Share Classes: Accumulation vs. Income

"We would always advise clients to buy the accumulation share classes. With accumulation, the reinvestment of the dividends provides a large portion of your total returns,” says Mark Preskett, investment consultant for Morningstar Investment Management Europe.

However, Preskett adds one caveat: you should choose the income share class if you are going to be relying on the fund’s income for your living expenses. But that should typically only happen in retirement, he says.

While all investors are different, as a general rule Preskett advises buying funds with accumulation share classes throughout your working years, and then transitioning into income share classes when you retire. Of course, rebalancing your portfolio is also important as your needs and life change over time, he says.

Martin Bamford, a chartered financial planner and managing director at Informed Choice, echoes Preskett’s sentiments. Generally the accumulation share classes are for pre-retirement investors, while the income share classes are for post-retirement investors, he says.

But what if you’re approaching retirement and you own a fund with Acc shares, but you want to switch to Inc shares and stay invested within the same fund? What then?

You may incur charges to switch from the Acc to the Inc share classes, but that all depends on rules laid out by your fund provider and the platform on which you are buying/selling your fund, explains Preskett. Some places, such as various life insurance companies, offer investors the option to switch between share classes for free, he says.

Preskett also points out that some funds only offer individual investors an income share class option, but those funds are few and far between.

Alanna Petroff is a financial journalist with Morningstar.co.uk.