Accumulation or Income?

tintin_1929
tintin_1929 Posts: 20 Forumite
First Anniversary First Post Combo Breaker
in ISAs & tax-free savings
Hi All,
My colleague invests in an Stocks and Shares ISA. He tells me his strategy:


He invests in several funds but specifically selects the 'income' variant and not the 'accumulation' variant. However, he has set the income paid to be automatically reinvested.


Isn't this the same behaviour as an accumulation fund? I'm having trouble understanding why he believes this strategy works or is better than going to accumulation route?


Appreciate it if someone could help me understand

Comments

  • MallyGirl
    MallyGirl Posts: 6,617 Senior Ambassador
    Photogenic First Anniversary Name Dropper First Post
    all this would do is to incur transaction costs for reinvesting the divi. Unless he needs the extra transactions to make him a regular investor and bring down the fee per transaction then I can't see why you would do this. Maybe his platform has a different fee for investing dividends?
    Acc is simpler in the accumulation phase of your life, although if in an ISA it is a less marked difference
    I’m a Senior Forum Ambassador and I support the Forum Team on the Pensions, Annuities & Retirement Planning, Loans
    & Credit Cards boards. If you need any help on these boards, do let me know. Please note that Ambassadors are not moderators. Any posts you spot in breach of the Forum Rules should be reported via the report button, or by emailing forumteam@moneysavingexpert.com.
    All views are my own and not the official line of MoneySavingExpert.
  • tintin_1929
    tintin_1929 Posts: 20 Forumite
    First Anniversary First Post Combo Breaker
    Glad you're thinking the same, I am unable to see the logic in it especially as they offer an accumulation variant.


    I noted that the accumulation fund price was some 0.40p higher than the income fund. Could this influence the decision do you think? If he buys more of the income fund, he gets more of them, therefore his income payment is higher than the accumulation....?


    I doubt that's correct but I'm trying to make sense of it!
  • dunstonh
    dunstonh Posts: 116,358 Forumite
    Name Dropper First Anniversary First Post Combo Breaker
    Normally I pick income units but then I dont use platforms that charge transaction fees.

    There is no difference in the returns.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • tintin_1929
    tintin_1929 Posts: 20 Forumite
    First Anniversary First Post Combo Breaker
    Good to know. Thanks for your feedback. I have asked him about the platform, he uses a platform which doesn't charge to reinvest the income so he's not being charged any fees. I guess this works out better for him as when he's ready to draw income from the funds, he just stops reinvesting the payout.
  • dunstonh
    dunstonh Posts: 116,358 Forumite
    Name Dropper First Anniversary First Post Combo Breaker
    I guess this works out better for him as when he's ready to draw income from the funds, he just stops reinvesting the payout.

    Not necessarily. Natural yield is not a popular method nowadays. Fixed regular paid from the cash account is. But the natural yield can feed the cash account.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • tintin_1929
    tintin_1929 Posts: 20 Forumite
    First Anniversary First Post Combo Breaker
    Whoa, you just said a whole bunch of words that I didn't get there! Would you help me to understand better please? :-)
  • dunstonh
    dunstonh Posts: 116,358 Forumite
    Name Dropper First Anniversary First Post Combo Breaker
    Natural yield is the income from the funds (e.g. dividends).

    People wanting to take a regular "income" from their investments can have just the natural yield. However, that can be messy as the amount is variable and comes in at different frequencies. Or you have to limit your choice of investment funds to match your desired frequency of income.

    So, instead, they can a fixed monthly withdrawal which is taken from the cash account on the platform. It makes budgeting so much easier. However, the cash account would be eroded in value to zero if it was not topped up. So, the natural yield from the funds goes into the cash account.

    Periodically, such as when rebalancing, you can adjust the cash account balance by reinvesting any surplus or selling units to top up any shortfall.

    Some people will also use growth (through sale of units) to fund some of their "income". It can be quite tax efficient doing that.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • tintin_1929
    tintin_1929 Posts: 20 Forumite
    First Anniversary First Post Combo Breaker
    I really appreciate you taking the time to explain that to me, thank you. Really well explained, I completely get it now :-)
This discussion has been closed.
★ ★ ★ Meet your Ambassadors

Categories

  • All Categories
  • 343.2K Banking & Borrowing
  • 250.1K Reduce Debt & Boost Income
  • 449.7K Spending & Discounts
  • 235.3K Work, Benefits & Business
  • 608K Mortgages, Homes & Bills
  • 173.1K Life & Family
  • 247.9K Travel & Transport
  • 1.5M Hobbies & Leisure
  • 15.9K Discuss & Feedback
  • 15.1K Coronavirus Support Boards