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Long-term investing report
Pre-tax returns may only tell
half the story
Why you should remain mindful of the impact tax plays on investment returns when planning for retirement
While it is no secret that investing through a super fund can be an extremely tax-effective means of saving for retirement, a recent report on long-term investments and their after-tax returns illustrates just how effective it can be.
The Russell Investments Long-term Investing Report compares the performance of various investments on both a pre-tax and after-tax basis over 10, 20 and 25 years.
The report demonstrates how investing in assets through the vehicle of superannuation can be very beneficial, particularly for those investors who are on the highest marginal tax rate. What's more, the advantages of holding these assets inside super will grow the longer they are held there. This is mainly because contributions and performance returns inside super are taxed at a maximum of 15% whereas investing outside of super generally attracts tax at marginal rates, which for most people is greater than 15%. This means returns inside super will also compound at a faster rate.
So how did the asset classes perform in the long term (20 years) – before tax?
Investment returns for twenty years to December 2010 (1 Jan '91 - 31 Dec 2010)
| Asset class | Return |
| Australian shares | 11.0% |
| Residential investment property | 10.2% |
| Fixed interest | 8.2% |
| Global Real Estate Investment Trusts | 7.4% |
| Real Estate Investment Trusts (REITS) | 7.0% |
| Overseas shares (unhedged) | 5.6% |
| Cash | 4.3% |
Over twenty years we can see that, before tax, growth assets (Australian shares and residential property) were the highest performers while cash was the lowest performer. Please note past performance is not indicative of future performance.
Let's now look at the Australian share returns - after tax
| Tax rate (includes Medicare levy) |
Australian shares* after-tax return |
| Higher tax rate (46.5%) | 9.0% |
| Lower tax rate (16.5%) | 11.2% |
| Superannuation tax rate (15%) | 11.4% |
The report demonstrates that investing in Australian shares via super produced up to a 2.4% higher return over twenty years than the return on the same investment outside of super. This means that super is one of the most tax-effective ways to save money. Regardless of whether an investor was on the higher or lower tax rate investing through super still produced the higher return.
*Australian shares measure is based on investment in listed shares with price movements and dividend reinvestment consistent with S&P ASX All Ordinaries Accumulation Index
View the full report to learn more about how long-term investments compare after tax and expenses.
