Day: 5 December 2019

The number of Australians establishing SMSFs has been rising consistently since an amendment to the Superannuation Industry (Supervision) Act 1993 in 1999 allowed for SMSFs to be controlled by trustees rather than the federal government.

The Australian Prudential Regulation Authority’s recent statistics on SMSF funds showed there were 595,840 SMSFs operating in Australia, holding $712 billion in assets. The recent revelations from the banking royal commission around the lack of transparency of retail funds’ investments and their tendency to focus on profit rather than the interests of members is likely to only drive more people to set up their own funds.

But how well equipped are SMSF trustees to be managing their own retirement investments?

As part of further investigations in recent years, the Australian Securities and Investments Commission (ASIC) conducted an online survey of 457 SMSF members who had set up their own fund in the preceding five years. The results were published in two reports, “Report 575: SMSFs: Improving the quality of advice and member experiences” and “Report 576: Member experiences with self-managed superannuation funds”. The reports make for sobering reading.

The main reason for setting up an SMSF is greater control over investment decisions. According to ASIC, around one-third of SMSF trustees are naïve about what is required to run their own fund and the benefits of diversification.

In one case, an SMSF member, believing the property market was “over-inflated” and the stock market was too “risky”, held 100 per cent of their SMSF balance in cash with a view to investing in property “in maybe three or four years”.

Survey respondents reported misalignment of their expectations and actual experiences as SMSF members in a number of key areas, including:

• costs to set up and run an SMSF,
• time spent on administering an SMSF,
• the unexpected complexity of running an SMSF, and
• member understanding of SMSFs and their legal responsibilities as SMSF trustees.

 Costs of setting up and running an SMSF

Individuals looking to set up an SMSF need to factor in all costs to establish and run their SMSF including amounts to cover any initial and/or ongoing advice, as well as establishment costs, including the appointment of the trustee and registration of the fund.

Once established, there will also be the annual cost of running the fund, including accounting, auditing and reporting costs associated with ensuring the fund is compliant, and the ability for members to extract relevant information during any period of the financial year if needed.

What is the ideal starting balance for an SMSF?

At the heart of this question should be an examination of the client’s needs, goals and objectives: why does the client need an SMSF and would they be better served by a retail fund or even an industry fund?

Advisers should start with an exploration of the client’s ability to act as a responsible trustee. Do they understand their obligations as a trustee and do they have the time, interest and ability to ensure the fund is adequately serviced and remains compliant?

Cash-flow analysis, on both the fund’s proposed underlying investment assets and the overall fund itself (particularly where direct property may be part of the fund’s investment strategy), will also influence the suggested starting balance.

Time to spend on SMSF administration

The time required to manage and administer an SMSF will often depend on what type of investor the client is and how active they are when managing their SMSF investment portfolio. Having said that, 38 per cent of respondents in the ASIC survey said running an SMSF was more time consuming than they expected.

All SMSF trustees will need to undertake some level of regular investment research on their investment options. Hand in hand with this is the ongoing monitoring of the investment strategy and the performance of current and future investments. This may include the need to organise annual valuations of assets such as direct property investments.

Trustees also need to be mindful of the need to meet their regular reporting obligations, ensure the fund remains compliant and keep abreast of changes in regulation or super laws that may affect trustee responsibilities.

They need to appreciate that they remain responsible, and will be held accountable, for the compliance of their SMSF at all times.

Dealing with the complexity of running an SMSF

The main arguments against SMSFs relate to the complexity of running the fund and in meeting compliance obligations.

Trustees can certainly outsource many aspects of running a fund, but are obligated to ensure the investments selected for the fund remain appropriate. The ASIC survey revealed 6 per cent of SMSF members had not made any investments since setting up their SMSFs, with the most common reason being they had not yet found the right property to buy.

The ATO can conduct a random audit of an SMSF at any time. The penalties for non- compliance are high and receiving a notice of non-compliance from the ATO usually has devastating tax consequences.

Understanding of SMSF concepts and legal responsibilities as a trustee

SMSF trustees are required to have a sufficient level of financial literacy to make investment decisions that are consistent with their fund’s investment strategy. However, ASIC’s advice review revealed 33 per cent of members did not know their SMSF was legally required to have an investment strategy. Even fewer than that (28 per cent) were aware SMSF trustees are required to consider the insurance needs of all members when drafting an investment strategy.

Clients should also be made aware they – not their financial adviser, accountant or lawyer –are legally responsible for their SMSF. A few simple questions during the initial interview will quickly determine whether a person has the requisite financial literacy to carry out the legal responsibilities of an SMSF trustee.

Just as important is recognising when clients no longer have the cognitive ability to function as an SMSF trustee. Assisting clients with succession planning and/or winding up their SMSF is crucial at this time.

As individuals get closer to retirement, many are seeking further advice to help them better understand the circumstances required to allow them to access their superannuation savings, often with the desire to access their super at an earlier age. Many consumers often don’t  understand the rules and conditions necessary to allow for the release of their super savings.

According to a recent AMP report “In particular, many Australians don’t realise they can access super early if they change jobs between the ages of 60 and 65, even if they continue working in a new job, however, super benefits can be accessed as a tax-free lump sum during this period, or used to commence a retirement income stream, which receives both a tax exemption on earnings, and has no maximum pension restriction.” 

With respect to the desire to access super balances early, there are very limited circumstances when you can access your super early. These circumstances are mainly related to specific medical conditions or severe financial hardship.

Consumers need to be aware that some promoters claim to offer early access to your super by transferring your super into a self-managed super fund. These schemes are illegal and heavy penalties apply if you participate. Access to your superannuation outside of the traditional “retiree – commencement of pension” methods are limited and well policed by the regulators.

Access on compassionate grounds

You may be allowed to withdraw some of your super on compassionate grounds. Compassionate grounds include:

• paying for medical treatment for you or a dependant
• making a payment on a loan to prevent you from losing your house
• modifying your home or vehicle for the special needs of you or a dependant because of a severe disability
• paying for expenses associated with a death, funeral or burial of a dependant.

Access due to severe financial hardship

You may be able to withdraw some of your super if you have received eligible government income support payments continuously for 26 weeks and are unable to meet reasonable and immediate family living expenses.

A super withdrawal due to severe financial hardship is paid and taxed as a super lump sum. The minimum amount that can be paid is $1,000 (unless your super balance is less than $1,000) and the maximum amount is $10,000. You can only make one withdrawal from your super fund because of severe financial hardship in any 12-month period.

There are no cashing restrictions under severe financial hardship if you have reached your preservation age plus 39 weeks and you were not gainfully employed on a full-time or part-time basis at the time of application.

Access due to terminal medical condition

You may be able to access your super if you have a terminal medical condition.

A terminal medical condition exists if:

• two registered medical practitioners have certified, jointly or separately, that you suffer from an illness, or have an injury, that is likely to result in death within a period (certification period) that ends no more than 24 months after the date of the certification
• at least one of the registered medical practitioners is a specialist practising in an area related to your illness or injury
• the certification period for each of the certificates has not ended.

Your fund must pay your super as a lump sum. The payment is tax-free if you withdraw it within 24 months of certification.

Access due to temporary incapacity

You may be able to access your super if you are temporarily unable to work or need to work less hours because of a physical or mental medical condition. This condition of release is generally used to release insurance benefits from a super fund.

You will receive the super in regular payments (income stream) over the time you are unable to work. A super withdrawal due to temporary incapacity is taxed as a normal super income stream.

Access due to permanent incapacity

You may be able to access your super if you are permanently incapacitated. This type of super withdrawal is sometimes called a ‘disability super benefit’.

Your fund must be satisfied that you have a permanent physical or mental medical condition that is likely to stop you from ever working again in a job you were qualified to do by education, training or experience.

At least two medical practitioners must certify this for you to receive concessional tax treatment.

You can receive the super as either a lump sum or as regular payments (income stream). A super withdrawal due to permanent incapacity is subject to different tax components.

Superannuation Balances less than $200

You may be able to access your super if your employment is terminated and the balance of your super account is less than $200, or if you have formerly lost super held by a super fund or by us that is less than $200.

Other questions often raised with advisers include:

• How much can be contributed to super through non-concessional contributions?;
• How transition to retirement pensions work?;
• Understanding how the superannuation death benefit works; and
• Understanding how total and permanent disability insurance works within superannuation.

Consumers should seek out advice from their financial planner for further information. 

The release of ASIC’s Report 627 Financial advice: What consumers really think, highlighted that among Australians who have received professional financial advice, 89% intend to get advice again in the future.

The report also revealed that almost four times as many Australians who received advice in the past 12 months had a ‘great deal of trust’ in their advisers compared to those people who had not received advice recently.

It was a resounding endorsement for the advice industry but one that is not reflected in the level of support it is currently receiving from the Federal government, which is standing by while the Australian financial advice industry is experiencing death by a thousand cuts.

The other very important piece of information that Australian consumers provided in this research was that the main reason they did not obtain advice was that it was too expensive.

And yet the industry is about to have a reform agenda thrust upon it that will greatly increase costs to the consumer.

The ASIC report also highlighted that advised consumers are more engaged with their financial affairs, have higher incomes and levels of education. If their interaction with advisers has improved their financial behaviour, then that is another reason to seek advice.

Either way, the government should be looking at ways to get more people into advice rather than increasing the barriers such as cost and creating trust issues by blaming advisers for things that are out of their control, such as product failures.

In the absence of strong government leadership, the mainstream media has filled the vacuum and been allowed to drive the narrative on this issue.

During the Royal Commission, the mainstream media focused on the horror stories that mostly came out of the wealth management arms of the large institutions without making the distinction between that model and the non-institution aligned financial planning model.

The ASIC report indicated that there was significant mistrust of financial advisers, but that it was mainly prevalent among people who had never received financial advice.

The only conclusion that can be reached from this is that those people who don’t trust advisers have formed that opinion from statements made by politicians and sensationalist mainstream media coverage. Actual recipients of advice remain overwhelmingly positive about their experiences with advisers.

This has had the effect of vilifying all 30,000 financial advisers in the industry when the over- whelming majority of them always act in the best interests of their clients to improve their financial circumstances.

This would indicate that the government has dropped the ball on this issue and our elected officials need to develop a better understanding of our industry before they destroy it, to the detriment of all Australian consumers.

My belief is that the negative perception of financial advisers can also be attributed to lack of understanding. As the ASIC report acknowledged: “Even limited knowledge of recent reforms (e.g. the Future of Financial Advice (FOFA) reforms or the professional standards re- forms for financial advisers) appeared to improve perceptions of the financial advice industry”.

To its detriment, the industry did not speak up in its own defence in the wake of the Royal Commission.

For example, planners themselves have no control over product failures but this fact was never part of the public debate.

The government has agreed to act on the recommendations of the Royal Commission, which were essentially motivated by public pressure to rectify the dysfunctional situations in the large financial institutions. But around half of the advisers not aligned with institutions ended up as collateral damage and by the time all the advice arms of the institutions are closed down or reduced in size, it will be many more.

These small business people, who invested their own savings to build a business, and al- most all of whom followed the rules to the letter, are suddenly looking down the barrel of a significant and permanent loss of income.

The recently announced legislation to remove trailing commissions from the industry has not given due weighting to the fact that commissions act as a vital funding mechanism for Australians who cannot afford to pay high fees to access financial advice.

In addition to a loss of commissions, increasing compliance, education and licensing costs are also cutting into advisers’ bottom lines, with some saying that revenues will fall by 30%. Most of these costs will have to be passed on to clients.

This upheaval is forcing many advisers out of the industry. Almost 3,000 advisers, around 10% left the industry in the first half of 2019 alone.

For those that remain, the stress is having a terrible impact. It is at the point where a few licensees actually have some of their financial advisers on a suicide watch list.

Furthermore, advisers who have successfully served their clients for 30 years or more have been told that they have to become degree qualified. Thankfully, the deadlines for completion were extended last week as a small concession.

All of this has advisers wondering what’s lying in wait for them around the next bend.

As Julie Bishop said in her address at the Association of Financial Advisers National Conference: “It’s so important that politicians and regulators understand the impact of legislation”. The Royal Commission certainly failed to recognise unintended consequences for the industry by focusing its efforts on stamping out misconduct and ignoring all other factors. The government owes it to the public to look at the broader effects of these reforms. ASIC’s Report 627 provided vital information in this regard that it would be negligent to ignore, as it highlights the fact that consumers are better off with financial advisers. We need a reform agenda that enables more Australians to seek advice, not less.

Australians who have racked up sizeable study debts should not rush to pay them back and instead should divert their money elsewhere, experts say.

The Higher Education Loan Program (HELP) debts are one of the cheapest forms of debts people can have because they do not attract interest charges.

Lifespan Financial Planning’s chief executive officer Eugene Ardino said Australians should be focused on paying down debts that attract interest.

“It should be a priority, all other forms of debt generally come with minimum repayments and you must repay them irrespective of whether or not you work,” he said.

“If you have any other debts I would be paying them off first. HELP debts are indexed at inflation on June 1 every year.

In 2019 they rose by 1.8 per cent.

Most credit cards attract rates around 20 per cent, followed by personal loans at often more than 10 per cent and home loan debt at about 4 per cent.

Those owing still owing debts at death, must have all their tax returns filed and once that is completed, any further outstanding HELP debt is wiped.

Financial comparison website RateCity’s spokeswoman Sally Tindall said the government had failed to do enough to encourage people to pay back their loans sooner.

“The government isn’t doing much to encourage people to clear their loan early,” she said.

“In 2017 they scrapped the 5 per cent bonus for voluntary repayments, and in doing so, they took a very large carrot off the table.”

But she warned Australians having a HELP debt could impact their ability to get other loans down the track.

“An outstanding HELP debt could potentially become a thorn in your side when you go to get a mortgage because the compulsory repayments can eat into your disposable income and potentially curb how much you can borrow,” Ms Tindall said.

University debt

• AGE: 0-19 DEBT: $353m
• AGE: 20-29 DEBT: $33.64b
• AGE: 30-39 DEBT: $17.8b
• AGE: 40-49 DEBT: $6.3b
• AGE: 50-59 DEBT: $2.5b
• AGE: 60-69 DEBT: $962m
• AGE: 70+ DEBT: $315m
• AGE: N/A DEBT: $44m

TOTAL: $62 billion

Source: ATO 2017/18 financial year, numbers rounded up

Mr Ardino said investing any excess money you had would be better down into the sharemarket than paying off HELP debts.

“For younger people you would be better to use excess savings and start an investment portfolio or potentially put the money aside to buy your first home,” he said.

But he warned the government that writing of HELP debt at death meant they were costing themselves money.