Finding out about tax

John and Judy were looking at two savings products. One was offered by their bank, and the other by a financial adviser. Each offered a diversified mix of investments. But while the products appeared to be similar, Judy couldn’t see any reference in their respective investment statements to how their fees were taxed.

She decided to ask the bank and the adviser if they could provide this information. Eventually, they came back with the following figures:

• The adviser’s product had annual investment fees of 1.5% before tax
• The bank’s product had annual investment fees of 1.5% a year after tax – this meant that its fee before tax was actually 2.23%!

If both products earned 8.5% a year before tax, then a $10,000 a year contribution for 20 years would produce the following returns after tax (but before inflation): $321,000 for the adviser’s product, or $304,000 for the bank’s product.

The seemingly small difference between fees paid before tax and after tax turned out to be potentially worth $17,000. While the products were similar, the fees weren’t and so John and Judy chose the adviser’s offering.