How to Take Control of Your Superannuation — Part Two

For most people superannuation is way too complex to bother understanding how it works.

When compared to the relatively straightforward (or so they think) exercise of negatively gearing an investment property, super comes a distant second.

With property, you can see it. You can touch it. And, the annual tax refund lobbing into your bank account makes you feel like you’re having a win against the taxman.

Investment property is sexy. Superannuation is prudish.

However, when you spend some time with superannuation you find there’s a lot to love about it.

  1. The tax deductions ($30,000 under age 50 and $35,000 over age 50).
  2. The ability to contribute up to $540,000 (after tax contribution) to quarantine significant capital in a zero or low tax environment.
  3. The opportunity to use franking credits to enhance your after tax returns.
  4. The zero tax rate on income, capital gains and capital withdrawals after the age of 60 (for those in pension phase).

When you know how superannuation can legitimately enhance your financial situation, the prudish facade gives way to a very attractive investment.

Whereas the once-sexy negatively geared property can lose its allure when interest rates go up, vacancy rates rise, maintenance bills pile up, land taxes increase, council rates rise faster than CPI and your household income falls. What was once exciting can become a costly drag.

How to make your super look attractive
Yesterday’s Markets and Money included the following chart from ASFA on how the $1.8 trillion superannuation pool is divided up.

Superannuation is divided into three camps — public offer funds (retail and industry funds), employer funds (corporate and public sector) and self managed (funds with less than five members).

The first two camps — public offer and employer funds — usually provide a range of investment options for members to choose from. If the member does not make a choice, the default option is used (see yesterday’s Markets and Money for my explanation of the default options and problems with them).

The individual investment options range from conservative (cash) to aggressive (emerging markets).

As a reader of Markets and Money, it’s assumed you have at least a passing interest in understanding the investment and economic world.

If you’re a relative newcomer to investing, you may have formulated a few ideas on the appropriate asset mix for you, but still don’t quite trust your own judgement.

Caution is a good thing. Far better to be cautious than overconfident.

What you can do is obtain a list of the investment options from your super fund. Identify the investment/s that closely align with your model portfolio and then keep a weekly or monthly check on the unit prices. Call this approach ‘paper investing’.

For those who are confident enough in their investment knowledge, most public offer and employer funds offer sufficient selection to construct your own portfolio. The switch from the default option to your own portfolio is done by written instruction to your fund administrator (the switch form can usually be accessed via the fund’s website).

Be aware this approach is not a certainty to outperform the default fund. Time will tell. One thing is for certain though. This real life experience will teach you so much more about investment markets than you could possibly learn from textbooks. There’s nothing like having ‘skin in the game’ to keep you focussed.

The other thing is you do not have to convert your entire default fund super balance to your model portfolio. You may decide to do a 50/50 split to see how they compare with each other.

The beauty of taking a flexible approach is you can proceed at your own pace. And that is the point of this exercise, to empower you to take control of your financial destiny one step at a time.

SMSF — is it for you?
With all this information about superannuation it’s timely to remember the intent behind superannuation. The Sole Purpose Test defines that for us:

The sole purpose test requires that all regulated super funds including SMSFs are established and maintained for the sole purpose of providing benefits to members upon their retirement, or to a member’s beneficiaries in the event of their death.

In other words, the investment process behind superannuation must be solely focused on providing retirement benefits to its members — not participating in some personal indulgences on the road to retirement.

The investment industry has campaigned long and hard on the basis that people can’t be trusted to manage their own funds.

Granted, there have been cases of flagrant abuse by individuals. But in fairness, public offer funds have been subjected to appalling management.

The world will always have its ‘bad eggs’, and no amount of legislation can outlaw corrupt and stupid behaviour.

The $64 question is whether self managed is for you or not.

Depending on whom you talk to (accountant, financial planner, real estate agent, industry fund representative), you are likely to receive a variety of responses.

As a rule of thumb, these are the criteria I’d use to assess whether an SMSF is warranted for a client:

Do you have sufficient funds to invest to warrant the establishment fees and annual running costs?

As mentioned yesterday, the conventional thinking was you required at least $250,000 to justify the expense of a SMSF.

The SMSF cost comparison table provided by SMSF Review showed it’s possible to pay as little as $700 per annum (with some caveats) to administer a SMSF. This low cost regime is a real game changer.

Now it’s quite feasible to consider the merits of a SMSF for those with $70,000 ( as $700 per annum represents a 1 percent cost of fund assets).

The lower threshold to access SMSF poses an even bigger threat to public offer funds.

If you have a lesser amount, do you have the ability to make maximum contributions to reach the critical level necessary to make the annual accounting and administration fees a reasonable proposition (as a percentage of funds invested)?

Do you have an interest in controlling/managing your own funds?

Do you have a long term investing mentality or are you more about the “quick buck”?

Have your previous investment attempts been successful or not? (the reason for this is that if all else fails, then having an industry or retail fund to fall back on in retirement isn’t a bad thing). Frankly some people can be their own worst enemy.

Do you have life and disability insurance cover in your existing super fund that you may wish to retain (for those with pre-existing health conditions or consider replacing with new cover in your SMSF?

Do you like keeping good records? Compliance is a major consideration in SMSF.

Assuming you answer in the affirmative to the above, then you should move forward and delve a little deeper into the SMSF world.

The pros and cons of SMSF
Superannuation is the government’s preferred savings vehicle. The tax system is skewed towards encouraging people to contribute, accumulate and eventually draw an income from superannuation.

In return for the tax concessions, the government requests (via legislation) you do the right thing with the funds. The intent should be to invest your retirement funds in a manner consistent with promoting the long-term growth of your capital.

Taking control of your superannuation (with an SMSF) may be considered your right, but as always, rights are accompanied by responsibilities.

Tomorrow will be the final article in our Markets and Money superannuation series. We’ll look at little more closely at the pros and cons of SMSFs, and some other little tips to help you maximise your super.


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Vern Gowdie has been involved in financial planning since 1986. In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners. His previous firm, Gowdie Financial Planning was recognized in 2004, 2005, 2006 & 2007, by Independent Financial Adviser (IFA) magazine as one of the top five financial planning firms in Australia. He has been writing his 'Big Picture' column for regional newspapers since 2005 and has been a commentator on financial matters for Prime Radio talkback. His contrarian views often place him at odds with the financial planning profession. Vern is is Founder and Chairman of the Gowdie Family Wealth advisory service, a monthly newsletter with a clear aim: to help you build and protect wealth for future generations of your family. He is also editor of The Gowdie Letter, which aims to help you protect and grow your wealth during the great credit contraction. To have Vern’s enlightening market critique and commentary delivered straight to your inbox, take out a free subscription to Markets and Money here. Official websites and financial eletters Vern writes for:

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