5 Reasons Why I Like Accumulation Units

Both income and accumulation units do exact same job. Ultimately the choice between them is a matter of individual preference and convenience.

I’m firmly in the passive investing camp.

Without going into much detail, my first ever investment was a leveraged disaster held through a partnership structure. It didn’t work out. My second investment was an index fund.

At first I found index trackers confusing – unit trusts vs ETFs, physically replicated vs synthetic, full replication vs sampling, Fantastic Investment Manager A’s vs Fantastic Investment Manager B’s funds. I wish that Monevator’s friend Accumulator had written this handy guide a couple of years earlier.

Never mind.

Two years ago, after long procrastination followed by a solid day of googling, I picked my first index fund and found myself talking to a lady from HL about a regular investment plan. I told her how much I wished to invest and quoted the fund’s ISIN, and then she asked me whether I wanted income or accumulation units. Thewhatprettyplease? Which are better? I see. Let me think about it and get back to you.

And back to Google it was, seeing as this handy guide wasn’t available either. That Accumulator chap was slack back then. 😉 In the end I settled on accumulation units. It works for me, and here’s why:

1. I’m lazy

Accumulation units automatically reinvest my share of the fund’s income. That’s one less thing for me to do.

I invest monthly and rebalance quarterly by adjusting the following month’s purchase allocation[1]. Since accumulation units don’t go ex-div, when I rebalance I don’t have to care where in the distribution cycle each of the funds are, and whether a dividend payment will mess up my freshly rebalanced asset allocation.

Accumulation units also save me some spreadsheet legwork. All broker platforms I’ve used show life to date capital gains and losses per investment as standard. If you only hold accumulation units that’s your cummulative actual return before platform fees.

2. I’m tight

I don’t like transaction costs as a matter of principle. Stamp duty is my favourite bugbear[2], but dealing fees annoy me as well. Wouldn’t it be the same if, say, the FT sold you an annual subscription and then tried to charge you 50p each time you wanted to read an article?

The value of my S&S ISA is low enough for it to stay with a percentage fee broker where I can trade funds for free. But the SIPP is on a fixed fee platform, and each investment purchase costs me £2 a pop. Am I too cheap to pay £2 without having to moan about it? It turns out that, sadly, I am.

Only two of the funds I invest in have a bid/ask spread, but the spread is c.5%. That’s a lot. If I took income in cash and reinvested it into these funds, I’d pay the spread on the reinvestment. Accumulation units allow me to bypass it.

3. I have years to go until I’m able to retire

The convention is that you should buy accumulation units throughout your working years, and then transition to income units when you retire and start to draw income from your investments.

For now I have at least nine years before I reach any sort of financial independence. As I (hopefully) approach The Day and start reducing my allocation to equities, I’ll probably start gradually moving money into income units. We’ll see.

4. There’s less temptation to tinker

Investor know thyself, they say. And I do.

My borderline ADD personality means that I manage many areas of my life by alternating between utter neglect and killing it with care. My garden is a good example of that. 😉

When it comes to investing, a monthly investment plan via a direct debit plus a written rebalancing strategy keeps me on the straight and narrow. If I had cash from distributions sitting there (staring at me) I know there’d be times when I’d find it impossible to resist tinkering.

5. All my investments are in tax wrappers

There is no difference in how accumulation and income units are taxed, albeit income units will provide you with cash for when the tax man turns up with a bill.

Since all my investments are in tax wrappers, tax is not an issue. If I did have large amounts invested in taxable accounts, I might see a reason for holding some of that in income units. Yet even then, given the £5k dividend allowance, there’d have to be a lot of yield for this to become relevant.

But what if I’m neither lazy nor cheap and am about to retire?

Ultimately, it all depends on your individual circumstances and preference.

I’ve heard that some people derive a lot of joy from seeing dividends roll into their accounts. Some others say that being physically paid investment income serves as a positive reinforcement tool and motivates them to keep investing. I’m not one of those people, but if you are, then more power to you. By all means, go for income units, colour your spreadsheets gold, whatever floats your boat and/or helps you in your journey to financial freedom.

Keep on trudging up that metaphorical mountain; it will be worth it in the end. It is Known.

Notes:

  1. Right now the portfolio value is small enough so I can rebalance with new money only. I’m aware that this may not always be possible going forward.
  2. The entire concept of a stamp duty is positively medieval. I can understand the rationale for it in a society where wages were often paid in kind: given the difficulties that such a system would pose for Their Majesties collecting PAYE, a transaction tax payable on transfer of a legal title to property was a practical solution to a complex problem. Nowadays, however, transaction taxes are nothing but blatant second-dipping: taxing the deployment of income that’s already been taxed.

23 thoughts on “5 Reasons Why I Like Accumulation Units”

  1. Hi 3652,

    Love it 🙂 You are spot on – the ease of acc. units in the “fire and forget” is a wonderful thing, but as you say each to their own! If I were investing outside of a tax wrapper than I would 100% use an acc fund (Vanguard LS most likely) regardless of the Divi income.

    Inside my tax wrapper, I take the dividends I have to admit. I have only 1 smallish holding of a fund in my ISA – everything else are direct shares or ETFs, so if I get round to rebalancing, then I need the cash. Seeing the dividends coming in each month and ticking another bill off the list is a great help for me on the motivation side, hence I do it, but the “just drip feed and forget” I can see really working!

    So when the portfolio gets larger, are you planning on transferring to a fixed fee platform?
    FiL

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  2. Thanks FIL 🙂 I think the cutoff point between fixed fee and percentage fee platforms is c. £20k for ISA and c. £40k for SIPP, after you take into account transfer costs. So I’ll be moving the ISA to a fixed fee platform sometime this year. Maybe.
    Why would you choose acc units outside a tax wrapper? You’d still have to pay tax on the notional distributions (exact same amount as you would pay on income units), but you’d have to raise the cash yourself… am I missing something?

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    1. Hi 3652,

      It is to do with the way I believe the tax is counted – if I take Inc units, they pay out every quarter (or whatever time period they are), and so it will count as income along with my salary, so would really hurt me. With Acc units the total value continues to rise within the fund, so the total value grows, however no income is paid to me, but I would get exposed to potential capital gains tax further down the line. The aim would be that once I FIRE I can then sell off within my capital gains allowance and convert to Inc units….
      Tax over complicates everything sadly!
      FiL

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      1. I see… Actually, that’s not really the case. Both income and accumulation units are taxed the same way (you pay the same tax on both). With income units, the fund’s income is paid out to you, and that counts as taxable dividends in that year. With accumulation units, the fund’s income is kept within the fund, but it still counts as taxable dividends to you, in the year in which that income is added to the value of the units. So it’s exact same tax to pay. You get a tax certificate that shows the taxable dividends on accumulation units (even none of it shows up in your bank account).
        https://www.youinvest.co.uk/faq/what-difference-between-income-and-accumulation-units

        Liked by 1 person

        1. Hmmm when I read the Monevator article (I cant remember the link I am afraid!) I thought that was not a tax I was due but on the investment itself. I will take a read, as if any of it does result in taxable income that is a complete bugger for me, I am trying to reduce my income from taxed sources at the minute!

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          1. @FIL – 3652 is definitely right – if you’re holding a fund outside a tax wrapper it makes no difference whether its acc or inc with respect to the dividend tax you have to pay. With accs you have to check your tax certificate, as 3652 says, when you come round to tax return time and stump up if need be..

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            1. To be fair I haven’t looked too hard at it given pension, 2x ISA allowance and mortgage, there isn’t anything left to worry about outside of a tax wrapper – but does mean I will need to look at alternatives to Acc units then if I want to invest outside of the wrapper 😦

              Thanks both – saved me from a potential future tax liability – I don’t ever recall seeing anything on the tax returns for this, but as I say, I dont have any acc units outside of a tax wrapper!

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  3. @3652 – I bet your not bypassing that bid/offer spread using acc units. Your prob just hiding it under the covers?

    could i ask what fixed fee SIPP provider you went for?

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    1. Unit trusts aren’t my area, but my logic was that the preliminary (aka “initial”) charge is usually the bulk of the spread. It’s due to the fund manager on new units. As I’m not getting any new units when the fund’s income is reinvested into accumulation shares, there’s no preliminary charge.
      You may be right about the rest of the spread, i.e. creation price less bid, depending on the mechanics of unit pricing. Though my layman’s understanding was that it’s slightly tilted to protect incumbent unitholders when you’re buying into a fund, and those who are staying invested in the fund when you’re selling. It might have to do with the fact that you bring in cash when buying units; cash has no disposal costs, so would be valued at nominal, but the offer price you’re paying does not take that into account. We’re talking small amounts on each individual contribution, yet funds tend to have net inflows of cash over time 😉

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      1. ah ok, i got totally the wrong end of the stick

        when you were talking about bid/offer spread i assumed you were talking about buying ETFs

        more like shares really but the F stands for fund so I thought thats where you were coming from

        thought it was a bit odd though as they’re hard to find in acc format, lions share are inc.

        you’re talking about dilution levies for unit-trusts and as such, yes, you’re prob right that you’re not stumping up for that when divis get automatically rolled up in acc units..

        in case FILs reading this, here are the relevant MV articles that he should prob read?

        http://monevator.com/income-units-versus-accumulation-units-difference/
        http://monevator.com/accumulation-funds-dividends/

        and most importantly

        http://monevator.com/income-tax-on-accumulation-unit/

        working out the dividends paid on acc units can be a bitch, which is why those tax certs are so handy as they’ve done it for you..

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          1. any chance of naming your fixed fee SIPP provider, reason I ask is I am on the verge of ditching HL to go fixed fee myself. Currently thinking AT or II.. So I’m looking for info on whats good and what to avoid..

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            1. I use YI (AJ Bell). They’re ok, though my tax statement didn’t turn up until November this year. I only trade a couple of times a year on that account (end of tax year mainly, though I did chuck in some cash into it July this year and then again in Oct).
              Haven’t had any issues with them that I can recall. Lifestrategy funds do the rebalancing and I adjust equity % by allocating more of new money to LS60 vs LS80, etc.

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  4. haha – now i’m totally confused again!

    “But the SIPP is on a fixed fee platform, and each investment purchase costs me £2 a pop.”

    YI is % fee not fixed fee for funds (0.25% on 1st 250k) and fund purchase is £1.50 not £2

    Have our wires crossed somehow here? (or have YI just had a massive charging restructure and MV broker table is out of date?)

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  5. What do you think the YI charges are?

    Say you had 250k in vanguard LS in a YI SIPP

    You dont think you’d pay 250k x .25% = £625 per year?

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    1. It looks like the fee structure changed in October and I somehow missed it, even though, judging from message history online they’d been going on about it since August last year…. But there haven’t been any hard copy letters, and I only found one email in junk folder. Must have accidentally blocked them or something. To be honest, I would have noticed it before March, just by looking at transaction history, but thanks anyway. I guess it’s saved me a few quid.
      I assume II is Interactive Investor. What does AT stand for and why did you narrow it down to these two?

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  6. Yes ii interactive investor. At alliance trust. These are 2 flat fee other than iweb/halifax who im already with for isa and unwrapped. Really the craic with the sipp is to go etf then you can premium platform at bargain cost. But alas no LS etf as of yet..

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  7. Just twigged that iweb and halifax are effectively aj bell under the covers for their sipp offerings.

    I might just use hslifax for the sipp as the concentrationrisk isnt actually really there. Ie its not actually halifax its aj bell

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    1. I’m looking at iWeb, a bit cheaper than AJ Bell fixed fee proposition was. £5 per trade, £3 on trade plan.
      http://www.iweb-sharedealing.co.uk/charges-and-interest-rates/sipp-charges.asp
      Has Vanguard LS funds.
      https://iwebfunds.webfg.com
      Interactive Investor also looks good. Has all the funds I need
      http://www.iii.co.uk/funds/fundfilter?task=show_fund_search&o=1&searchtype=basic&submitted=&l=50&FS__FSM__id=195&FS__FSS__id=&FS__fn=
      Both have VWRL, obviously.
      Halifax owns iWeb (??) Seems exact same thing. Both have tiered fee structure but with no custody charge. Who’s the custodian then? Halifax? Would be a conflict of interest, methinks.
      Still pissed off though, it’ll cost me to transfer in fees, plus I’ll be out of the market for a couple of weeks, unless I transfer investments not cash, which may or may not be an option for funds, and will cost additional fees.
      Annoying.

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  8. What shoul really piss you off is if you transfer from youinvest to halufax or iweb you are actually transferring from aj bell to aj bell! How should that cost you anything😀 i think yiuve got to transfer in specie or not at all as you could lise far more than youll ever save

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  9. sorry for the pedantry, but iweb tradeplan isn’t about saving you £2 on trades – what its saying is that in the SIPP you can have the tradeplan options for free, i.e. limit-orders, stop-losses etc.

    but you will still be paying £5 per trade

    If you have no reason to favor iweb, i.e. your not an existing customer, you would prob go halifax for the £2 regular trades if you’re monthly drip feeding from salary.

    but to be fair, we’re starting to get down to worrying about pretty small differences in cost, i.e. a few 10s of pounds a year..

    just to reiterate on who runs/owns what

    for ISA / trading

    halifax == iweb

    for SIPP

    halifax == iweb == AJ Bell

    and critically:

    halifax / iweb isa and trading != halifax / iweb SIPP

    Youinvest SIPP == halifax / iweb SIPP

    I’m just talking about who administers what here, not saying charges are equivalent.. the charges definitely aren’t and thats what we’re interested in..

    Like Lynn trying to convince Alan to buy a mini-metro to save pear-tree productions..

    “they’ve just re-badged it you fool…”

    there’s a whole lot of re-badging going on here…

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