Investment funds are often made available in two classes: income and accumulation.1 Unlike train carriages, one class isn’t better than the other. In a contest, income vs accumulation funds always ends in a draw. That’s because they’re functionally identical, except for how they pay dividends or interest to their investors.
For brevity, I’ll only refer to dividends below. But the accumulation vs income funds rules apply equally to interest payments, too.
And everything we’ll discuss today also applies to Exchange Traded Funds (ETFs) as well as Unit Trusts and OEICs.
Note that ETFs sometimes replace the terms income and accumulation with distributing and capitalising.
The difference between income and accumulation funds
- The income class of a fund pays dividends out as ever-popular cash. This goes directly to your brokerage account shortly after the fund’s payment date. From there, you can spend them, reinvest them, or just watch the cash pile up.
- The accumulation class of a fund reinvests your dividends back into itself. This buys you more of the fund, increases the value of your holding, and compounds your return.
The graphic below shows you the income vs accumulation fund effect of reinvesting a dividend, as opposed to taking the money.
The 5p dividend raises the value of a single unit of your accumulation fund to £1.05.
Note, you don’t receive additional units or shares. The reinvested dividend simply increases the value of every accumulation unit (or share) that you own.
Meanwhile, the income version of the fund hands out its dividends. In fact the value of inc units of a fund actually drops slightly when dividends are stripped from its net asset value, ready to be distributed to the lucky fund owners.
Over time, the accumulation share class price of a fund gradually climbs higher than the income class. The retained dividends increase the capital value of these acc units.
But income owners do benefit instead from regular cash paydays. These can be spent on life’s little pleasures, bills – or on other investments.
Income vs accumulation fund returns
Happily, you get exactly the same investing bang for your buck with either class of fund.
The chart below illustrates the point. It shows the 10-year returns for a FTSE All-Share index fund in both accumulation (or acc) and income (inc) varieties:
The line on the graph shows identical returns for both funds when dividends are reinvested in the income version.
In this scenario, the income fund’s performance matches its accumulation sibling over comparable timeframes. (Bar the occasional rounding error.)
However if the income fund’s dividends are spent, then its value falls behind. You can see this in the next chart:
Now we can see how badly the income fund trails (red line) when we don’t reinvest its dividends.
The blue line of the accumulation version slowly diverges from the identical starting point as those re-invested dividends boost its growth like little rockets.
And so a yawning acc vs inc fund gap opens up over time.
The acc fund demonstrates the power of compounding dividends as and when they’re earned, retained, and reinvested.
Whereas income units leave all that up to you.
Still, there’s no right or wrong choice when it comes to selecting income vs accumulation funds.
How you use your dividends depends on your financial objectives and investing preferences.
But your choice does have knock-on effects. Let’s quickly run through the key reasons why you might pick income or accumulation funds.
Accumulation vs income funds: pros and cons
Why choose acc or inc funds? Here’s why:
Spending now vs spending later
Pick income funds if you want to use dividends as spending money. That’s particularly useful for retirees who want to live off their income.
Your inc fund payouts effectively provide a rule-of-thumb spending guideline. And you limit the hassle factor of periodically selling off funds to meet your expenses.
Accumulation funds are ideal if you’re building your pot – particularly in tax shelters. Your income is automatically rolled up into a snowball of future wealth. You needn’t lift a finger.
That’s appealing given the passive investing benefits of investing on auto-pilot.
Convenience has a value all of its own in investing. Viewed through this lens, your accumulation vs income fund choice is the one that best fits your lifestyle.
Controlling investment costs
If you need to sell units or shares to meet everyday expenses, then regular income fund cash distributions can reduce costs.
When you withdraw dividends from your account, you avoid paying dealing fees compared to selling down your investments.
Some people also like to use their spare dividends to pay platform fees.
Contrarily, if you plan to reinvest your dividends then acc funds enable you to avoid:
- Reinvestment costs
- FX fees
- The bid-offer spread
Your money is also put to work in the market at the earliest possible moment. That’s liable to be positive for your returns in the long-term.
Obviously you can reinvest dividends manually, too. But inevitably there’s a lag.
Fund managers must pay your broker the dividend. Your brokers must process the payment.
And then real-life sometimes gets in the way before you can do anything with the cash lying dormant in your account.
Many inc fund investors like the feeling of watching dividends roll in as live cash-money in their account.
There’s no doubt the ‘Ch-ching!’ morale boost is real. It can help you stay motivated during a long investing journey towards a faraway objective like FIRE.
The countervailing advantage of accumulation funds is that automatically invested dividends juice your returns without any danger of you self-sabotaging.
You can’t, for example, divert the cash into a wildly overvalued investment because you’ve been swept along by the madness of crowds.
And you won’t fail to reinvest into an asset on sale just because it’s taken a pounding lately.
The best habits are the ones that don’t cost willpower.
Acc vs inc fund taxation
When it comes to paying tax the critical point is that there’s essentially no difference between income and accumulation funds.
Your dividend tax, income tax, and capital gains tax liabilities are the same.
The main issue is you need to keep good records if you hold accumulation funds outside of tax shelters.
Our post covering tax on reinvested dividends in accumulation funds explains the extra step you need to take to protect yourself from being overtaxed.
If you don’t take that step, you could be unfairly taxed twice on the interaction between capital gains and reinvested dividends.
Your tax certificates and/or dividend statements from your broker should provide you with the paperwork you need to fill out your self-assessment form.
The tax certificate tots up the dividends you receive from your accumulation funds in a given tax year.
Hassle your broker if you’re not receiving this certificate after the first tax year you held your funds.
Note: you won’t get, nor need, a tax certificate if your funds are held within an ISA or SIPP. Hurrah!
Some people investing outside of tax shelters find it easier just to hold income funds.
Others – incorrectly – believe that receiving inc fund dividends will save them capital gains tax that could be triggered if they sell acc fund units to meet expenses.
But this is not the case. Accumulation fund dividends do not count towards capital gains.
Therefore you can sell acc units or shares equal to the dividends you receive without incurring a capital gain.
Does switching from accumulation to income funds trigger capital gains tax?
Switching between accumulation and income share classes within the same fund may not trigger capital gains tax – but it depends on how the tax rules are interpreted.
Snippets from HMRC tax manuals in circulation appear to suggest that such a switch doesn’t trigger a capital gains tax event.
But much depends on gnomic HMRC guidance that’s laced with technical terms and depends on opaque interactions between different pieces of tax legislation.
The tax manuals are also silent on what happens if you trade between an accumulating and distributing ETF.
The bottom line: get expert tax advice beforehand if you’re concerned about the capital gains tax consequences of a switch.
Again, capital gains are not an issue if your accumulation or income funds (or ETFs) are snugly secured in your tax shelters.
The difference between income and accumulation fund names
How can you spot an accumulating fund or ETF? The clue is usually in the name. Look out for these abbreviations:
C is for capitalising which is another term for accumulating.
Income funds or ETFs may also be termed distributing and tip you the wink like this:
Read more on Monevator about decoding fund names. You can also learn more about accumulation funds – including how to uncover their dividend history!
Take it steady,
- Funds with ‘inc’ in the title indicate income units. Meanwhile ‘acc’ indicates accumulation. [↩]
Thanks – another great summary of a subject that is just not explained very often. It took me a long time a while back to work out the difference, and even then I didn’t understand why the price was differnet between income and accumalation options of the same fund! Great stuff – keep it coming please!
Have you any thoughts on when it is preferable to buy income and accumulation units.
It can be useful to have income units once you start to live off your savings, since there will be no extra income tax to pay if you are a basic rate tax payer. If you have accumulation units, you will have to start selling them and may have to pay capital gains tax unless they are in an ISA or are below the threshold.
Also income can be re-invested in different holdings for rebalancing purposes.
So I like income units, but for my Alliance ISA Vanguard funds, I prefer accumulation units.
Thanks, Dave! Much appreciated.
Andy, I agree with your points. My assumption is that I’d transfer to income units later in life, though I haven’t looked into whether that’s possible without having to technically sell the funds and potentially incur capital gains penalties. My funds are all in ISAs so shouldn’t be a problem. Likewise for funds in a SIPP.
If there’s a cost involved in reinvesting then I’d definitely plump for accumulation units as long as I need to grow my pile. Using income units during the growth phase definitely depends on how much you trust yourself. I love getting divis from my ETFs. Definitely helps me fight the good fight. But then I recently withdrew some from one of my trading accounts and popped them in a savings account. I tell myself that I’ll use them to fund a purchase later, but will I really? Will I really add that extra little bit to what I would have bought anyway? I just don’t trust myself, see…
The Accumulator, yes I also thought it would be a nice idea to transfer from accumulation units to income ones, but I’ve never seen it offered anywhere so I assumed that I’d have to sell and buy if I wanted to change.
Why transfer to income units later in life? If all your investments are in ISAs or SIPPs and you don’t have to worry about capital gains, you can just sell as you need the income. Taking income or drawing down capital should have the same effect, although it might seem more reassuring that you aren’t selling your capital. Also selling investments during drawdown can be used to help you rebalance your portfolio.
Because most of my funds are Vanguard, so would be incurring a trading fee to sell. Same would be true if I owned capitalising ETFs. It would also be less faff and, I suspect, a psychological boon, as you infer. Again, I appreciate your points, and there may well be no need, depending on your personal circumstances.
did you buy vanguard through alliance trust in their ISA/SIPP?
Yep, in an ISA with Alliance Trust.
For the unwary accumulation units in high income assets could easily be double taxation as a lot of the rise in the unit price will stem from dividend income on which tax is paid at every distribution. Then when you cancel the units how do you accurately determine the true capital gain unless you have kept scrupulous records? Best to take the income and not have the hassle. In retirement the challenge is to use up your entire annual capital gain. Accumulation units make this task much more difficult.
Thanks for all the good articles. We have been following your website for a while. We are two IT consultants ( novice investors and only started passive investing after reading Tim Hale’s Smarter Investing book) trying to learn how the accumulator mutual funds work. We have been searching the internet and all we get is about Tax’s involved on these funds. Please can you help us on the following.
We only invested in ISAs and Vanguard LifeStrategy 60% & 80%. The questions we have are as follows.
1. How the dividends were payed in accumulator funds? Do you get more units for the amount of dividends each year?
2. How does the price of the fund get increased or decreased? We believe that in a accumulator mutual fund you get price gain as well as dividends.
3. Do we actually get any advantage of investing early in the financial year? I mean do we get more benefit than a person who buy these just 5 days before ex-divi date? Say this person can keep cash 11 months in a cash account and then buy the units and gain benefits from both sides. Do they take in to account how long you have been invested (in that financial year) for the dividends calculations.
Thanks in advance for your help.
Manoj & Robin
You don’t get more units when dividends pay out in to an accumulation fund. Instead, the value of each unit increases so you will see this as an increase in the price of the fund. Though of course that uplift may well be swamped by market moves.
You aren’t penalised for sneaking your move into a fund just before the ex-divi cut-off point. The advantage of being in a fund earlier is that you’ll benefit from any market gain that occurs. I don’t think it’s worth trying to be too clever about this.
If I have income units and the income is reinvested back into the fund, this will be done on a certain day every month, quarter, bi-annually or annualy at (hopefully) an increased price per unit/share.
If I have accumulation units, is the income reinvested back into the fund on the same date and will the same price per unit/share equally apply ( assuming that accumulation funds have to physically buy more units/shares with the income – but they might well use a different method ?!) ?
I just get the feeling that accumulation units might be more cost effective here – either buying more units/shares earlier and/or at a better (smaller) price.
I agree with Nick that even if you do not want dividend income, it is much simpler to go with income units and then reinvest the dividends (unless you really can’t trust yourself not to spend them on something frivolous). I am finding it very complicated to track the reinvested dividends on my current accumulation units so that I can correctly calculate the capital gain when I eventually sell them. I suspect most people will get this wrong and will end up calculating a gain that is too high.
Trouble is, it would cost £10 each time I reinvest the dividends. Might be worth it, for the sake of saving the hassle of tracking. I could build up the dividends from several different funds and then make one single purchase as appropriate to rebalance my portfolio.
I mean investments outside a tax-exempt wrapper (ISA, SIPP).
On the subject of tax wrappers, is the tax treatment of income and growth any different with either unit type outside an ISA?
I’m assuming income and capital gains tax will both be waiting to pounce, with no difference between the two unit types for tax cost purposes, is it just the way in which any tax due is clawed back that differs?
I am also a Nick but I heartily agree with my namesakes comments above. Accumulation units are close to a section 104 holding in shares. You must keep scrupulous records of distributions and your average book cost i.e. the average accrual cost in line with section 104 rules. The government have encouraged accumulation units because many punters overestimate the final exit CGT and effectively pay tax twice. Multiple disposals in a given tax year require accurate determinations on comparitively small holdings. Many people never get to understand this. Lets have a comprehensive article please that covers income tax and CGT over the full life cycle of an accumulation holding that has paid out dividends. Many don’t pay out anything because all the underlying dividend stream is gobbled up by managment fees in which case the issue doesn’t come in to play. Its complex folks. Stick with income units if you can.
How are future/outstanding dividend payments handled after selling units of an accumulation fund?
Say I hold a FTSE tracker (ACC) on the United Utilities (or Fund???) ex-dividend date, but sell it a week later…
Will I receive the dividend separately when it’s paid, receive nothing at all, or, is it somehow magically already included in the price when I sell?
You will receive the dividend for the number of fund units held on the ex-dividend date whether you have subsequently kept the units or sold some or all of them.
On a different subject:
I hold some accumulator units (group 2) and receive a tax certificate showing dividends paid + equalisation sums.
I’m trying to work out the actual income received (dividend yield) – is this just the “dividends paid” figure or the sum of “dividends paid + equalisation”
Also, if calculating the “Total Shareholder Return” would it be:
(Unit price at start of period – Unit price at end of period + Dividends paid) divided by Unit price at start of period
(Unit price at start of period – Unit price at end of period + Dividends paid + equalisation) divided by Unit price at start of period
to take into account the fact that the equalisation is a return on capital?
I have an life policy that has a saving element linked to a Unit Trust. From the above is it safe to assume my savings have been placed in Accumulation units. The policy document only gives the name of the Unit Trust
I have my portfolio running with TD direct investing. It’s mainly down – I have 20% in gold which is fine with me. But I also own domestic and international index trackers with vanguard, I know it’s only been a few months but how do you know when are any earnings reinvested into the fund?
You should find the dividend distribution date buried somewhere in the fund documentation, though it’s not in a consistent place. Here’s a piece that tells you how to work out how much your accumulation units are paying you: http://monevator.com/accumulation-funds-dividends/
How do tracking funds work if the dividends are automatically reinvested (i.e. accumulator)? Do the acc funds show a tracking error which is equal to the dividends received or is there an “acc index” they follow? For example, if the FTSE went up 10% in a year I would expect a working “inc tracker” to increase in value by 10% but the “acc tracker” to go up by 10% + dividends? I am not sure how you would know the accumulating tracker is working.
Also I am now thoroughly confused about tax on dividends. I was going to buy some accumulating trackers as that seemed the simplest option. However it now sounds like the complicated one: do I have to declare to the tax man dividends that are automatically reinvested (and pay income tax on them out of other pots of money)? Should I then keep a track of what proportion of the fund was effectively bought with dividends and so is capital injection rather than capital gain? That sounds extremely complicated and I can’t imagine many people would attempt that calculation – fewer still would get it right.
Steve, I don’t know how to explain it any better than in the picture. The dividends increase the value of the acc fund over and above the inc fund.
Yes, if you have taxable acc funds you need to keep a track of the dividends and declare them on your tax form. Here’s a piece to help you do that: http://monevator.com/accumulation-funds-dividends/
You could sell fund units to cover the cost if you didn’t want to pay cash from elsewhere.
Some people will use a tax accountant to help with the calculation.
The graphic is clear enough. I think my question is more to do with index tracking funds than “acc” vs “inc”. In fact I’ve just found http://monevator.com/tracking-error-how-to-measure-it/ which mentions choosing the Total Return flavour of index when comparing “acc” funds.
I was going to choose accumulating funds for simpler investing but I might now opt for income funds as it makes the tax returns that much simpler. I don’t see a risk in me spending the cash but it would result in a delay in reinvesting… I’m not going to reinvest without hours of getting the payout – that seems like work! Are there any guides on how to track capital growth correctly for tax purposes?
As I understand it, tracking capital gain with acc funds should be easier than with inc funds.
All you have to do is add your dividends to the original value of your acc fund and the rest is capital gain.
Whereas with inc funds, every time you reinvest, you create a new base point from which capital gain must be calculated.
I haven’t come across a good guide to this problem although the above reflects investor discussions I’ve read. Some people though prefer inc funds so they can use dividends to rebalance or pay tax bills or invest in new shares for funds.
All that said, here’s some HMRC guidance:
I would like to join Steve’s question. I’m not sure I get how the graph explains it (sorry…).
When corporates pay dividends, their market capitalization decreases and thus their stock price drops to reflect the transfer of money from company to share holders.
If I own an index-tracking inc ETF, the NAV of the fund will go down with the stocks, we will get perfect tracking and I would additionally get the dividend.
But if the dividend is reinvested in buying more shares per ETF-unit, the NAV of this unit must go up, and thus lose track of the index, right? or am I missing something?
How could the ETF stay on track with the index if it reinvests?
There are different varieties of index that take into account the reinvesting of dividends. Most ETFs will show performance against a net total return index that demonstrates the return including dividends but after tax.
I opted for an accumulation version of a HSBC FTSE All-share fund as I liked the option of not having to rely on my own self discipline.
I understood the notion that any dividends would automatically be reinvested, but when it happened for the first time, it was still confusing. It really wasn’t helped by the “equalisation” figures (which could do with a Monevator article on their own) but what really got me was that in my portfolio, my cost figure had gone up by the post equalisation dividend, meaning it seemed my overall portfolio was down (on paper)!
I trust that this isn’t the case and that either the fund is holding the cash waiting for an opportunity to invest or the dividend was so small that I just didn’t notice a corresponding rise in the overall current value?
@ Ross – Yes, you’re right, equalisation is something of a head-scratcher. Not sure what you mean by your cost figure? I must admit I don’t look for the bump in fund value, I rely on the announcement to know it’s happened.
Hi, my ISA is made up of Vanguard Acc funds. I’m simply trying to build a war chest for the future. But when I finally do want to draw down some income, is selling capital the only way to do so? If so, it’s not very attractive! Ideally I’d be able to simply change from Acc to Inc, but this will obviously carry a cost. Perhaps I should have gone for Inc in the first place and been disciplined about reinvesting. Can’t see the answer to this above. Any thoughts?
@Medicineman — Check fund switching costs. For a lot of platforms, it’s free. 🙂
So does anyone know if Interactive Investor allow fund switching (and if so if it’s for free).
Google doesn’t want to tell me.
If your broker charges £0 for buying and selling funds then fund switching is free. Otherwise you’ll pay the dealing costs. You can find those here: http://monevator.com/compare-uk-cheapest-online-brokers/
If you’re trading half a dozen funds from Acc to Inc then that isn’t going to cost you much next to a lifetime of investing. Personally, I think the auto-pilot reinvesting of Acc funds is invaluable. The best discipline is the one you don’t have to impose.
Thanks Accumulator. A one off dealing swap cost is something I’m happy to take. But wouldn’t you get hit with a massive CGT bill if you’d held on to acc funds for 20 years and then changed them to inc?
Good point, yes, if you’re holding them outside an ISA or SIPP and you hadn’t tax-loss harvested over the years then that would be an issue once you go beyond your capital gains allowance.
You could always defuse that in the years ahead by using up capital gains allowances to switch funds to close analogues.
Or sell down acc funds rather than live on the income.
Or get into inc funds now.
There’s no right or wrong ultimately, it comes down to the best fit for your circumstances.
quick question of clarification. i am using sharescope to record my transactions. how should i record the receipt of accumulation units when announced. should i record as a scrip dividend which essentially would appear as a cost. is this correct?
Hi James, sorry I don’t use sharescope so can’t help you with this one.
let’s assume you weren’t using sharescope which simply tracks and records transactions. if you were doing the same thing in excel, for example, how would you treat the distribution of accumulation units? the key is to be able to track annual return and then of course calculate gain upon sale (or not if it’s held in ISA or SIPP). since it;s not a cash how would i calculate the return?
how would the units be reflected when you come to sell? would the fund simply sell the units that i originally purchased and add those units that have accumulated?
I bought accumulation units in Woodford Equity Income, held in a SIPP and ISA. The units were purchased before the ex dividend date. I have recently sold units (after the ex dividend date) so do not hold any units at present. The payment date is 31st May. Will i receive anything on the payment date in terms of units ?
Accumulation units seemed the easy option for my ISA… I opted for ACC variants for the non-ISA part to, rather than over-think the issue and never invest. I’m doing my first tax return following this decision and think I chose the wrong one for the non-ISA part. I should have gone for INC variants as tracking the number of units owned at the ex-dividend date, remembering to keep a track of the dividend amount for future CGT and wondering if it gets attracts tax credits is just far more faff than I can be doing with on a sunny weekend.
Would transferring to the INC variants be considered as buying and selling different shares (so allowing be to realise any capital gains and start from a clean sheet re: CGT).
@ Steve – I believe selling an acc variant to invest in an inc version would trigger capital gains, but suggest you double check with your broker / HMRC and let us know for certain.
I hear you about the sunny day.
After much phone-based queuing and three operators in, the answer is “it depends, but probably won’t trigger CGT”. The final operator spoke with an inspector who thought a straight acc-to-inc switch would be considered a paper exercise and so the shares would remain within the 104 holding. The BlackRock annual reports might reinforce this, as they show the various share classes on the same fund sheet: i.e. the Emerging Markets fund report is the same for both the Acc and Inc variants – they are the same underlying fund. If I sold the BlackRock Acc funds and invested in Vanguard Inc funds this would be enough to trigger capital gains – even if they were tracking the same index.
BTW: the broker (Interactive Investor) have been practically useless as they want to distance themselves from anything that might be classed as tax advice. Vanguard have been equally evasive.
Thanks for coming back on this one, it’s really appreciated. I’ve recently experienced the very same issue with Vanguard – everyone is terrified of making it sound like they know anything about tax.
Here’s some stuff I’ve just dug up via a link which has taken me to salient parts of HMRC’s guides:
See this link: http://www.taxationweb.co.uk/forum/bed-breakfast-rules-for-unit-trust-acc-inc-units-t38722.html
HMRC’s view is that a switch between acc and inc units is just a switch between classes of the same unit. It is therefore classed as a reorganisation for CGT purposes, which means it is treated as not being a disposal and acquisition at all. So you will not use your annual exemption by switching between acc and inc units.
Link to HMRC manuals: http://www.hmrc.gov.uk/manuals/cgmanual/cg57709.htm
Many unit trusts offer accumulation units and income units. These should be treated as different classes of unit. Any switch from one class to another within the same unit trust should be treated as a share reorganisation, see CG51700+.
For capital gains purposes a share reorganisation is not treated as a disposal of the taxpayer’s existing shares or an acquisition of any new shares and new shares issued are treated as though they were acquired at the same time as the existing shares. This may raise questions of share identification when there is a later disposal, see CG51701.
So that would seem to suggest that a switch from acc to inc won’t trigger CGT but I’m no tax expert (as I think I’ve proved amply 😉 Definitely worth an email to HMRC I think.
Your links tie up with my current view.
My confusion as a consumer is that I don’t see the switch from acc to inc as a paper exercise, at least with Interactive Investor, as the switch costs me two trades for each fund (sell acc, buy inc). I have four funds so it will cost £80, or perhaps £46 if I time the transaction to happen around the regular investment date. This tax return doesn’t feel very passive at the moment, so it might be worth me paying for the conversion, or even switching fund providers to get my clean start.
I have got a question regarding HMRC top up for accumulation fund units in SIPP account.In the income fund,the dividend is credited into sipp account .I believe that if i use this dividend to buy more units then HMRC will give further credit into sipp account .In the same way,Do we get HMRC pension top up for distributions made in the form of accumulation units in SIPP account.
there’s no top up on dividend purchases for either account. I guess you’re talking about pension tax relief but that’s not payable on dividends earned in your SIPP
thanks for clarification.This dividend tax top up/pension tax relief idea came to my mind yesterday night.I googled but had no luck .I am going to continue with Accumulation plan.
CGT on ACC/reinvested INC funds just makes my head spin. It took me 4 years to get rid of a monthly savings fund while being sure I had no CGT liability.
I doubt many people have salary-expenditure > £40k+£15.4k, so generally the problem is taking a lump sum from an inheritance and managing it while waiting for the tax-free savings to soak it up
My solution now for savings outside SIPP/ISA is to take the INC dividends and invest them in something else. One FTSE tracker is considered different to another, and won’t trigger Bed and Breakfast rules.
One solution, if X is £200k
– Invest large sum X in fund A INC units
– Get the quarterly dividends and invest in pension/ISA and remainder in similar fund B ACC units (building a pot and doing this yearly will save your admin). Most people really won’t have the excess dividends to do this anyway
– Every year think about selling enough of fund A to take advantage of the £11100 CGT limit. Be generous with the margins, no point running close to the limit.
– Put the proceeds in an ISA/pension (use ACC for them), then invest in fund B
– Once A is exhausted start moving B back into a new A, but be cautious with the B numbers. Take a very cautious interpretation of the GCT rules. CGT=units*(current – first purchase), which is the worst possible case. After all, you shouldn’t have much left.
1) CGT is use it or lose it. Think each March how you can diffuse some gain
2) put monthly savings in tax free things like ISAs/SIPPs, only do large transactions for CGT liable things.
3) HMRC only demand CGT calculations if you expect to pay something, or dispose of funds 4*allowance, so 44400 (see https://www.gov.uk/capital-gains-tax/work-out-need-to-pay). Well worth keeping disposals below this to stop having to do the work.
Thanks for this – a helpful explanation of the pricing difference between income and accumulation units.
On a separate note could you please signpost me to the latest update on the slow and steady passive portfolio – the link above takes me to the original post I think.
The one main point for me that Income units trumps over Accumulation units is the issue of rebalancing over different funds. I expect to have a sizeable portfolio as I drip feed over the years and hope that one day the snow ball effect can be self feeding. The risk is that Accumulation Units will snowball all into one ‘basket’ if one fund performs particularly well. Thus I have chosen the Income route to give me more control over the rebalancing aspect of the portfolio.
In reality, I am not too sure if the issue of accumulation units causing a bubble to build up in your portfolio away from your desired allocation is a real problem or how long it can take to happen.
@TA… Think the HSBC reference may have run it’s course ?
Super simple and effective description of accumulating vs distributing.
One point to add might be the taxes. At least in Belgium this is a hot topic as dividends are taxed at 27 pct… Accumulating ETFs are in theory taxed when you sell them… Luckily, there is a way around.
My index fund is in a accumulating ETFs. Next to that, I plan to have a dividend portfolio, for the motivation that comes from the cash flow. The ration will be very much tilted to accumulating. When coming closer to FIRE, I will tilt it towards DGI.
I’ve wrestled over this subject for a long time and remember reading this article a while back with relief that there is no substantial difference between the two types. In the end I have decided that I will stick to INC variety for several reasons, notably:
a) I like the ‘feeling’ of seeing my monthly/quarterly dividends come in. yes I know they are still there in the ACC version but it just does not feel the same. It helps to keep me motivated in some way.
b) It makes working out any income liabilities with HMRC a bit easier than the record keeping and maths needed with ACC. I cant use SIPP or ISA as I am non-resident at the moment. So pay tax on UK earnings.
c) The dividends get reinvested every month with regular savings plan and I can in some small way help to rebalance i.e. I have the choice where my dividends get reinvested.
d) While I am disciplined enough I would not spend dividend income it does give me the flexibility to have the income if I really need it without having to draw-down at a bad time in the market. If I found myself out of work or unable to earn money for some reason, and really needed the income its there. But emergency only.
As you said there is no right / wrong with this one – its what works for us all I guess.
I have two objections to the accumulation units version of unit trusts:-
1. It can be the devil’s own job to get the unit trust manager to give you a tax certificate for the income that’s accumulated – after all, you have to declare it.
2. When you finally sell that unit trust, the capital gains calculation is:-
The sale price less (the original cost plus all those distributions over the years). Yes, all those distributions reduce your capital gains liability. And this means that, for as long as you keep an accumulation unit trust, you must keep all the paperwork.
So I’ve given up and buy the income versions. Furthermore, if you reach that Shangri-La of investing, rebalancing your portfolio, you can use the income to do (part of) it.
Dont forget that 5000 GBP of dividends are free of tax from this year.
So this allows buying a fund paying divs but not interest outside ISA
Great article – and interesting comments. I use the Acc units because they are simple and require no effort. It would be nice to see a few quid appear out of thin air, but then it needs to be reinvested, so for me simplicity (and gentle reinvestment discipline) wins the day. I can equally see the case for income units if they suit your temperament.
I guess it links into the theme that arises here frequently – that the worst enemy of the investor is the investor themselves – and knowing ones own temperament and behaviours is key to picking what works.
K. Don’t be fooled by the spin put on dividend tax. All dividends were tax free for basic rate payers, now only the first £5k is. This is a tax rise for basic rate payers, a reduction for higher rate payers. And as no tax is deducted at source, it will force anyone with dividends over £5k into completing a tax return
@amber tree — The tax situation is different in the UK, and is referenced in the article. Readers should note the comments that you’re taxed on the income in the UK with either sort of fund, and follow the link to here: http://monevator.com/income-tax-on-accumulation-unit/
@all — I updated this article, not The Accumulator (who is still neck deep in book writing with his Monevator hours) so the archaic HSBC reference is on me. I’ll yank it out and update the Slow and Steady link (thanks for responding to that query!)
I’d agree that outside of tax shelters, buying Income units is going to make for a far easier life. Even if you’re not currently earning enough to require you to fill in a tax return, you might be in the future and as some commentators have said at that point the historical compounding may come back to bite you in terms of tedious/impossible calculations and paperwork. Income units keep it simpler.
Inside tax shelters (ISA or pension) I think most passive investors still in the phase of building up their pots are best going for Accumulation funds for an easy life, provided trading such passive funds (for re-balancing) is free with their platform. The tedious paperwork risk goes away as you don’t have to report on holdings inside ISAs etc.
If you’re looking to draw an income (say in retirement) some will favour Income units and seek to live on the yield in an ideal world, and some will take a capital return approach and stick with Accumulation units which they sell down, as we’ve debated elsewhere. 🙂
@JohnB — It’s more nuanced than that for most people, because they won’t earn more than £5,000 in dividends outside of ISA/SIPPs.
Higher-rate taxpayers who might last year have paid tax on dividends may pay nothing this year, if they do not receive more than £5,000 in dividends.
That’s really the critical cut-off point in these changes (and why it’s much worse if you take an income from work via dividends, where it’s very easy to receive more than the £5,000 limit.)
All that said I’d agree one should put everything you can in ISAs or SIPPs before starting to use this £5,000 allowance as any sort of tax shelter. Who knows how long it will even last in this form? 🙁
I also fully agree that investors with sufficient funds/investments outside of ISAs/SIPPs should defuse their Capital Gains, and probably make it a core part of their strategy. 🙂
We’ve just had a letter from M&G saying they were changing their policy as to where they took their management fee from. It was a hodge-podge, but they were standardising on taking the fee from dividends for ACC, and from capital from INC. This makes sense given the nominal goal of each fund class, but would make a difference in the tax paid. If the charge was 0.5%, then switching from a capital to income charge would change a 3.5% dividend to 3%, resulting in less exposure to dividend tax, but more to CGT.
Other providers may be doing the same, so keep an eye out, especially if dividends rise and take you into a taxable band.
from my experience with HL and iweb you do get a tax cert which tells you what the divis were for any acc units in a given tax year. This makes it pretty easy to fill in your return. its also quite nice that you don’t have to declare and CG if its below the thresholds as given on the hmrc site. So assuming your not making some large sales, acc units can be pretty painless in taxed accounts.
The issue I have with Acc units is that the “dividend” simply pumps up the value of each unit, you don’t actually get any more units. This means that if the value of the Acc unit goes down, you’ve effectively lost any benefit of that “dividend”.
With the Inc units, you get a divi paid out as cold hard cash, which you then *can* use to buy more units, or else just enjoy the £. If the capital value of the unit goes down, at least you have either (depending on what you did with the divi) (a) more units (if you reinvested), or (b) a higher bank balance (if you simply took the cash and saved it).
Given markets (in the UK at least) seem to be drifting sideways (and frankly, seem to have been for years), Inc units from which you’ve had an income paid out to you seem (to me, psychologically), to be “better” than divis being “retained” in the Acc unit, which saw a slight increase in the unit price, but which didn’t get you any more units, and then promptly tanked in value following the latest credit crunch/herd panic/brexit worry/remain worry/Greek debt crisis/general Euro crisis/US interest rate rise/war/death/pestilence/famine/[insert preferred black swan event here]
@Dragon – thats pretty shaky stuff there, not that rational. What if the market goes up?
You don’t have to worry about what seemed to happen in the past, as the data is there, we know what happened, i.e.
Hence why I said “psychologically” 🙂
If the market goes up, great. My Inc units are worth more *and* I’ve had an actual divi, instead of something that looks suspiciously like an accounting exercise.
Interesting link you sent. Looking at that, if you start from 2008, in very crude terms, it looks suspiciously like it takes you all of 2009 and 2010 to cancel out 2008. 2011 and 2012 pretty much cancel each other out. 2013 was good and then 2014 goes down again. So in 6 years, in real terms, an increase in only 1 year. Now, OK, that’s a relatively short period in share terms, and things will look different for other indices, but for the UK’s bellweather index, that’s a pretty depressing pattern.
In some ways, that info only really serves to show that market timing (and reinvesting divis) is all! i.e. if you invested at the height in 2007, on a capital value basis only, you may well still be underwater, even now. On the other hand, if you invested at the low in 1994 and sold out at the height in 1999, you made
The FTSE 100 barely staggered over 7,000 in March and April last year. Given it was just shy of 7,000 in December 1999 and is currently at 6,300, that looks like going sideways to me, at best. And that over a 15 YEAR period. Which is starting to look like a long time!
Obviously the performance of individual shares will vary widely.
Interesting article here:-
@John B – Are you sure that’s how it works? Surely a 3.5% dividend will be taxed as such. The fact that the provider takes the cash fees from that dividend is irrelevant for the tax calculations. My understanding is that direct purchase and sales costs (“dealing” costs, including stamp duty) can be allowed for in CGT calculations but not general platform charges (“holding” and “management” costs) and the like.
@Rhino – I’ve found the HL tax certificates to be clear and helpful…but far too slow. I like to complete my tax return on 7th April (usually because HMRC owe me money). This year the tax cert arrived 24th May.
The problem I’ve found with (non-wrapped) accumulation funds is the “Equalisation payments”, which is a lowering of cost for CGT purposes. Bit of a pain as – potentially many years in the future – I may have to work out a purchase price that is not as simple as “cost of share bought less any dealing fees”. Keeping good records is the key…
Their example suggested switching charges from out of income to out of capital would increase the INC payout and increase tax. I threw away the piece of paper though.
@Richard – wow, that is unbelievably organised, less than a week in and its done. I’m more of a late december kind of guy as the deadline looms – so at that end of the spectrum a may tax cert delivery is not a problem
I have a mix of accumulating/capitalising funds/ETFs and distributing ETFs. I do like the sense of winning the investment game that dividends provide, but they also provide cash for my small Australian super account that requires minimum cash balances for fees.
I used to invest all ACC units back in the ’90s and ’00s (and I’m glad I did), but then when I started migrating holdings to online platforms I found I preferred the flexibility INC units gave me to redeploy the income elsewhere (and at some point I anticipate living off it). By the time the FTSE100 had got up to 7000 I was redirecting most of my portfolios’ yield into property and fixed interest. As it sunk back to 6000 I steered the income flow back towards reinvesting in equities. With ACC units I wouldn’t have had that freedom… sure, I could just sell and buy ACC units to achieve any target asset allocation, but using the dividend flow to take me towards where I want to be seems a smoother ride and probably keeps me from overreacting. The way things are currently I don’t mind rolling up cash to keep dealing-cost impact under control (or to wait and see what happens with the referendum for that matter).
So I came to the site last year and managed to come up with answers that I think suit me best as regards the following :
-Proportion savings o/pay mortgage/proportion to invest
– Pension or ISA
– Shares / Actively managed funds/ Passive funds
BUT…I’m the 68th commentator on here and for ISA or pension investors the INC/ ACC question appears to be akin to Coke / Pepsi :0)
I set up ACC units in a drip feed and leave strategy…but secretly wish I could see the divis “rolling” in …
Hi PA, I agree. You can record them rolling in by following the instructions here: http://monevator.com/accumulation-funds-dividends/
Tells you how to find out your ACC units dividends.
@PA… thanks… I tried that and it is no quite the same :0)
I know this sounds nuts, but I have six funds I actively contribute to…and I think I’m going to buy £100 worth of INC of each one…that way I can see what dates the dividends are paid and what pc they were…then simply multiply that by £amount of ACC funds to see what my total dividends were…
Haha. I sympathise and can see the method in your madness 😉 Be careful the divis aren’t different.
@anyone using Charles Stanley Direct
You can see the dividends received in Accounting funds by going to
– dashboard, my direct accounts, stock movements
Very interesting I might add ;0)
What about recurring investments?
In comment 24 TA suggests that tracking CG is easier with Acc than Inc funds. I think that’s true in the specific case of a one-off investment where you reinvest dividends. But if I make recurring investments, I need to keep track of total cost of lots of purchases anyway, whether I buy Acc or Inc.
And if I sell part of my investment, I need to adjust my cost basis, again whether I am in Acc or Inc.
In fact, I think my broker should report my total cost anyway. For Inc shares, this is the same as my cost basis for CGT purposes, but this is not so for Acc shares as has been discussed on this thread.
So it seems to me that for taxable accounts where you are making recurring purchases and/or sales, you will be thankful come tax day that you use Inc rather than Acc.
Does that make sense?
Calculating CGT on Acc funds can be horrible, and allowing for the conversion from dirty to clean funds (the clean fund often has a different unit price) when you come to sell the clean one adds another complexity.
I have found Fidelity provide a tool to calculate CGT incurred, that allows for income reinvested and equalisations. You can also see CG to date, to allow you to keep below the allowance. Very nice.
Youinvest say they provide CG calc at end of year- useful, but you cannot see ‘year to date’.
iWeb do not provide anything to do with CG calculation.
Hi Kraggash. Thanks for the tip! Would you mind posting a link to the calc? Cheers!
In case I was not clear: it only does it for the holdings you have with Fidelity platform, so you have to log-on to their site. It is a platform value-add that is something to consider rather than ‘just’ fees. It is under ‘Capital Gains Reporting’ under ‘Your Accounts’
Incidently you have to log-on selecting ‘investing personally’ (if you get the option) to see the CGT tool. If you select ‘investing with an advisor’ – eg if you are going via Cavendish – you do not see the tool.
I am new to self-investing and indexes etc. I have most investments in accumulation. I am retired but not taking income just yet. My question is……if the markets went pear-shaped how would that impact on the two types of investment? (monosyllables would be good for me guys 🙂 )
Hi Ray, it would impact acc and inc units in exactly the same way. Apparently US dividends were cut 50% during the Great Depression. I don’t remember seeing anything about how much dividends were cut during the 2008 crisis but a good Google search would probably conjure something up.
A quick question to anyone with the time or inclination to respond. Currently as an example, vanguard’s ftse all share inc class pays out on the 31st Dec with an ex div date of 31st October ( I think). So would you get close to double whack on your returns if you held acc shares from, say 5th Jan to mid September, accumulating the hundreds of divi payments that roll in throughout the year and then swapped out for inc shares ready for the bulk divi payment from the inc shares, also using this opportunity to rebalance your portfolio as you go? Obviously you open yourself to huge index swings during a brief transition between share classes…thanks
When you swap between the two, the income class hasn’t paid out, so the dividends you were due to receive would be included in the purchase price.
Hi, M&G have a ftse index tracker fund which shows a yield of 3.2% on accumulation units and 3.8% on income units. I don’t really understand why there is such a big difference, as the charges and distribution dates are identical. Could anyone explain why the yield shown is different? Thanks, Garry
I wish I had seen this article when I was a novice investor and bought accumulation shares held in a non tax sheltered account. I was told ( inaccurately as it turned out) by the platform I use that they didn’t include the dividend on the annual tax statement. Eventually I found the dividend information in the funds ‘s annual report but it wasn’t exactly straightforward. But worse still is the calculation for capital gains. I now only hold accumulation shares in my ISA.
Thanks for this update. I’m commenting only to thank Monevator for informing my investment decisions, after making a comment on one of the threads.
My wife and I had all our equity funds in ISAs (in accumulation units). We had found ourselves with more cash than we could invest last year following an inheritance, because we were reluctant to add tax complication by buying funds outside an ISA. Someone helpfully pointed out that by using income units outside an ISA we could easily check that the income stays within the £2000 a year which doesn’t need tax reporting, as well as CGT liability if needed. (Importantly they also explained, which I didn’t know, that all a fund’s income counts in the dividend allowance even if up to 60% of the fund is bonds). Now part of our strategy.
I wish I could thank the person by name, but I don’t now remember who it was, so instead thanks Monevator once again for practical advice.
Slightly off piste but does anyone have a problem with the date stamp on comments posted? Aside from the last post all the other 82 posts on my device are for dates varying between Sept 6, 2011 through to Aug 26, 2018. I guess it doesn’t really matter but just in case I reply or comment I like to know how old the post is.
As an aside there is growing amounts of speculation regarding what Sunak might do on March 3. Whilst all our tax arrangements are different I’d been interested in whether anyone is making any changes in view of what might be expected. For instance selling any AIM registered shares or funds in case the IHT benefit gets removed.
@Merlotman — This is an updated post from 2011. We occasionally update and repost old articles partly because new people come and ask the same questions, partly for SEO, and partly for sleep purposes. 😉
@all — It’s not just us who have some theory about tax being payable, however fiddly. Google around and you’ll find brokers and others saying the same. That’s not to say it’s not difficult information to come by. I agree at this stage platforms should be making it easier. But as I’ve discussed before, often platform operators seem as ignorant of some of the quirks of actually being an investor as anybody else.
Of course one can roll the dice on HMRC, just like any other tax evader. I’ve wondered too for example if/how they police ISA top-ups versus new ISAs across platforms. In theory it should be possible to reconcile all flows and accounts if they centralize that data. In practice, this sort of thing still seems unlikely to me given the problems with e.g. the pensions dashboard.
However as I said to a friend decades when I did my first piece of freelance writing when I had a job and was figuring out how to declare it to HMRC, if I wanted to commit a crime there are other paths I’d probably choose. Would I go and steal an iPad from the Apple Store if I thought nobody was looking? No, both both for moral/economic reasons and because I don’t want to risk being caught and all that it entails.
Same thing with taxes. I prefer to mitigate sensibly, avoid doing anything faintly borderline, pay everything due, and rest easy knowing that if I am ever unfortunate enough to be subject to a big investigation there shouldn’t be smoking guns all over the place that I have to account for. 🙂
If I have been paying into Acc funds in an ISA leading up to my retirement and then want to retire early, stop paying into the funds and start spending my savings, what is my best option? Sell a portion of my fund each month to spend it, or convert the funds to Inc ones and wait for the income to be generated and automatically distributed to me?
Great article explaining very clearly, thank you!
I had a dilemma a little while ago with a passive fund I’m invested in within my pension, but can get another that is very similar elsewhere for a slightly lower fund charge. I’m unable to transfer to my SIPP therefore would need to encash and re-purchase.
My concern was selling up and interrupting the compounding (of which I have 6 years at this point) rather than leave it alone to do its magic.
I posted this question on a forum and got responses that indicated I was ‘imagining something that doesn’t exist’ and another questioned how I’d come to this conclusion.
So, is selling up and re-purchasing causing a reset on the compounding or is it immaterial in the long run?
You don’t need to worry about resetting the compounding effect, essentially because money is fungible. For example:
You invest £1000 in a fund and leave it to compound for a decade.
Ten years later you’ve got £10,000. £1,000 is your original investment and £9,000 is the effect of interest on interest.
Sell up and you’ve got £10,000 to spend on a new fund.
£9,000 of that is still your compounded return which will still merrily snowball in the years ahead.
No matter where you invest the money, you only ever invested £1,000 in this scenario and the whole amount will continue to compound in another fund. So long as you leave it invested, reinvested dividends etc.
Hopefully that makes sense and answers your question?
Where you’ve got a point though is that the market can move against you when you sell out of one fund and buy another.
Say you sell your fund for £10K. But by the time it’s reinvested a day later it’s only worth £9750. That may mean it’s not worth bothering to move a fund for a marginal cost difference.
These two pieces may help you with that conundrum:
@The Accumulator Thanks for a great explanation. Apologies if this has been answered already but wouldn’t the dist fund overtake the acc as more shares are bought with the reinvested dividends? This would mean a greater amount of dividends every quarter/year and a greater increase in the number of shares reinvested and so on. Or is this covered by the growth in value of the acc fund?
The greater value of your acc fund shares is the same as owning more, lower priced shares in the equivalent inc fund.
In reality, you could also own your inc fund with a broker that’ll charge you for reinvesting dividends. You don’t have to worry about that friction with acc shares.