Question
Some time ago I bought income units in an equity unit trust from a discount broker and automatically reinvest the income in new units. Recently I read that some fund managers make no initial charge whilst the policy of others is to levy the full initial charge on such new units. This could amount to quite a drag on returns over the long term. Which fund managers levy the full initial charge on income unit reinvestments?
If accumulation units are available would be worth my while paying the 0.25% fund supermarket switching charge to change my holding from income to accumulation units? Answer
Thanks for raising an often overlooked issue. When you buy an income producing unit trust there’s usually the option to buy income or accumulation units. Income units pay out the income while accumulation units simply increase the unit price to reflect the income being retained in the fund. Either way income is still taxable, but accumulation units are convenient if you want to reinvest income back into the fund.
It’s also possible to reinvest the income from income units, but historically a few fund managers have levied an initial charge on the new units purchased, potentially costing you 5% or more. This is a greedy practice and thankfully not very common these days, but it’s certainly something to watch out for.
How do you find out if your fund manager levies this charge? In theory it should be detailed in a fund’s simplified prospectus/key features, but it’s not always specified so you might have to phone and ask. Ideally units should be purchased at either the creation or bid price, which means no initial charge. Purchase at the offer price means an initial charge (see our unit trust page for more details on fund pricing).
Fortunately fund supermarkets don’t seem to levy an initial charge for reinvesting income. FundsNetwork confirms that reinvested income is not subject to an initial charge in its key features document. Cofunds and Skandia don’t make this clear in their literature, but on checking they both confirmed that there’s no initial charge when reinvesting income (Skandia will only take a charge if the adviser elects to take commission).
I also checked about a dozen of the larger fund managers and they all either reinvest income with no initial charge or convert income units into accumulation units free of charge – either way a fair result.
I believe a few fund groups do still charge for reinvesting income but I’ve not managed to find any. If any readers know of offenders please post below!
As you hold your funds via a fund supermarket you should be fine. But if there is a 0.25% switching charge, then assuming a 5% initial charge and 3% annual income it’d take around 2 years to profit from the switch.
Some time ago I bought income units in an equity unit trust from a discount broker and automatically reinvest the income in new units. Recently I read that some fund managers make no initial charge whilst the policy of others is to levy the full initial charge on such new units. This could amount to quite a drag on returns over the long term. Which fund managers levy the full initial charge on income unit reinvestments?
If accumulation units are available would be worth my while paying the 0.25% fund supermarket switching charge to change my holding from income to accumulation units? Answer
Thanks for raising an often overlooked issue. When you buy an income producing unit trust there’s usually the option to buy income or accumulation units. Income units pay out the income while accumulation units simply increase the unit price to reflect the income being retained in the fund. Either way income is still taxable, but accumulation units are convenient if you want to reinvest income back into the fund.
It’s also possible to reinvest the income from income units, but historically a few fund managers have levied an initial charge on the new units purchased, potentially costing you 5% or more. This is a greedy practice and thankfully not very common these days, but it’s certainly something to watch out for.
How do you find out if your fund manager levies this charge? In theory it should be detailed in a fund’s simplified prospectus/key features, but it’s not always specified so you might have to phone and ask. Ideally units should be purchased at either the creation or bid price, which means no initial charge. Purchase at the offer price means an initial charge (see our unit trust page for more details on fund pricing).
Fortunately fund supermarkets don’t seem to levy an initial charge for reinvesting income. FundsNetwork confirms that reinvested income is not subject to an initial charge in its key features document. Cofunds and Skandia don’t make this clear in their literature, but on checking they both confirmed that there’s no initial charge when reinvesting income (Skandia will only take a charge if the adviser elects to take commission).
I also checked about a dozen of the larger fund managers and they all either reinvest income with no initial charge or convert income units into accumulation units free of charge – either way a fair result.
I believe a few fund groups do still charge for reinvesting income but I’ve not managed to find any. If any readers know of offenders please post below!
As you hold your funds via a fund supermarket you should be fine. But if there is a 0.25% switching charge, then assuming a 5% initial charge and 3% annual income it’d take around 2 years to profit from the switch.
Read this Q and A at http://www.candidmoney.com/questions/question264.aspx
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