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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

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

Democrat Joe Biden is pressing ahead with preparations to take the reins as the next President of the United States. Despite legal challenges and recounts, the early signs are that markets are responding positively.

In fact, the US sharemarket hit record highs in the weeks following the November 3 election as Biden’s lead widened.

So what can we expect from a Biden Presidency?

Biden’s key policies

The policies Joe Biden took to the election which stand to have the biggest impact on the US economy and global investment markets include the following:

• Corporate tax increases. The biggest impact on corporate America would come from Biden’s plan to lift the corporate tax rate to 28 per cent. This would partially reverse President Trump’s 2017 cut from 35 per cent to 21 per cent. Biden is also considered more likely to regulate the US tech giants to promote more competition. These plans may face stiff opposition from a Republican Senate (which appears likely).
• Stimulus payments to households. Biden supports further fiscal stimulus to boost consumer spending. While there were hopes that this could be delivered before the end of the year, action now seems unlikely until after January 20.
• Infrastructure program. Biden has promised to rebuild America’s ageing public infrastructure, from roads, bridges, rail and ports to inland waterways. This would stimulate the construction and engineering sectors.
• Climate policy. Biden is expected to rejoin the Paris Climate Accord and join other major economies pledging zero net carbon emissions by 2050. To achieve this, he would likely promote renewable technologies at the expense of fossil fuels.
• Expand affordable healthcare. Biden wants to create affordable public health insurance and lower drug prices to put downward pressure on insurance premiums.
• Turn down the heat on trade. Biden will continue to put pressure on China to open its economy to outside investment and imports. But unlike President Trump’s unpredictable, unilateral action, he is expected to take a more diplomatic approach and build alliances with other countries in the Asian region to counter China’s expansionism.

While a Republican Senate may oppose measures such as higher corporate taxes and tougher regulation of industry, it is expected to be more open to other policy initiatives.

The outlook for markets

The general view is that further stimulus spending should support the ongoing US economic recovery which will in turn be positive for financial markets.

While Biden is committed to heeding expert advice in his handling of the coronavirus, a return to lockdown in major cities may put a short-term brake on growth.

Longer-term, recent announcements by pharmaceutical company Pfizer and others have raised hopes that vaccines to prevent COVID-19 may not be far off. This would provide an economic shot in the arm and continued support for global markets.

However, as sharemarkets tend to be forward looking, the US market appears to have already given Biden an early thumbs up with the S&P500 Index hitting record highs in mid-November.

Lessons of history

Despite the Republicans’ more overt free market stance, US shares have done better under Democrat presidents in the past with an average annual return of 14.6 per cent since 1927. This compares with an average return of 9.8 per cent under Republican presidents.

While the past is no guide to the future, it does suggest the market is not averse to a Democratic president.

What’s more, shares have done best during periods when there was a Democrat president and Republican control of the House, the Senate or both with an average annual return of 16.4 per cent.ⁱ

Implications for Australia

Australian investors should also benefit from a less erratic, more outward-looking Biden presidency.

Any reduction in trade tensions with China would be positive for our exporters and Australian shares. While a faster US transition to cleaner energy might put pressure on the Morrison government and local companies that do business in the US to do the same, it could also create investment opportunities for Australia’s renewables sector.

Ultimately, what’s good for the US economy is good for Australia and global markets.

If you would like to discuss your overall investment strategy as we head towards a new year and new opportunities, don’t hesitate to contact us.

i https://www.amp.com.au/insights/grow-my-wealth/joe-biden-on-track-to-become-us-president-implications-for-investors-and-australia

With tax cuts and stimulus payments on the way, Treasurer Josh Frydenberg is urging us to open our wallets and spend to kick start the national economy. But if your personal balance sheet could do with a kick along, then saving and investing what you can, also makes sense.

One positive from this COVID-19 induced recession, is that it has made many of us more aware of the importance of building a financial buffer to tide us over in lean times. Even people with secure employment have caught the savings bug.

According to the latest ME Bank Household Finance Confidence Report, 57 per cent of households are spending less than they earn. This is the highest percentage in almost a decade.ⁱ

More troubling however, was the finding that one in five households has less than $1,000 in savings, and only one third of households could maintain their lifestyle for three months if they lost their income.

Whatever your financial position, if saving is a priority the next step is deciding where to put your cash.

Banking on low interest

Everyone needs cash in the bank for living expenses and a rainy day. If you’ve been caught short this year, then building a cash buffer may be a priority.

If you have a short-term savings goal such as buying a car or your first home within the next year or so, then the bank may also be the best place for your savings. Your capital is guaranteed by the Government so there’s no risk of investment losses.

But with interest rates close to zero, the bank is probably not the best place for long-term savings. So once your need for readily accessible cash is covered, there are more attractive places to build long-term wealth.

Pay down your mortgage

If you have a mortgage, then making extra repayments can reduce the total amount of interest you pay and cut years off the life of your loan. This strategy has the most impact for younger people in the early years of a 25 to 30-year loan.

If your mortgage has a redraw or offset facility, you can still access your savings if you need cash for an emergency or home renovations down the track. This may be a deciding factor if retirement is a long way off.

Boost your super

Making extra super contributions is arguably the most tax-effective investment, especially for higher income earners.

Even so, super is likely to be more attractive as you get closer to retirement, the kids have left home, and your home is close to being paid off. (see Mortgage or super below).

You can make personal, tax-deductible contributions up to the annual cap of $25,000. Be aware though that this cap includes super guarantee (SG) payments made by your employer and salary sacrifice amounts.

You can also make after-tax contributions of up to $100,000 a year up to age 75, subject to a work test after age 67.

Mortgage or super?

A question often asked is whether it’s better to put savings into super or your mortgage. Well, it depends on factors including your age, personal circumstances and preferences, interest rates and tax bracket.

Mitch is 35 with 25-year, $500,000 mortgage and monthly repayments of $2,300. If he increases his repayment by $400 a month, he could cut five years off the term of his loan and save almost $40,000 in interest.ⁱⁱ

But what if Mitch were to salary sacrifice that extra $400 a month into his super? He currently earns $85,000 a year which puts him in the 34.5 per cent tax bracket, including the Medicare Levy. By age 60, his super balance would be around $138,000 higher than if he relied on his employer’s SG contributions alone.

Mathematically, Mitch would be better off putting extra savings into super than his mortgage. But he and his partner Grace are planning to marry and start a family, so getting on top of the mortgage and having access to his savings to upgrade their home and fund their kids’ education is a bigger priority than retirement right now.

It’s different for Gail, who at age 55 has $200,000 and 10 years left on her mortgage and just $100,000 in super. If she puts an extra $400 a month into her mortgage, she will save around $5,800. But if she salary sacrifices $400 a month into super until age 65, she will boost her balance by around $48,000 and still manage to pay her home off by the same time.ⁱⁱⁱ

Invest outside super

If you would like to invest in shares or property but don’t want to lock your money away in super until you retire, then you could invest outside super.

If you are new to investing, you could wait until you have saved $5,000 or so in the bank and then buy a parcel of shares or an exchange-traded fund (ETF). ETFs give you access to a diversified portfolio of investments in a particular market, market sector or asset class.

First home buyers might consider the Federal Government’s expanded First Home Loan Deposit Scheme with as little as 5 per cent deposit. There are limited packages available and price caps on the home value, depending on where you live.

With tax cuts set to flow and a new appreciation of the importance of financial security, now is the perfect time to start a savings plan. Contact our office if you would like to discuss your savings and investment strategy.

i https://www.mebank.com.au/getmedia/c27b0a0d-cc4e-470e-8a37-722d6f00af98/Household_Financial_Comfort_Report_July_2020_FINAL.pdf

ii Calculations using the MoneySmart mortgage calculator, 14 October 2020, using default assumptions.
https://moneysmart.gov.au/home-loans/mortgage-calculator

iii Calculations using the MoneySmart super calculator, 14 October 2020, using default assumptions.
https://moneysmart.gov.au/how-super-works/superannuation-calculator