Hymans Robertson and Vanguard issue joint white paper
Choosing a tax optimised fund wrapper could lead to a wealthier retirement
19 Mar 2018 - Estimated reading time: 15 minutes
Hymans Robertson and Vanguard have published the joint white paper ‘Navigating DC Fund Structures’ which shows that UK pension funds could find themselves 5% worse off over a thirty year period if they fail to consider a tax optimised wrapper.
The paper reveals that some fund wrappers aren’t recognising the full tax privileges of UK DC pension fund investors which potentially leads to material losses over time. This is leading to a ‘hidden’ tax drag which may reduce returns by around 0.3% per annum on average.
Over the course of a DC savings journey, this could reduce an individual’s ultimate retirement pot by 5%. For example, a saver targeting a pot of £250,000 over 30 years might need to save an additional £12,500 if saving through an Open Ended Investment Company, which are more tax opaque, than if they were saving through a more tax efficient Life Fund or Tax Transparent Fund with similar costs.
Douglas Anderson, Partner and Founder of Life and Financial Services at Hymans Robertson explains this further:
“The fund management industry appears to be at a turning-point when it comes to wrappers and we’re now seeing a more widespread appreciation of the advantages that alternative fund wrappers can offer over more traditional versions. Trustees and governance committees seeking simplicity and clarity will value tax transparent funds for their ability to offer greater tax efficiency benefits.
Every pension scheme has its own goals and targets and Trustees should ensure that whichever wrapper they select is the best for both their members and the Scheme as a whole. However, it is important that Schemes ensure they are not falling into this avoidable tax drag which can significantly impact an individual’s final pension pot over a saver’s lifetime.”
Gavin Lewis, Head of Institutional UK, Vanguard adds:
“Failing to deliver tax benefits to retirement savers is equivalent to an unnecessary cost. These costs have a material impact on people’s lives. A 5% shortfall in retirement savings may mean the need to delaying retirement, or to accept a lower quality of life in retirement.
Vehicles offering retirement savers the dual advantages of tax-efficiency and ring-fencing of their assets, give investors a better chance of successful retirement outcomes.”