Do income units really make sense in retirement?

[RichS]

Hello,

Let's assume my wife and I are maxing out our ISAs each year, and our pensions, and we ignore VCTs/EIS/SEISs for now.

We retire and have a portfolio of funds sitting in our "normal" (i.e. non-ISA) broker account.

Conventional wisdom says that you should convert the funds to income units and live off the income. But that's subject to income tax.

Doesn't it make more sense to simply keep or buy accumulation units, in which the dividends etc which would have been paid out as income are rolled up and the value of the fund accumulates? Then just sell say 4% per year? That way you potentially get charged for CGT, of course (but only if the funds has gone up), and you've of course got a CGT allowance. You don't get hit for income tax.

What am I missing?

just musing.... retirement is a long way off yet... but trying to work out what the best mix of investments would be, assuming as I say you've already maxed out your pension/ISA/risk appetite for VCT etc.

I seem to recall Terry Smith said something similar, but I think that was more about why companies shouldn't pay out dividends, which isn't quite the same point.

R

[xeny]

I understood you're meant to pay income tax on those rolled up dividends....

https://www.youinvest.co.uk/articles/sharesmagazin...

"Income rolled up into your accumulation units is known as a “notional distribution” and is taxable in exactly the same way as the distributions from income units. Any dividends that are automatically reinvested can be used against your £2,000 dividend income tax-free allowance, which means that if total dividends received/reinvested surpass this you may have additional tax to pay.

The other point to consider is that any income that is automatically reinvested into a fund is not liable for capital gain tax (CGT). This means the holders of accumulation units would have to keep a record of all the notional distributions so that they can adjust the calculation when they sell their holding in order to work out their capital gain. There is an annual CGT allowance of £11,700 before any tax would be due. "

I hold inc units in taxable accounts to make the record keeping easier.

[RichS]

Blimey! Thanks. I never knew that. So every year if I'm holding ACC units outside an ISA I'm supposed to account on my self-return for notional income in the ACC units? How am I meant to work that out? (not directed at you, more HMRC). And then subtract the accumulated notional income when I sell, to calculate the actual capital gain?

[LeoSayer]

You should be getting dividend tax vouchers for the non-cash distribution on the acc units which give you everything you need for your tax return. You deduct that non cash amount from the gain for the CGT calc.

[RichS]

Aah! Thank you. I knew it seemed too good to be true....

[Dr Mike Oxgreen]

xeny said:

I hold inc units in taxable accounts to make the record keeping easier.

I do the same. And configure the investment platform (Fidelity, in my case) to reinvest the dividends. The overall effect is the same as acc, but I get transaction records that show each reinvestment. It also has the useful side-effect of reminding me of the importance of dividends.