

Secret2ndAccount

dont_use_vistaprint said:

Is distributed income treated as crystallised drawdown ? Does it impact the 25% tax free lump sum calculation. Is it treated differently if you are under or over 55 at the time is earned?

Are there any other implications of making the choice e.g. tax returns  (SIPP only not ISA or trading).
 

I think the bit you might be missing is that the drips of cash that drop out of the Inc fund land INSIDE the SIPP. Therefore there are no tax implications. It's all just money inside your SIPP.

With the accumulation, would there be extra fees involved if you were to access the capital during that period for drawdown ? Versus accessing just the income if it was distributed.

It is highly unlikely that the amount of dividends that fall out of the Inc fund will exactly match your income needs. You either have to pay a fiver to turn the cash back into more VLS100, or you have to pay a fiver to sell some VLS100 before you make a cash withdrawal.
Simpler, in my view, to hold Acc units, and sell some if you need cash.

gm0

The use case for inc depends on your deaccumulation plan.  

I use inc (not to the point of inconvenience on what I am holding - that comes first) - but where it exists as an equivalent option (size/liquidity, content) I do.

I sell NOTHING automatically for income.  I only sell at rebalancing events - once every 12-18 months.  This rebalancing trade recharges income buffer (part of the sequence buffer is inside the pension but not in equities).  Inc units auto recharge the income buffer quarterly/half yearly per the fund.    Purists will object that me controlling the timing of my rebalancing event - being conscious of what is going on -how volatile etc. is market timing and so "bad".    I consider this less bad than just letting it happen on my behalf.  

Pound cost averaging works in your favour saving up.  The same is not so obvious when selling.  You could consider the effect of volatility on these trades as a transfer of wealth from the pensioner to the saver.

So inc units and an income planning and drawdown strategy like this has the benefit that your income producting investments are not sold in a short dip.  Nothing moves until you tell it to.

You need to have a scheme that supports the rule set you need - spread across (preserving balance), biggest fund, cash first.  And to instruct them how to take income.  My "no sales" plan can be implemented with acc units.  And buffering in IGLT or MMFs etc.  Releasing funds for cash or by sales from units of specified non-equities fund as you and your platform capability allows.  

And the disadvantage that any cash (dividends included) is not in the market and so not exposed to the gains of the market (lost possible return).  Allowing of course for the possibility that said investments could plummet as well as dip.  Sequence risk.

Pat38493

Couple of additional points:

Leosayers explanation on the first answer is slightly simplified in that the fund won’t necessarily drop by the exact amount of the dividend paid out - there are various dates like “declaration date”, “ex dividend date”, “payment date”.  Also the valuation may change based on investor’s forecasts about the next dividend so it’s not so simple that the price will change on that day by exactly that amount to the penny (at least by my observation).

There is a site called Dividend max that gives some useful information about dividends paid out for many of the funds - you have to pay to get forecasts but you can get the history for free.

Unfortunately I never found a site that gives you a “trailing annualised dividends over time” figure like you can get with overall returns.

Pat38493

Sorry just to add:

- As Secret alludes, accumulation vs income has nothing to do with crystallisation or pension withdrawals.  If you have say £10K in an an II SIPP and it pays out £100 in dividends, you will see the £100 arrive as a cash balance within your II SIPP, so the dividends are still inside your pension.

- Another wrinkle - many (all?) Vanguard funds pay our their dividends in US dollar, even if the fund is based in the UK (or is an ETF on the London Stock Exchange).  Therefore you need to be aware what currency the dividends are paid in, and you need to be aware of any costs associated with converting the dividends to your required currency.  With II, if you click on your cash balance you will see the balance by currency and you cannot spend USD on a GBP fund purchase - you first have to convert it.

- Some platforms have a button “reinvest dividends” which will automatically reinvest the dividends for you, which they may or may not charge you for, and which may not be available for all funds.  This is not the same as having an accumulation fund since with an accumulation fund, you will never see any transactions in your SIPP related to dividends and you won’t need to care about it unless it’s in a taxable account like a GIA.

LHW99

One possible use for distributing rather than accumulating funds is that the distributions can be used in balancing without having to sell part of one holding to buy more of another.

So perhaps one buy transaction rather than a sell + buy. Still minimal over the long term.

gm0

As others have said.  FX is a factor (as can be witholding taxes).  Which in turn are driven by the fund or etf jurisdiction.  UK, Lux, Ireland etc.  Because the tax treaties then vary.  Most regular consumers are encouraged/limited to purchasing UK reporting funds (UKFRS) in the jargon - which limits the jurisdictions you will see regularly. 

Some of these aspects are "tricky" to get at in terms of clear unambiguous info for the consumer.   As they turn up embedded in unit prices, dividends etc.  

Just one of the ways both the government and the financial fund management organisations can still take a little drink.  And it is hard to find anything which is optimised on all dimensions at once.  

So I don't generally think it is worth sweating to much over it past a certain point.

Linton

In my retirement strategy the sole role of INC funds, with SP and annuities, is to provide sufficient income to meet expenditure  needs.  Generally ACC funds are only sold to buy other funds, either for asset allocation rebalancing or for increasing the size of the income portfolio. This minimises any concerns about selling when prices are low.

Holding income funds in ISAs minimises tax. ACC funds are held in both SIPPs and ISAs. There is an ongoing policy of moving investments from SIPPs to ISAs but only to the extent it can be done within the basic rate tax band.