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Tax Strategies Boost Retirement Savings: Research


Tax-efficient strategies can boost retirement savings by more than $200,000 from accumulation to retirement phase, according to Parametric.

The firm's latest research debunks the myth that trying to achieve tax efficiency within a super fund's equity portfolio is 'chasing fool's gold'. It largely quantifies savings of up to 7.2%, Parametric said.

Researchers used two hypothetical super funds: One had an equity portfolio with a pre-tax focus and ignored dividends and capital gains taxes, while the second equity portfolio uses a tax-efficient strategy.

Over a 40-year period, members contributed $10,000 per annum (over 30 years) to their respective fund and drew down $30,000 per annum (for 10 years).

The researchers found the fund adopting tax efficiency practices was $200,000 better off on a unit-priced member option level and after accounting for deferred taxes.

Keeping income, growth and cashflow characteristics in each portfolio controlled, the researchers said the tax-aware equity portfolio reduced turnover by half and prevented short gains taxed at higher levels realised in the portfolio.

Just before members hit retirement, the tax efficient fund also generated additional savings between $60,000 and $70,000.

Parametric chief investment officer, Paul Bouchey, and managing director of research, Raewyn Williams, said this is almost $200,000 more members can use to meet their needs and aspirations in retirement that's attributable to having a superannuation fund using after-tax investing in their equity portfolio.

"In modelling the hypothetical members' experiences, the lump sum balances accumulated after 30 years of contributions, as the first member prepares to retire, are 4.69% higher if tax efficient investing has been continually practiced," the pair said.

The findings directly challenge a view sometimes proffered by consultants and commentators that tax efficient investing does not benefit super fund members, they added.

By Karren Vergara

Financial Standard

21 February 20118


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