Study Note: C105 - 07 Pension Actuary's Guide to Financial Economics

[XANDER]

Stupid questions RE: Augmented Balance Sheet - shouldn't column labeled "After-tax Income" in Table 3B (Pension Plan) be using a 40% personal tax rate? :-?

Or, are they using 15% because of of the statement just under Table 2 (Assumptions)...?

Thanks!

[Kenny]

Yes and no :)

It depends on the investment. If you look at the tax rates on direct holdings, equities are taxed at 15% and bonds are taxed at 40%. The tax shown in the top half of the table is based on the assumption you reference and the fact that the income is passed through the company to the investor so is an equity return from the investor's perspective.

Basically, the company does not have to contribute $16,250 to the pension plan because of the investment earings in the plan. This leaves an extra $16,250 that can be "passed" to the investor via capital gains (or the assumption that dividends are also taxed at 15%).

[XANDER]

Yes and no :)

It depends on the investment. If you look at the tax rates on direct holdings, equities are taxed at 15% and bonds are taxed at 40%. The tax shown in the top half of the table is based on the assumption you reference and the fact that the income is passed through the company to the investor so is an equity return from the investor's perspective.

Basically, the company does not have to contribute $16,250 to the pension plan because of the investment earings in the plan. This leaves an extra $16,250 that can be "passed" to the investor via capital gains (or the assumption that dividends are also taxed at 15%).

Thanks Kenny! that helps! I think I fumbled with the "passed" through bit when I was working through this problem during the reading...silly!