GPL Financial Group GPL Partners

August 2017

Our ‘hardest’ SMSF tasks

What are the hardest aspects of running your self-managed super fund (SMSF)? There are certainly more and more tasks and professional help my be needed to manage them properly.

 

Are they the seemingly ever-changing rules, the paperwork and administration or the challenge of choosing where to invest?

If you named dealing with the changing rules and choosing investments as your two hardest jobs, you are among hundreds of thousands of other trustees.

Comprehensive surveys for the 2017 Vanguard/Investment Trends Self Managed Super Fund Reports, released during the past week, asked SMSF trustees to list the hardest aspects of running an SMSF. Their responses include:

  • Choosing investments (31 per cent).
  • Dealing with regulatory uncertainty (31 per cent).
  • Finding time to research investments (16 per cent).
  • Handling paperwork and administration (16 per cent).
  • Finding time to plan and review for their SMSFs (12 per cent).

The most positive finding was that a quarter do not find any aspect of running their fund hard.

It should be emphasised that trustees could give multiple responses to the survey conducted by specialist researcher Investment Trends. For instance, other responses dealt with such specific challenges as having too much exposure to certain asset types (9 per cent) and sticking to an investment strategy (4 per cent).

The findings that many SMSF trustees have difficulty choosing investments and in dealing with regulatory uncertainty partly explains another finding from the survey that a large proportion of SMSFs recognise that they have unmet needs for advice.

Investment Trends estimates that 277,000 SMSFs – out of 585,000 funds at the time of the survey – had unmet needs for advice. This is the highest number to date based on past annual surveys.

An estimated 152,000 SMSFs have broad unmet needs for advice on tax and super while 113,000 have unmet needs for advice on retirement strategies. And an estimated 103,000 funds have unmet needs for investment advice.

Many SMSFs recognise their unmet need for advice on inheritance and estate planning (an estimated 59,000 funds), strategies in response to recent super changes (51,000), tax planning (50,000), investment strategy/portfolio review (50,000) and identifying undervalued assets (50,000).

Other unmet advice needs include investing for a regular income (46,000 funds), Exchange Traded Funds (46,000), SMSF pension strategies (45,000), offshore investing (43,000) and longevity protection (38,000).

The finding that almost half of Australia’s SMSFs recognise that they have unmet needs for professional advice is a critical acknowledgement by trustees that they need professional guidance.

In turn, this will hopefully lead to more trustees actually going the next step of gaining that advice.

Robin Bowerman,
Head of Market Strategy and Communications at Vanguard.
22 August 2017
www.vanguard.com.au

Lack of literacy promotes unrealistic goals

A large proportion of Australians have unrealistic retirement goals.  (NB: There are financial tools on this site that can help as too can a financial planner)

 

Australians’ lack of financial literacy is contributing to unrealistic expectations about their retirement, with more than half of consumers saying they want to travel regularly in their retirement despite the fact 63 per cent say they do not have a financial plan to guide their savings.

Sunsuper’s “2017 Australian Employee Insights Report”, based on a survey of over 1000 Australians, found that although 51 per cent of consumers had nominated travel as a key retirement goal, more than 40 per cent had not thought about how they were going to use their superannuation to fund their retirement.

At the same time, the report revealed 73 per cent of Australians thought they would have to rely on the age pension when they gave up work.

Speaking to financialobserver, Sunsuper head of advice and retail distribution Anne Fuchs said a lack of financial literacy was most likely to blame for the apparent gap between what many consumers wanted to achieve in retirement versus what their actual financial situation would be.

“Because financial literacy is quite low, Australians as a consequence have quite misguided expectations about what we think we can achieve,” Fuchs said.

“In Australia we are often brought up not to speak about money and because we are not speaking about it, we don’t understand our full financial position so we are prone to having unrealistic expectations.”

At the same time, she said many Australians were reluctant to seek financial advice as they were embarrassed or afraid of having third-party confirmation that their financial situation was not ideal.

“People have dreams about what they want to do in retirement and they are scared to speak to someone because they don’t want to be told it’s not possible – living in denial can be a happy place,” she pointed out.

To that end, Sunsuper had developed a “nudge” strategy to engage small groups of fund members around the importance of specific aspects of their finance to ensure even those who avoided seeking full financial advice were being encouraged to take action to improve their situation.

“We have good data around where [a member] is at a point in time and where they should be, and we take insights from that and get small groups of people around a boardroom table to have a conversation,” she said.

“If we take that approach, we find we have greater success as opposed to a generic presentation about the value of advice – we develop trust with the members so they don’t view us with a lens of suspicion and they are quite open to it.”

By Sarah Kendell
22 Aug 2017
financialobserver.com.au

Young investors: Time is on your side

Today's young investors weren't alive when The Rolling Stones, among others, released versions of Time is on my side yet the song's title just about sums up their lengthy investment horizon.

 

Young investors truly have time on their side.

By starting to invest as early as possible with enough exposure to growth assets, young investors typically have plenty of time to ride through numerous investment cycles, cope with share market volatility and enjoy long-term compounding returns.

And young investors have much more time to recover from investment setbacks. They have pre-retirement investment horizons of up to 40-plus years and then many years of investing once eventually retired.

Young investors should have target asset allocations for their portfolios – the proportions of assets in different asset classes of mainly shares, property, fixed interest and cash – that reflect their usually higher tolerance to risk.

Unfortunately, many young investors may invest too conservatively for their own good.

The ASX Australian Investor Study 2017, carried out by Deloitte Access Economics, comments on a “disconnect between investor risk profiles and their return expectations”. (The study focuses on investors who have at least some investments outside the big APRA-regulated super funds.)

Researchers found that young investors generally appear more risk averse than older investors, contrary to “conventional expectations” and challenging investor stereotypes. For instance, a very high percentage of investors under 35 were seeking guaranteed or stable investment returns.

The study comments that the risk aversion of young investors may be related to their growing up in the time of the global financial crisis (GFC). Their greater unwillingness to take risks might be linked to their inexperience as investors and level of their financial knowledge.

As the study comments, diversification is one of the most-effective ways to manage investment risk.

A well-diversified portfolio with a long-term asset allocation to reflect a young investor's tolerance to risk spreads the risks and opportunities as well as helping to smooth returns from growth assets over the long haul.

A fundamental understanding for young investors is to realise that time is on their side.

 

Robin Bowerman,
Head of Market Strategy and Communications at Vanguard.
09 August 2017
www.vanguard.com.au

Is your SMSF retirement-ready?

A landmark stage in the life of a self-managed super fund is when at least one of its members moves from the accumulation phase to retirement phase. (NB:  A financial planner can help with this question if you're not sure)

 

SMSFs often have members in the accumulation and pension phases. And typical two-person funds have both members retiring within a short time of each other – if not at the same time. (Two-person funds make up 70 per cent of SMSFs.)

Of course, some members take a transition-to-retirement pension rather than move from full-time work to full-time employment in one step yet still may contribute to super.

The growing waves of baby boomers who are nearing retirement or in early retirement and the large percentages of greying SMSF members underlines the need for their trustees to consider how their funds should handle the retirement phase.

Tax office statistics show that 46 per cent of SMSF members are over 60. And well over a third of SMSFs pay superannuation pensions (including transition-to-retirement pensions) to at least some of their members.

The Superannuation market projections report 2016, published early this year by independent consultants Rice Warner estimates, that SMSFs hold 52.5 per cent of overall superannuation assets invested in retirement products (including transition-to-retirement pensions), as at June 2016. This compares to 32.1 per cent for commercial super funds and 6.1 per cent for industry funds.

Some of the issues that SMSF members should be thinking about in preparation for retirement include:

  • Whether to gain additional specialist advice on preparing their funds for the members' retirement.
  • The appropriateness of a fund's asset allocation for retirement, given such considerations as the need to pay member benefits while gaining an appropriate exposure to growth assets. A decision may be made to sell some assets to acquire others. If direct property transactions are anticipated, the process may take some time.
  • Whether the fund's existing mandatory investment strategy will still be appropriate for the retirement phase.
  • The need for pension-paying SMSFs to accurately calculate their tax-exempt pension income, whether to manage assets on a segregated (specifically allocating or segregating assets to supporting its pensions) or unsegregated basis, and to pay the annual minimum pensions required to retain concessional treatment.
  • Estate planning. Quite simply, the retirement of members will no doubt prompt many SMSF trustees to focus on the need to plan for the management of their funds upon the death of a member.

Specialist superannuation editor Stuart Jones writes in the Thomson Reuters Australian Superannuation Handbook 2016-17 that beginning to pay a pension to members is a significant event for an SMSF that may warrant a revision of its mandatory investment strategy.

Under superannuation law, SMSF trustees are legally required to prepare, implement and regularly review an investment strategy that has regard to the whole circumstances of their fund.

These circumstances include investment risks, likely returns, liquidity, investment diversity, risks of inadequate diversity and ability to pay member benefits. And trustees are required to consider the profile of their members, which would include their individual tolerance to risk.

Jones writes that a revised SMSF investment strategy for the pension phase may include the likely returns from the fund's pension assets, liquidity of pension assets, expected cash flow to pay the minimum pension, and the ability to member pensions and death benefits.

As Jones says, there are no specific rules for the investment of a fund's assets supporting a pension.

Is your SMSF retirement-ready? There's plenty to think about.
 

Robin Bowerman,
Head of Market Strategy and Communications at Vanguard.
25 July 2017
www.vanguard.com.au

Investors acting their age

Young investors can fall into the trap of being too conservative for their own good, forfeiting compounding long-term returns from growth assets.

 

This can lead to the question: How do we tend to invest at different ages?

Of course, a higher percentage of Australians hold much of their investment savings in the default diversified portfolios of the big super funds – often with extra savings invested outside super.

And the way that investments held outside the big super funds' default portfolios are allocated in different asset classes provides a useful insight into personal investment preferences by age.

Independent consultants Rice Warner includes a look at investor preferences by age and wealth in its Personal Investments Market Projections 2016 report.

This report broadly defines the personal non-super investments market to include all investment assets held by investors in their own names or through trusts and companies. It does not include family homes and personal effects.

Rice Warner' discussion of asset allocation of personal non-super assets by age begins with investors aged 15-24. Parents and grandparents often have made investments on their behalf; and this appears to show up in their asset allocations.

Half of the personal investment assets of investors aged 15-24 are in cash and term deposits – second only to investors aged over 75 – and 27 per cent is allocated to life products, investment platforms and managed funds.

Interestingly, 22 per cent of the personal, non-super assets of these investors under 24 are in direct property. Young people generally would not have the money to invest in property by themselves; this percentage suggests plenty of parental help. And they have almost no investments in direct equities.

A point worth noting is that the personal, non-super investment patterns of these young investors seem to setup a broad path for their investing at older ages– yet with some key variations in asset allocations with age.

Consider these for asset allocations of personal, non-super investments at different ages shown in the Rice Warner report:

  • Cash and term deposits: aged 15-24 (50 per cent of their assets), aged 25-34 (46 per cent), aged 35-44 (37 per cent), aged 45-54 (38 per cent), aged 55-64 (43 per cent), aged 65-74 (46 per cent) and aged 75-plus (52 per cent).
  • Direct investment property: aged 15-24 (22 per cent of their assets), aged 25-34 (47 per cent), aged 35-44 (50 per cent), aged 45-54 (47 per cent), aged 55-64 (43 per cent), aged 65-74 (38 per cent) and aged 75-plus (17 per cent).
  • Life products, investment platforms and managed funds: aged 15-24 (27 per cent of their assets), aged 25-34 (3 per cent), aged 35-44 (7 per cent), aged 45-54 (7 per cent), aged 55-64 (6 per cent), aged 65-74 (7 per cent) and aged 75-plus (14 per cent).
  • Equities: aged 15-24 (1 per cent of their assets), aged 25-34 (5 per cent), aged 35-44 (6 per cent), aged 45-54 (9 per cent), aged 55-64 (8 per cent), aged 65-74 (9 per cent) and aged 75-plus (16 per cent).

Keep in mind that some investors may decide to have well-diversified portfolios for their savings in large super funds and self-managed super funds while taking a different approach for their personal, non-super holdings.

For instance, many investors choose to hold direct property in their own names and perhaps with some cash, fixed-interest, selected direct shares and managed funds.

The appropriate course for the asset allocation of personal, non-super investments will depending much on personal circumstances, including professional advice received.

It can be a pitfall for an investor to look at their personal, non-super portfolio or their super portfolio in isolation when considering the appropriateness of their asset allocations. Consider taking professional advice on this point if you haven't already.

Some investment habits – good and bad – tend to be set at a young age. It is vital to get on the right path at the beginning of your investing life.

Robin Bowerman,
Head of Market Strategy and Communications at Vanguard.
09 August 2017
www.vanguard.com.au

ATO locks in details, addresses panic on real-time reporting

The tax office has addressed several points of confusion with the new events-based reporting regime, locked in key deadlines, and outlined what will be included in a new position paper set to be released shortly for the SMSF community. 

 

From 1 July 2018, SMSFs will be required to report those events which impact on a member’s transfer balance account on an events basis. For those who want to get on board early, SMSFs can voluntarily begin reporting from October this year, which is when APRA funds will start.

Speaking to SMSF Adviser to address some concerns about the breadth of the new regime, ATO assistant commissioner Kasey Macfarlane emphasised the events that are required to be reported on a more regular basis are confined to transfer balance cap events.

“SMSFs won’t be required to report investment earnings, investment gains, investment losses on a more regular basis. They won’t be required to report members’ account balance information on a more regular basis. And they won’t be required to report contribution or pension payments on a more regular basis under this model,” she said.

The more common items that will need to be reported include the dates and value of any pension that an SMSF member is entitled to or commences, the date of any commutation of one of those pensions, and any structured settlement payment that an SMSF member receives and contributes to their fund.

Further, LRBA payments that give rise to a transfer balance credit will need to be reported, following a bill that was introduced in June.

“Importantly SMSFs, only have to report something if there is an event that impacts on one of their member’s transfer balance. An SMSF with relatively straightforward events may only have one or two events per member to report over the life of the fund,” said Ms Macfarlane.

Further, and as foreshadowed by SMSF Adviser last week, the ATO will be releasing a position paper shortly which will look at adjusting the time frames for events-based reporting.

One of the options is that from 1 July 2018, SMSFs would only be required to report transfer balance cap events quarterly, with a view to have a generous transitional period — possibly two years — before moving to monthly reporting.

“The feedback has been that there are different reporting periods for different events, which may make the reporting requirements less clear, and make people less likely to report these events appropriately,” she said.

 

KATARINA TAURIAN
18 Aug 2017
smsfadviser.com