When you invest in a pooled fund, you often have the choice between ‘income’ (‘Inc’) and ‘accumulation’ (‘Acc’) units for a given fund. The two choices are merely two different ways of owning the same fund.
Most funds will earn at least some income from the investments they hold: dividends from equities, interest on bonds, etc. and probably a combination of multiple sources of income. The fund managers will generally re-invest that income back into the fund on your behalf. If you choose the ‘accumulation’ share class of the fund, this is what will happen. You won’t get any income paid out to you from the fund.
As a unitholder of the fund, however, you have the right to be paid out some of the income being earned within the fund. If you chose to invest in the ‘income’ share class of the fund, you will have some of the fund’s income paid out to you in the form of a cash distribution, with a frequency defined by the fund’s documentation. The amount paid out will vary slightly but will typically be close to a percentage amount set by the fund’s documentation, similar to how a company decides the dividend it pays out to shareholders. Over time, if you choose to receive an income payout, the value of the units you hold in the fund will increase by less than they would if you chose to invest in the accumulation units.
Some funds are designed specifically to generate income. If you are looking for income, it will make sense to invest in one of these funds. These funds are expecting you to choose the income share class, and the distribution yield (percentage of the fund paid out to its investors) will typically be higher than those funds which are not specifically designed to generate income.
If, however, you are working and earning a salaried or self-employed business income, it may not be efficient for you to take income from your investments. Viewing your investments as savings vehicles for the long term or for a particular future expense, it often makes sense for you to choose accumulation units (of a non-income fund) whereby ‘your’ investment income is automatically reinvested back into the fund for you by the managers. This becomes especially clear when you consider that even on income funds, distribution yields are likely only to be around 3-5%; even with a £100,000 investment, your income will be around £3,000-£5,000: not enough to meaningfully supplement your salaried or business income.
Income units of income funds are useful for those in retirement because the income supplements your contracted pension income (state + private if you have one). The income units provide a means of ‘drawing down’ your savings pot so that you don’t have to sell anything. Of course, if that still isn’t enough, you may have to begin selling your investments to pay for retirement. This is something we cover in other articles on retirement.
If you’re still earning, choose the accumulation units to get the best of the wealth compounding effect from your investments.
We refer to lots of linked posts in this post. We hope that by following the links you can answer any questions you might have, but if anything is unclear in this post, or you have any questions relating to anything investment-related, please submit comments or questions in the section below and we’ll do our best to answer them.
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