Benefits of a super long engagement

Benefits of a super long engagement

Superannuation is a long-term financial relationship. It begins with our first job, grows during our working life and hopefully supports us through our old age.

Throughout your super journey you will experience the ups and downs of bull and bear markets so it’s important to keep your eye on the long term.

The earlier you get to know your super and nurture it with additional contributions along the way, the more secure your later years will be.

Like all relationships, the more effort you put into understanding what makes super tick, the more you will get out of it.

Your employer is required to make Superannuation Guarantee (SG) contributions into your account of at least 9.5 per cent of your before-tax income. If you are self-employed you are responsible for making your own voluntary contributions, but these are tax-deductible.

Check your account

The first step is to check how much money you have in super and whether you have accounts you’ve forgotten about.

You can search for lost super and consolidate all your money into one fund if you have multiple accounts by registering with the ATO’s online services.i Having a single fund will avoid paying multiple sets of fees and insurance premiums.

The next step is to check what return you are earning on your money, how it is invested and how much you are paying in fees.

If you don’t nominate a super fund or investment option, your SG money is invested in the ‘Balanced’ or default option nominated by your employer. Balanced options typically have 60-75 per cent of their money invested in growth assets such as shares, with the remainder in bonds and cash.

Over the past 10 years, $100,000 invested in the median balanced option would have nearly doubled to $193,887, but there was a wide range of performance (see the graph below). The best performing balanced option returned $214,464 over the same period while the worst returned $156,590.ii

The difference between the best and worst performing funds could fund several overseas trips when you retire, so it’s worth checking how your fund’s returns and fees compare with others. You can switch funds if you are not happy, but it’s never wise to do so based on one year’s disappointing return. Super is a long-term investment so get in the habit of looking at your fund’s performance over five years or more and comparing its returns with similar products.

A decade of super returns

Source: Super Ratings

State your preferences

Default options are designed for the average member, but you are not necessarily average. Younger people can generally afford to take a little more risk than people who are close to retirement because they have time to recover from market downturns. So think about your tolerance for risk, taking into account your age, and see what investment options your super fund offers.

As you grow in confidence and have more money to invest you may want the control and flexibility that come with running your own self-managed super fund.

Also check whether you have insurance in your super. A recent report by the Australian Securities and Investments Commission (ASIC) found that almost one quarter of fund members don’t know they have insurance cover, potentially missing out on payouts they are entitled to.iii

Insurances may include Total and Permanent Disability (TPD) and Income Protection which you can access if you are unable to work due to illness or injury, and Death cover which goes to your beneficiaries if you die.

Building your nest egg

Once you understand how super works you can take your relationship to the next level by adding more of your own money. Small amounts added now can make a big difference when you retire.

You can build your super in several ways:

  • Pre-tax contributions of up to $25,000 a year (including SG amounts), either from a salary sacrifice arrangement with your employer or as a personal taxdeductible contribution. This is likely to be of benefit if your marginal tax rate is higher than the super tax rate of 15 per cent.
  • After-tax contributions from your takehome pay. If you are a low-income earner the government may match 50c in every dollar you add to super up to a maximum of $500 a year.
  • If you are 65 and considering downsizing your home, you may be able to contribute up to $300,000 of the proceeds into your super.

You could also share the love by adding to your partner’s super. This is a good way to reduce the long-term financial impact of one partner taking time out of the workforce to care for children. You can split up to 85 per cent of your pre-tax contributions with your partner. Or you can make an after-tax contribution and, if your partner earns less than $40,000, you may be eligible for a tax offset on the first $3,000 you put in their super.

Before you make additional contributions, adjust your insurance, or alter your investment strategy, it’s important to assess your overall financial situation, objectives and needs. Better still, make an appointment to discuss how you can build a positive long-term relationship with your super.

i https://www.ato.gov.au/individuals/super/keeping-track-of-your-super/

ii https://www.superratings.com.au/2018/09/20/dont-panic-what-superannuation-is-teaching-the-post-gfc-world/

iii https://download.asic.gov.au/media/4861682/rep591-published-7-september-2018.pdf

The information posted is intended to be general in nature and is not personal financial product advice. It does not take into account your objectives, financial situation or needs. Before acting on any information, you should consider the appropriateness of the information provided and the nature of the relevant financial product having regard to your objectives, financial situation and needs. In particular, you should seek financial advice and read the relevant product disclosure statement (PDS) or other offer document prior to making a decision.

Is an SMSF right for you?

Is an SMSF right for you?

As anyone who has joined the weekend crowd at Bunnings knows, Australians love DIY. And that same can-do spirit helps explain why 1.1 million Aussies choose to take control of their retirement savings with a self-managed superannuation fund (SMSF).

As well as control, investment choice is a key reason for having an SMSF. As an example, these are the only type of super fund that allow you to invest in direct property, including your small business premises.

Other reasons people give are dissatisfaction with their existing fund, more flexibility to manage tax within the fund, plus greater flexibility in estate planning.

What type of person has an SMSF?

If you think SMSFs are only for wealthy older folk, think again.

The average age of people establishing an SMSF has been coming down and is currently between 35 and 44. Around half of all SMSF trustees own or have owned a small business and over 50 per cent have had their fund for over 10 years.i

They’re also dedicated. The majority of SMSF trustees say they spend 1 to 5 hours a month monitoring their fund.ii

But an SMSF is not for everyone. There has been ongoing debate about how much you need to have in your SMSF to make it cost-effective and whether the returns are competitive with mainstream super funds.

So is an SMSF right for you? Here are some things to consider.

The cost of control

Running an SMSF comes with the responsibility to comply with superannuation regulations, which costs time and money.

There are set-up costs and a range of ongoing administration and investment costs. These can vary enormously depending on whether you do a lot of the administration and investment yourself or outsource to professional services providers.

A recent survey by Rice Warner of more than 100,000 SMSFs found that annual compliance costs ranged from $1,189 to $2,738. These are underlying costs that can’t be avoided, such as the annual ASIC fee, ATO supervisory levy, audit fee, financial statement and tax return.iii

If trustees decide they don’t want any involvement in the administration of their fund, the cost of full administration ranges from $1,514 to $3,359.

There is an even wider range of ongoing investment fees, depending on the type of investments you hold. Fees tend to be highest for funds with investment property because of the higher costs of servicing direct property and higher administration costs for accounting and auditing.

Median total fees for SMSFs with and without direct property

Balance All funds Funds with no direct property Funds with direct property
$50,000 $2,002 $1,958 $9,352
$100,000 $2,298 $2,220 $9,003
$200,000 $2,898 $2,603 $10,398
$300,000 $3,140 $2,861 $10,044
$400,000 $3,235 $3,034 $9,887
$500,000 $3,339 $3,207 $9,969
$1 million $3,558 $3,476 $10,619
Over 5 million $12,461 $6,746 $32,641

Source: Rice Warner

By comparison, the same report estimated annual fees for industry funds range from $445 to $6,861 for one member and $505 to $7,055 for two members. Fees for retail funds were similar. It’s worth noting that fees for SMSFs are the same whether the fund has one or two members.

Size matters

As a general principle, the higher your SMSF account balance, the more cost-effective it is to run.

According to the Rice Warner survey:

  • Funds with $200,000 or more in assets are cost-competitive with both industry and retail super funds, even if they fully outsource their administration.
  • Funds with a balance of $100,000 to $200,000 may be competitive if they use one of the cheaper service providers or do some of the administration themselves.
  • Funds with $500,000 or more are generally the cheapest alternative.

Returns also tend to be better for funds with more than $500,000 in assets. While returns will depend on the investments in your fund, average returns for the sector have tended to lag those for other types of super funds.iv

Even though SMSFs with a balance of under $100,000 are more expensive than industry or retail funds, they may be appropriate if you expect your balance to grow to a competitive size fairly soon.

In 2019, only 8.5 per cent of SMSFs held less than $100,000 in assets. Most of these small funds tend to grow quickly via ongoing contributions, or close, once retirees in pension phase wind down their fund.

Increased responsibility

While SMSFs offer more control, that doesn’t mean you can do as you like. Every member of your SMSF has legal responsibility for ensuring the fund complies with all the relevant rules and regulations, even if you outsource some functions.

SMSFs are regulated by the ATO which monitors the sector with an eagle eye and hands out penalties for rule breakers. And there are lots of rules.

The most important rule is the sole purpose test, which dictates that you must run your fund with the sole purpose of providing retirement benefits for members. Fund assets must be kept separate from your personal assets and you can’t just dip into your retirement savings early when you’re short of cash.

Don’t overlook insurance

If you considering rolling the balance of an existing super fund into an SMSF, it could mean losing your life insurance cover.

Large super funds often provide life cover at discounted group rates. So to ensure you and your family are not left with inadequate insurance you may need to arrange new policies. Some people leave a small amount in their previous fund to maintain their cover.

If you would like to discuss your superannuation options and whether an SMSF may be suitable for you, don’t hesitate to call.

i https://www.smsfassociation.com/media-release/survey-sheds-new-insights-on-why-individuals-set-up-smsfs?at_context=50383

ii https://www.smsfassociation.com/media-release/survey-sheds-new-insights-on-why-individuals-set-up-smsfs?at_context=50383

iii https://www.ricewarner.com/wp-content/uploads/2020/11/Cost-of-Operating-SMSFs-2020_23.11.20.pdf

iv https://www.ato.gov.au/About-ATO/Research-and-statistics/In-detail/Super-statistics/SMSF/Self-managed-super-funds–A-statistical-overview-2017-18/?anchor=Investmentprofile#Investmentprofile

The information posted is intended to be general in nature and is not personal financial product advice. It does not take into account your objectives, financial situation or needs. Before acting on any information, you should consider the appropriateness of the information provided and the nature of the relevant financial product having regard to your objectives, financial situation and needs. In particular, you should seek financial advice and read the relevant product disclosure statement (PDS) or other offer document prior to making a decision.