Opinion Archives - Page 3 of 3 - Practical Systems Super

SMSFs continuing to diversify

Feb 21,2020 Comments Off

It’s time to call a spade a shovel.

When the two latest controversies surrounding Self-Managed Super Funds (SMSFs) – single-asset funds (typically property) and the release of an Australian Securities and Investments Commission fact sheet with a focus on risks and red flags – got a public airing, it gave critics the ammunition they needed to disparage this popular form of superannuation.

However, what was quietly overlooked was the release of the 2019 Vanguard/Investment Trends SMSF Report that painted a far different – and healthier – picture of SMSFs.

Although the report showed the pace of SMSF establishments was slowing, there remains keen interest in SMSFs among large super fund members.

More significantly, those setting up SMSFs are doing so at a younger age – a sign that people are taking their retirements more seriously in an era where many will live well into their 90s. It remains essential that they receive specialist SMSF advice and that an SMSF is suitable for them.

The SMSF sector represented about $747 billion in retirement savings as at March, 2019, compared with $1.8 trillion invested with APRA-regulated super funds.

The total number of SMSFs grew to almost 600,000, with an average balance of $1.2 million.

Perhaps the most positive sign drawn from the report was that investing patterns have changed.

Considering the volatile geo-political climate and strong concerns about the health of the Australian economy, it’s not surprising that more than one in three investors adopted a more defensive strategy.

Holdings of cash – even at today’s miserly interest rates – were the major beneficiary.

However, there was no rush to exit growth assets. After peaking in 2013 at 45 per cent, investment in direct shares – mostly Australian equities – has slowly declined.

Direct equities investments in 2019 stood at about 35 per cent.

Significantly, too, and despite recent scaremongering about the dangers of SMSFs piling into direct property, investors’ allocations to this asset class has risen from just 11 per cent in 2017 to 13 per cent in 2019. In 2008, it stood as high as 22 per cent. So much for the argument of SMSFs overheating the residential property market.

The other significant trend to emerge in the report is a growing appetite for overseas assets, the lack thereof in the past often being a point of criticism of SMSFs.

It’s still not excessive, at 11 per cent, but the evidence shows they are set to grow, with the report estimating they will hit 16 per cent of all SMSF assets by 2020.

That SMSFs have been wary about putting their toes in overseas markets is hardly surprising. Their liking for Australian equities, cash, term deposits and property reflects a preference for assets they understand.

However, the diversification message is clearly being heard, and SMSFs are seeking exposure via a variety of investment vehicles, with Exchange Traded Funds (ETFs), managed funds and Australian shares with overseas revenue heading the list. It’s a mix that reflects a more conservative mindset.

In the aftermath of the Global Financial Crisis, some in the industry believed SMSFs would be a major casualty, with volatile times requiring specialist input that only large APRA-regulated super funds with professional investment managers could deliver.

The reality is quite the opposite. SMSFs, often with advice from specialists, have flourished.

Written by John Maroney, CEO, SMSF Association

Tips and traps of DIY super

Sep 4,2019 Comments Off

Recent market volatility and the aftermath of the royal commission has prompted many Australians to look a little closer at their superannuation fund and their options.

With more than 1.1 million Australians taking control of their superannuation by having their own self-managed super fund (SMSF), we explore the tips and traps to be aware of when considering this option.

A bid to save costs

Self-managed super funds are more cost-effective the more you have in them and while the Tax Office reports that the average size of an SMSF is about $600,000, many consider one when their balance is much less. Nearly half of all new DIY funds come from members aged between 25 and 44. Regardless of age, establishing an SMSF should be considered based on your stage of life and ability to contribute to the fund. For example, if you are a young couple with $300,000 in super and earning a good income where you are contributing $50,000 per year, you might consider an SMSF sooner, knowing that your balance is going to continually increase substantially each year. This is very different to someone who has reached retirement with the same amount of money and will draw down on their super over the next five to 10 years, reducing their balance substantially in a short period of time. When it comes to cost, ensure you have someone objective to look at your own personal situation and be wary of companies advertising to set up an SMSF for little or no fees.

Investment preference

Having your own super fund does give you a broad range of investments to consider but a common trap is to concentrate on only one major investment. While it might make financial sense for a business owner to consider their business premises as an option to hold in their super fund, having a sole investment, such as a residential property, can be dangerous, particularly when it comes to the liquidity of the fund. Diversification is key in any portfolio and your own super fund shouldn’t be treated any differently. Regardless of which super fund option you choose, it is prudent to ensure your investments are professionally managed and investment choices are run passed your adviser to ensure your fund stays compliant but is also diversified to mitigate risk.

Your responsibility

As a controller of your super fund, you are responsible for running it, so it is important you understand your responsibilities and obligations. Some of these responsibilities are to ensure your SMSF lodges a tax return, reports member contributions and other regulatory information along with ensuring the financial statements are audited each year. While there are more duties with an SMSF, many trustees will partner with an accountant and financial adviser to help ensure the fund meets its obligations. Keep in mind that not all professional advisers are licensed to advise on SMSFs, so find one who has the expertise to run you through all your options when deciding on the best superannuation solution for you.

SMSFs are not appropriate for everyone but in the right circumstances can offer the many benefits that one million Australians are enjoying today.

Written by Olivia Maragna. Please note that Olivia’s advice is general in nature and readers should seek their own professional advice before making any financial decisions.

Source: Sydney Morning Herald.

Cash rate sits at record low

Jul 5,2019 Comments Off

The Reserve Bank of Australia (RBA) recently announced an unprecedented reduction in the official cash rate of 0.25% to 1.00%, which is the lowest on record.

This will have implications for cash returns on fixed interest investments such as term deposits which are often a significant portion of a Self-Managed Superannuation Fund (SMSF) investment portfolio. It will also impact on self-funded retirees who have assets outside of superannuation.

Whilst most banks and financial institutions have factored in these rate cuts to some extent, the full impact will be felt once existing term deposits come up for renewal.

There is some debate among analysts around what economic changes can be expected over the next 12 months. Many commentators are predicting a further rate cut of at least 0.25% this calendar year with further consequential effects on cash investment returns.

The future is bright for SMSFs, however these lower cash returns may result in slower growth of some superannuation balances and, for those in pension phase, the possibility of having to sell assets to meet minimum pension withdrawal standards.

Cash assets are traditionally seen as being more capital secure than growth investments (such as shares) but in a very low interest rate environment there are risks of erosion in the real value of cash based investments (i.e. where returns are less than the inflation rate).

Trustees of a SMSF would be wise to review their existing investment strategy, particularly in regard to target asset sector allocations (fixed interest, equities, property, etc.). Any changes to an investment strategy should take into account relevant considerations such as; a member’s age, immediate plans for their SMSF, whether the fund is in accumulation or pension phase, risk appetite of the members, the need for diversification of investments and liquidity requirements. Trustees should considering seeking professional advice to assist in this process where appropriate.

Bob Locke – CA SMSF Specialist – CEO of Practical Systems Super

The information and examples provided in this article are general in nature and do not take into account personal circumstances, needs, objectives or financial situation. This information does not constitute financial or taxation advice. Before acting on any information in this article, the reader should consider its appropriateness in relation to their personal situation and seek advice from an appropriately qualified and licensed professional.

Bob Locke examines the federal budget from his perspective.

Apr 8,2019 Comments Off

2019/20 Federal Budget Overview

Bob Locke, founder of Practical Systems Super, examines the 2019 Federal Budget.

Over my 35 years of working as an accountant and taxation expert, I have watched the increasing complexity in the administration and compliance of SMSFs in the face of ever-changing government regulation.

On the back of an improved fiscal position, the budget was clearly designed for an election year with no surprises or “hits” and where most people will benefit from tax cuts.

The slated tax reductions will increase consumer disposable income. In the context of the current lower than average consumer confidence, you could expect some of this to be saved (rather then spent) and some of these savings could flow into superannuation.

It’s good to see that the budget position is finally heading back into surplus but paying down the existing debt is going to require a sustained discipline on the part of current and future governments.

The 2019/20 Budget and superannuation

There were very few measures in this year’s budget relation to superannuation.

I think this is a good thing and very wise given the massive changes made over the last few years (i.e. changes to contribution caps, introduction of the Transfer Balance Cap and Totals Super Balance cap, etc.).

Any changes to superannuation arrangements tend to impact negatively on general confidence in superannuation – negative changes especially, but also positive changes can influence the general perception that “governments are always changing the rules and I can never be sure how my superannuation savings will be affected in the future”.

In my experience, younger people in particular are often skeptical about making additional contributions to super as constant changes undermine their confidence in a system where the government is supposed to be supporting and encouraging provision for their retirement.

To find out more about how the budget will impact on your SMSF call the office on 1800 951 855.

1800 951 855

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Category Opinion