Things you should consider reasons to stick with your current fund

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2 So you have been thinking about a self managed super fund (S.M.S.F) and you want to know if it is the right choice for you. Well, this simple guide has been prepared to assist you make this decision, but we must warn you that this information is general in nature. Most people are aware that the recent market crash and continued equity market volatility has resulted in super funds performing poorly. While this is true, returns alone are not a reason to switch your money from your current provider to an SMSF. Things you should consider reasons to stick with your current fund 1. Group rate administration fees your employer fund provides you with group rate fees, which reduces the cost to you. 2. What is your total superannuation balance individually or as a couple *Remember that you are looking at around $1,100 - $2,200 annually without financial or investment advice to operate your super fund, so you need to ensure that it s cost effective to setup an SMSF 3. Returns despite the bad returns of your fund, do you have the time, experience and knowledge to invest your super money? 4. Insurance can you get reinsured if you had to re-apply for insurance with a medical condition can you afford the higher cost of an individual insurance policy 2

3 5. Defined Benefit Funds is your current super in a defined benefit Fund? Typically these funds are not invested in managed funds, but the returns of these funds are determined by a combination of your salary and years of service and some additional variables. In most cases, it can be detrimental to move these funds and if you are in doubt speak to your super provider or your human resources department, who can provide you with more information. 6. Running your SMSF There are many companies providing a variety of services from share investment to property investment that are encouraging people to move their super into an SMSF. While these investments might be beneficial for you, what these people don t tell you is how much time, and work is involved with managing your SMSF and what your responsibilities are, let alone the concentration risk of investing in one asset class. Further there is no appeal process for SMSF trustees or members to recover funds from bad investments. Three Compelling facts about SMSF s 1. 60% of SMSF trustee s are older than 45 y/o % of SMSF s have 2 members 3. The average SMSF member balance as at the end of 2012 was $507,825 compared with approximately $22,000 in retail and industry funds. ATO guide to running a SMSF click here Summary So these facts paint an interesting picture of the type of people that an SMSF suits and interestingly, it reveals that there is a pattern of people over the age of 45 setting up an SMSF, people on average with higher incomes and savings and that two member funds are the most common type of SMSF fund, given the cost saving. Source: ATO statistical overview of SMSF s ( 2012) 3

4 NEW SMSF quick checklist How much will it cost me to run my SMSF How much time do I need to spend each week to manage my fund, if I don t use professional services ( financial adviser or accountant) What are the risks associated with running my own SMSF Will my SMSF outperform my current fund Define Benefit Funds (I.E: Public Sector Superannuation Scheme - PSS) Defined benefit funds are usually provided by the government or private sector to their employees. These funds are not market linked, meaning that they are not invested in managed funds like 90% of all superannuation money. Instead, the growth and returns in these funds are calculated on the following basis 4

5 % ( percentage of employment income ) x Years of Employment = funds return Defined benefit funds are great as they virtually guarantee growth in the fund, but the only downside is the ability of these providers to make these payments into the future. Uni Super recently wiped out 30% of the value of pension members accounts, stating that they were unable to fund these payments. So generally, the only risk with these funds is the ability of the provider to afford to make future payments to their member s pension accounts. SWITCHING SUPER things to consider If you have seen the Industry fund television advertisements you would be familiar with their catch phrase, which states that low fees can make a life time of difference and they are not wrong, but they are only half right. In fact most people start by comparing fees and returns when comparing the performance of their super fund. So what features should you compare and what do you get for what you pay? 1. Fees Fees can vary depending on the type of fund you are with. An important fact is to consider the fees you pay in relation to the benefits you receive from your fund. A recent independent study (i.) revealed what the average member is charged in account fees, for the following account balances. If you are paying high fees and receiving no service and you are not happy with your returns you should investigate your options. For members with a balance of $50,000 the industry average fee is 1.67%* For members with a balance of $100,000 the industry average fee is 1.62%* For member balances of $100,000 - $200,000 - SMSF fee - $2,410 - $4,820 ( up to 4 members) 2. Insurance Cover If you joined your employer s super fund, you should be receiving a group insurance benefit, without the need for a medical test, at a competitive price. In some cases, your employer will pay for part or all of the insurance cover. If you join a super fund as an individual rather than as an employee of the company fund, you may not be able to access the competitive wholesale rates for insurance before undertaking a medical test to receive cover and you may be rejected cover, if you have any preexisting medical conditions. This is a very important benefit of employer super funds. The downside 5

6 however is when it comes to claim time. As employer super insurance is not underwritten, the insurer can reject a claim on the basis of client non disclosure or based on the fact that the super provider will not recognize the claim. Insurance cover in super requires sound advice so that you can obtain a benefit. 3. Returns How your fund has performed, is ultimately the most important consideration. For people approaching retirement, or for those that are in individual retail super funds or self managed super funds, returns should be scrutinised more closely than for those in employer super funds. (Also referred to as industry and corporate funds) In addition, you can compare your funds returns by using an independent rating company such as Rainmaker s selecting super benchmark indices or super guides super switching calculator. Our final suggestion is that you consider completing a formal SMSF trustee education course or employ the professional services of an experienced financial adviser, if you intend on setting up an SMSF, as the responsibility of managing your retirement money is not one to be taken lightly. 6

7 Universe 1 Year 3 Years 5 Years 7 Years 10Years INDEX Selecting Super Balanced Index 223 funds 19.9% -2.4% 3.5% 6.7% 5.1% *Performance to the 28th of February 2013 CHOICE RISk insurance FEES BENEFITS Corporate Limited Average Customized High Some Industry Limited Above average Very Limited Moderate Yes SMSF Unlimited Low-high Unlimited Low None Setting up a SMSF Things to think about So you want more control, greater investment choice, estate planning benefits and the ability to deduct your professional fees and you have decided that an SMSF is suitable for you. So here are some points to consider before you set up an SMSF. 1. Should I setup an individual or corporate Trustee SMSF? 3 Reasons to Setup a Corporate Trustee SMSF Avoid potential stamp duty costs and capital gains costs due to a change in members Banks lend up to 80% to corporate trustee SMSFs Pay lump sum pensions, and receive TTR tax offsets with a corporate trustee SMSF Most people buying property setup a corporate trustee SMSF and for a once off fee it is well worth it when you consider the risks highlighted above. 7

8 2. Am I responsible for my SMSF? Yes, you are. The ATO ( the regulator of SMSF s) will hold you responsible for completing your SMSF s accounting and auditing on time and for any breaches, even if you appoint an accountant or financial adviser to assist you. It is very important that you meet all of your ATO and ASIC responsibilities and payments on time. 3: Who makes investment decisions? Whilst some of the benefit s of an SMSF include, greater control, investment choice and deductible fees and direct ownership benefits, the investment decisions are solely the Responsibility of the member. So you should consider whether you have sufficient time and experience to manage your investments and if employing an adviser will assist you in managing your SMSF investment responsibilities. An example of an unsuitable investment would be a painting purchased by an SMSF, left hanging in the members home or a stamp collection, which would be hard to value or a vintage car. The problem with these types of investments are that they must meet the section 62 ( sole purpose test) definition, which requires that you select investments to: I. Generate a retirement income and II. Provide a death benefit Whilst a painting, stamp collection or vintage car, might be seen to be a great asset to purchase in your SMSF, it would be hard to demonstrate that these assets can achieve capital growth and income to justify investing in them to generate a retirement income. Further there is the risk that these investments provide a personal benefit, which is prohibited under section 71, 109 there is also the matter of obtaining valuations for these types of assets, which can be problematic and costly. It is important to recognize that the superannuation laws are there to protect the sector, its participants and assist with better governance. Now having highlighted (vintage cars, stamps and paintings) there are ways to ensure you do receive income and capital growth from these types of exotic assets but it goes without saying that good advice needs to be sort when entering into these arrangements as the risk of the ATO rendering your fund non-compliant can be very costly. 4: What are the costs of setting up an SMSF compare with maintaining my retail or industry fund? A recent ATO report identified that SMSF s with balances of $100,000 - $200,000 can cost between $2,410 -$4,820. While this is an average cost, with some providers charging less, it is important to note that you will need to determine the cost of running, the combined funds you have to setup the SMSF and what you intend on investing in the fund and the time you will spend managing it, to determine, whether it s worth setting up an SMSF at all and if you can outperform your current fund. 8

9 5: What happens if I am exposed to fraud or theft in my SMSF? In the event of theft or fraud or a bad investment, you will not have access to any Compensation arrangements under the Superannuation Industry Supervision Act ( SISA). This is an important consideration for SMSF members and trustee s, as retail and industry funds provide these protection mechanisms. Summary The benefits gained from a corporate or industry fund, such as low account fees and subsidized insurance, are benefits well worth maintaining for most people. While there are added responsibilities with SMSF s, people on above average incomes paying a lot of tax, wanting to purchase direct property or who are seeking to diversify their investments to create wealth or to generate income in retirement, will often benefit from setting up a self managed super fund (SMSF) provided that they are aware of their responsibilities and can allocate the time to manage their SMSF. The bottom line is, there are risks and benefits with SMSF s and with retail and industry funds and with all investing for that matter. So it is always a case of determining, which type of fund is suited to different types of investors. Employing an adviser can help you achieve your financial objectives, but naturally this come at a price, compared to staying with an industry or employer super fund, where typically members receive benefits such as, cheap automatic acceptance insurance, discounts on health insurance, group rate fees but where their individual needs and objectives are not always considered nor do they have any control over where their money is invested. 9

10 SUPER FUND CHECKLIST: FEES BENEFITS RETURNS SERVICE Do you pay for your fees, or does your employer and how do they compare to the industry What additional benefits do you receive? Are your fees and insurance paid for, is it sufficient cover? Health fund and gym membership discounts are these important to you? How does your default fund compare to its peers Do you receive financial advice, or assistance with your account YES NO YES NO YES NO YES NO YES NO Written by: Robert Joseph SMSF Adviser MY SMSF PROPERTY APPENDIX: I. The average super fund fees were sourced from the a recent report completed by Rice Warner Actuaries 'Retirement Savings Gap in March 2012 II. The sample size of this research was 117 funds, including, retail master trusts, corporate funds and industry funds. III. Rainmaker research compiles their Selecting Super benchmark indices. Website: IV. ATO statistical report average operating expenses of SMSF s 10

11 General Advice Warning This brochure provides general information only. Before making any financial or investment decisions, we recommend you consult a financial adviser or accountant to take into account your particular investment objectives, financial situation and individual needs. My SMSF Property, and its authorised representatives do not accept any liability for any errors or omissions of information supplied in this ebook, which are subject to change. Copy write Warning This eguide is the property of My SMSF Property, A.B.N: Permission is given for personal use only and any unauthorized reproduction, modification, distribution, transmission, or republication of this eguide content, in part or in full, is prohibited. This document is for informational purposes only and is not intended to provide any tax, legal or financial advice. My SMSF Property Level 17,109 Pitt Street SYDNEY NSW 2000 Phone: F: info@mysmsfproperty.com.au Website: 11

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