Income or accumulation: which option is right for you?

Once you've chosen a fund to invest in, you'll often have another decision to make: should you choose an income or accumulation share class?

The difference comes down to what happens to the income generated by the investments in the fund.

• Income share classes pay that income out to you.
• Accumulation share classes automatically reinvest that income back into the fund.

If you're looking for a regular income from your investments, an income share class may be a good fit. If your goal is long-term growth and you don't need the income right now, an accumulation share class could be the better option.

What's the difference between income and accumulation?

Many of the shares and bonds¹ held in investment funds generate income.

Bonds typically pay a fixed rate of interest, which is why they're often referred to as "fixed income" investments. Shares can also generate income through dividend² payments, although these aren't guaranteed and can be reduced or stopped altogether.

Funds, including exchange-traded funds (ETFs), often come in different versions known as share classes. The underlying investments are the same, but the way income is treated differs.

Income share classes

Income share classes (sometimes called "distributing" share classes) pay income generated by the fund directly to investors at regular intervals.

This can appeal to investors who want their investments to provide a regular source of income.

Accumulation share classes

Accumulation share classes automatically reinvest any income generated by the fund back into the fund.

That means the income has the opportunity to generate returns of its own, in addition to those generated by the rest of your investment, helping you benefit from the full power of compounding.

Which option might suit you?

There isn't a right or wrong answer. It depends on what you're trying to achieve.

An income share class may be suitable if

• you want a regular income from your investments
• you plan to use that income to help cover your spending needs
• you're in or approaching retirement and would like your investments to provide cash payments

An accumulation share class may be suitable if

• your main goal is growing your investments over the long term
• you don't currently need the income generated by your investments
• you'd prefer income to be reinvested automatically rather than paid out

What happens behind the scenes?

Income generated by a fund isn't paid out immediately. Instead, it's typically reinvested by the fund until the next distribution date.

For income share classes, that income is then paid out to investors. For accumulation share classes, it remains invested within the fund.

What about tax?

Investing through an ISA or pension

If you're investing through a stocks and shares individual savings account (ISA) or pension

• you won't pay tax on income generated by your investments
• you won't pay capital gains tax (CGT) on investment growth

Investing outside an ISA or pension

For UK funds (and non-UK funds with UK reporting fund status) held outside an ISA or pension:

• you may need to pay tax on income received from interest or dividends
• when you sell your investment, you may be liable for CGT on any profit you make
• the tax rate applied to income depends on whether it's treated as interest income or dividend income

A point that's often overlooked is that accumulation share classes can still create a tax liability.

Although accumulation shares don't pay income directly to you, the income that is automatically reinvested is still taxable and needs to be reported on your tax return.

Any capital growth may also be subject to CGT when you sell your investment. However, accumulated income that has already been taxed can be taken into account when calculating your capital gain, helping to prevent the same income being taxed twice.

Vanguard General Account holders can find information about what may need to be included on a UK tax return on the General Account tax information page. This page also explains UK reporting fund status and how it applies to Vanguard Irish funds.

The bottom line

The technical details behind income and accumulation share classes can seem complicated, but the decision itself is usually straightforward.

If you'd like your investments to provide a regular income, an income share class may be the right choice. If you're focused on growing your investments over the long term and don't need the income today, an accumulation share class could help you make the most of compounding.

Whichever option you choose, you'll be investing in the same underlying fund. The difference is simply what happens to the income it generates.

¹ Bonds are a type of loan issued by governments or companies, which typically pay a fixed amount of interest and return the capital at the end of the term.

² Dividends are the payments some companies make to their shareholders out of their profits.

Investment risk information

Investing gives your money the opportunity to grow over time, but market movements mean values can rise and fall along the way.

Eligibility to invest in a Vanguard Personal Pension depends on your individual circumstances. Please be aware that pension and tax rules may change in the future and the value of investments can go down as well as up, so you might get back less than you invested. You cannot usually access your pension savings or make any withdrawals until the age of 55, rising to the age of 57 in 2028.

If you are not sure of the suitability or appropriateness of any investment, product or service you should consult an authorised financial adviser. Please note this may incur a charge.

The eligibility to invest in either ISA or Junior ISA depends on individual circumstances and all tax rules may change in future.

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Any tax reliefs referred to are those available under current legislation, which may change, and their availability and value will depend on your individual circumstances. If you have questions relating to your specific tax situation, please contact your tax adviser.

Important information

This is a marketing communication.

Vanguard only gives information on products and services and does not give investment advice based on individual circumstances. If you have any questions related to your investment decision or the suitability or appropriateness for you of the products described, please contact your financial adviser.

This is designed for use by, and is directed only at, persons resident in the UK.

The information contained herein is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so. The information does not constitute legal, tax, or investment advice. You must not, therefore, rely on it when making any investment decisions.

Issued by Vanguard Asset Management Limited, which is authorised and regulated in the UK by the Financial Conduct Authority.

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