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How are fund dividends reinvested?

Investment | Unit Trusts Helpful? 14

Asked by pencasros, submitted 06 April 2014.

Open Quote I have just invested in a number of funds.My aim is for growth, not income. Most of these assets have letters like R ACC, A Acc. Some have Income 2 Acc, Income ACC, Income A ACC, Income R ACC, Income Z ACC and in particular, Income A Inc.My income is well below the new personal tax allowance of £10,000. I do not have to fill in a tax return.

Can you confirm for me, if all of the above reinvest any income or if any would pay out unwanted dividends on an annual basis, instead of reinvesting? If so, which and what steps could be taken to ensure reinvestment?
End Quote

Answered by Justin on 02 June 2014

There are a few points to cover here.

The first is that whether you hold accumulation units or income units, any dividends or interest paid out by the fund is potentially taxable. Just because you don’t physically receive the money, it doesn't mean you automatically avoid paying tax on it.

Accumulation units work by increasing the fund price by the amount of income that would otherwise have been paid out. It’s convenient and avoids any potential income reinvestment charges, but the equivalent income must still be accounted for – i.e. income is not converted into capital gains.

However, the chances are you won’t have any income tax to pay in any case. Dividends are deemed to be paid net of basic rate tax, so you won’t have any further tax to pay (although non-taxpayers and ISAs/pensions cannot reclaim anything). And interest payments will either be made net of basic rate tax (which non-taxpayers can reclaim) or gross (without tax deducted), in which case you won’t have to pay tax provided your total income is below the annual personal allowance.

And if you hold the funds within an ISA or pension there is no tax on income in any case, so even simpler.

The letters within fund names that you refer to, e.g. R Acc or A Inc refer to two things. The first letter is the fund version – most funds have several versions these days, each with differing charges. For example, ‘R’ might be a ‘retail’ version which usually means commissions are built into annual charges, while Z is usually a lower cost ‘clean’ version without such commissions. The ‘Acc’ refers to accumulation units while the ‘Inc’ means income units, whereby income is paid out.

If you hold income units, income will be paid out but the platform (or fund manager if bought direct) should be able to arrange for automatic dividend reinvestment, just double whether any charges apply to do so

Please note this answer does not constitute a recommendation or financial advice and should not be relied upon when making specific investment or other financial decisions. You should always undertake your own research into whether a product or service is appropriate for your needs and, if necessary, use a qualified professional adviser.

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