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Four trends that make reducing investment tax drag increasingly important


Four trends that make reducing investment tax drag increasingly important


Both large and small institutional investors continue to use pooled funds to implement their portfolio strategies. But until now few have considered whether these funds have been built to be withholding tax efficient. These four trends make it increasingly important for investors to pay greater attention to the impact of tax drag on performance.


1. Switch from local to global

Pension schemes have become more international in their outlook, moving away from UK equity dominated portfolios and diversifying into global equities. But the impact of withholding tax on dividend income has not always been well understood.

“In 2017 allocations to UK equities relative to overseas had fallen to 30% compared to 70% in overseas equities which is a significant change from a decade ago where the allocation stood at 51% versus 49%.” 


The Investment Association, Asset Management in the UK 2017-2018, September 2018

2. Rising popularity of passive funds

The increased popularity of low-cost passive and smart beta funds makes investors pay greater attention to the performance drag of any charges or fees across all fund holdings. As institutional investors’ awareness grows, they are reviewing other costs, including the impact of withholding tax on equity performance.



3. Consolidation of defined benefit (DB) pension funds

The industry recognises that running a small multi-million DB fund is not efficient and is looking for ways to consolidate these funds to improve economies of scale. As funds merge, their management will focus on aspects such as enhancing governance and minimising the impact of tax drag.

“The Pensions Regulator (TPR) has repeatedly highlighted the regulatory challenge posed by small DB schemes, and consolidation was a key plank of the recent Department for Work and Pensions (DWP) DB White Paper and a core recommendation from the Pensions and Lifetime Savings Association (PLSA) DB Taskforce.” 


IPE Magazine, September 2018

4. The introduction of auto-enrollment

Defined contribution schemes are now the most important form of occupational pension provision and assets under management are growing rapidly.  Ensuring scheme members can access high-quality yet low-cost pensions is an important policy principal that has resulted in a management charge cap. Ensuring employees are not sacrificing performance to unnecessary withholding tax will drive companies and master trusts to consider more tax efficient structures.


Using Tax Transparent Funds to reduce tax drag

Improving the returns from a fund by making it tax transparent has obvious benefits for institutional investors. These additional savings can provide a useful buffer during periods of underperformance and will bolster overall performance of the fund making it easier to meet funding goals. The reduction in tax drag is also an incentive for investment managers to use these structures as it is a simple way for them to boost the performance of the funds.


Find out more about tax efficient investing in our tax transparent funds report.



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