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Tax free retirement
This article appeared in the October 2012 ASX Investor Update email newsletter. To subscribe to this newsletter please register with the MyASX section or visit the About MyASX page for past editions and more details.
Super's great, but choose the right type for you.
By Sam Henderson, Henderson Maxwell
Wouldn't you love to be able to invest in a completely tax-free environment? If you begin your investing time horizon with the end in mind, that's exactly what you should be aiming for: a tax-free retirement.
For retirees over 60 in pension phase, superannuation is a tax bonanza. There is no capital gains tax, no tax on the earnings and none on the income you draw from your account-based pension. You also receive 100 per cent of franking credits as a tax rebate at the end of the financial year when you complete your tax returns.
So you know super is a great and tax-effective environment into which to invest, but what super fund is best for you?
(Editor's note: To learn more about Self-Managed Superannuation, watch Sam's ASX Investment talk).
With around $1.4 trillion invested into Australian super funds, there is no shortage of players vying for your dollars. Of this, a little more than 36 per cent is sitting in self-managed super funds (SMSFs) and around 32 per cent each is in industry super and retail funds. SMSFs number 470,000, 3 per cent of the population, holding 36 per cent of the nation's wealth in superannuation. The average SMSF has two members, therefore representing about 940,000 members, and they are growing rapidly.
SMSFs are for people seeking greater control and flexibility in super investment and a more personalised approach to their investment strategy.
Despite the term self-managed, around half to two-thirds of all SMSF trustees seek advice. Most use an accountant and around half have a financial adviser. An accountant or specialist administrator is an essential requirement and I do not suggest you complete your own tax returns unless you are a licensed tax agent. It's fraught with danger and all funds are regulated by the Australian Taxation Office, so you don't want to raise their ire.
The rules often change
I have built a living around managing the administration and investment strategies for SMSFs, and can assure you that even the most astute investor can be caught out by changes or complexities in the rules. Every week on Your Money Your Call on Sky Business channel (8pm Fridays), I get the same questions about contributions, transition to retirement, pension strategies, Centrelink, debt instalment trusts, shares and property investments.
If there is one guarantee about superannuation, it is that it will be a changing animal over time and a political football given the amount of money already in the system and flowing in each year.
Fully engaged and astute investors only need their annual accounts, tax returns and audit completed by an accountant or specialist administrator. Generally speaking, no matter how large your fund, you should be paying around $2000 to $4000 a year for your accounts and returns, and an additional $2500 for an annual audit. If you fall into that category, you may not need further assistance, although you probably subscribe to a few investment newsletters.
Books such as my SMSF DIY Guide (published by John Wiley and Sons), or Trish Power's new book on SMSFs, will also help you keep on track.
You can also get helpful information on SMSFs at the following websites:
- Australian Securities Exchange (great information on shares, ETFs and LICs)
- The SMSF review (good source of free updates to SMSFs)
- Australian Taxation Office (download the free guides on SMSFs)
- SMSF DIY Guide (good source of information on SMSFs).
Get expert advice
For those looking for help, I think you will be best served by the assistance of both an accountant and a financial adviser. Generally, an accountant cannot give investment advice or strategic advice with respect to the operations of the SMSF, so you may need to engage a financial adviser/planner.
The best financial advisers specialise in SMSFs so make sure they know what you are talking about and don't deal with anyone that has less than 30 to 50 funds. You will pay a financial adviser up to 1 per cent of your funds per annum plus investment costs, or many will now agree to a fixed monthly fee reflecting the level of service you require.
Retail funds and online investing web platforms also provide some control and flexibility and many financial planners use these to manage their clients' accounts. A platform, or wrap, is simply a software system aggregating all your investments, allowing you to access wholesale managed funds, shares and term deposits, while keeping your assets segregated from those of the financial planner.
Although I use individually and separately managed accounts that are actively managed for my clients, for those with lower account balances or who are not suited to SMSFs, platforms now provide a cost-effective approach and costs are falling fast. If you have a planner and are paying more than 2 per cent for the management of all your assets, discuss some cheaper options, as the introduction of the MySuper initiative is pushing down pricing quickly. But you have to ask.
Check costs and security
Retail funds and platforms are good for clients who do not want an SMSF, although many advisers use them to invest clients' money even for SMSFs, given the falling costs and freedom of investment choices. The security aspect is also important as client assets are distinguished from those of the planner or their business. You should never write super rollover cheques out to your accountant or financial adviser; all rollovers remain in the name of your super fund. Check MoneySmart by ASIC on how to choose a financial adviser and what questions you should be asking.
Despite industry super funds still plugging advertisements denigrating the advice industry for receiving commissions, much of which will soon be outlawed, they do provide great options for a surprising large audience of investors with both high and low balances.
AustralianSuper, for example, offers the option of buying direct shares all within the confines of an industry super fund. Industry super funds also provide cost-effective group life and income-protection insurance. In fact, fees to invest inside an industry fund can be very cost-effective and in the past 12 months they have performed very well, having a higher allocation to bonds, which were the best-performing asset class.
Typically, members of industry super funds like the low-fee structure trust their administrators and are happy with the returns. However, many members with high balances have been leaving at the prospect of establishing SMSFs and taking control of their super, and being dissatisfied with their investment returns (in general) given the environment post-GFC. Industry super funds have internal trustees, rather than you acting as your own trustee in an SMSF. Occasionally, those trustees can make the wrong decisions and as member of the MTAA (Motor Traders Association of Australia) discovered, those mistakes can be costly. That said, many SMSF trustees also make poor choices in investment decisions and strategic direction.
Corporate funds and defined-benefit funds may also be a consideration, but usually these are imposed upon you, to your own significant benefit. A defined-benefit fund is one that pays a lump sum or defined annual amount on retirement. Corporate funds are often administered by the likes of Mercer or Plum and are specific to your place of employment. Many require little or no engagement or involvement, but it is important to understand how and where your funds are invested.
I would highlight the importance of receiving good advice no matter what your chosen direction. Industry super funds now offer financial advice on an ad-hoc or regular basis. If you decide an SMSF is right for you, you will need an accountant and possibly a financial adviser. If you choose a retail fund, you will no doubt be with an adviser already. If you choose the less engaging but cheaper option of an industry super fund, investigate what other services it provides before you jump ship; you may be pleasantly surprised at the options.
SMSFs have much appeal
For a fully engaged superannuation experience, I don't think you can go past an SMSF. It provides all the flexibility and control but leaves the trustee (you) with all the decision-making ability, albeit with the options of outsourcing the accounting or financial advice. An SMSF now provides options for borrowing money to buy property, self-funding instalment options for share investments, commercial property for small business owners, and a host of other flexible options to allow you to meet your financial and lifestyle goals.
Before jumping into any option, get your strategy right. Remember, you cannot access your super until aged 55, or 60 if you were born after June 30, 1964, and you are not allowed to access your funds. Make sure you understand the benefits and effects of capital gains tax, income tax, contribution laws and pensions. Make sure you download the booklets on SMSFs from the ATO website so you abide by the laws, and NEVER take advice from friends at a barbecue.
Always remember, "there's never a silly question when it comes to your own money!"
About the author
Sam Henderson is CEO and Senior Financial Adviser at Henderson Maxwell. He appears on Channel 10's The Project and The Circle, on Sky Business's Your Money Your Call, and broadcasts on Radio 2UE. He is the author of best-selling books, Financial Planning DIY Guide and SMSF DIY Guide. He was the recipient of the Financial Planning Best Practice Award 2011.
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