Investors can feel overwhelmed when picking funds. From asset class to region and style and beyond, making sure a fund fits your goals and investment horizon is a big task.
And when you’ve finally made your decision, you’re suddenly faced with different share classes – and with the choice of "acc" or "inc" funds. Let's look at the difference.
What’s the Difference?
To start, "acc" and "inc" mean accumulation and income. They are usually the two different unit options for how dividends are paid out to the investor.
An accumulation unit reinvests dividends. That means when you’re buying this share class, the net income from the fund will be reinvested back into the fund at no charge.
As you might expect, then, an income unit does pay out the dividend, either into the cash account of your ISA or trading platform, or directly into your bank account. You can then spend this on living expenses or reinvest the money elsewhere.
When investing specifically with income in mind, the distinction is important. As James Gard explained earlier this week in his article on top income funds, many of the funds included in his list (which was based on the funds’ own "clean" share classes) are acc units.
James also noted fund investors who want their income paid out have different options on how regularly this happens, including monthly, quarterly, bi-annually and annually.
Sometimes this is specified in the fund title.For example, Janus Henderson Fixed Interest Monthly Income Inc does what it says on the tin.
What to Choose?
Mark Preskett, senior portfolio manager for Morningstar Investment Management, says the main benefit of accumulation share classes is the reinvestment of dividends provides a large portion of your total returns.
"We would always advise clients to buy the accumulation share classes," he says.
However, Preskett adds one caveat: you should choose the income share class if you are going to be relying on the fund’s income for your living expenses. But that should typically only happen in retirement.
A sensible approach would be to buy funds with accumulation share classes throughout your working years, and then transition into income share classes when you retire. Of course, rebalancing your portfolio is also important as your needs change over time, he says.
You may incur charges to switch from the acc to the inc share classes, but that all depends on rules laid out by your fund provider and the platform on which you are buying and selling your fund, explains Preskett. Some companies (including life insurance companies) offer investors the option to switch between share classes for free, he says.
Preskett also points out some funds only offer individual investors an income share class option, but those funds are few and far between.
What About Tax?
Yesterday’s Autumn Statement brought a flurry of tax hikes, including dividends. Currently, the tax-free allowance on dividend income is £2,000 but this will drop to £1,000 next spring and £500 the following year.
The budget also brought capital gains tax (CGT) changes: the annual allowance will be reduced from the current £12,300 to £6,000 in April 2023, then to £3,000 from April 2024.
There’s no income tax, CGT or dividend tax when a fund is held in an ISA or Sipp. If you’re not using one of these, however, the choice of share class could have tax implications. With an acc unit, the reinvested income is known as notional distribution and is taxed like distributions from an inc class.
Through the personal savings allowance, basic-rate taxpayers can earn up to £1,000 in interest tax free – £500 for higher rate earners. This covers interest in cash and investments.
When selling acc funds, CGT on anything above the new allowance is based on the value of the units. The original investment, and the income (or notional distribution), is not included.
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