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Millions of multiple super accounts erode savings

One of the simplest ways to make your retirement savings more efficient and less costly is to get rid of needless multiple super accounts.

         

 

The vast majority of super fund members with multiple accounts unnecessarily pay multiple sets of fund administration fees and insurance premiums. These extra costs compound over time to eat away at retirement savings.

Further, members with multiple super accounts may have difficulty keeping track of how their retirement savings are invested, their asset allocations, and whether their returns are satisfactory. This can lead to sacrificing returns year after year in a poorly performing fund. Lost super accounts can often mean lost returns.

Yet many of us have more super accounts than credit cards. It may seem hard to believe but some individuals are members of six or more super funds.

Of 14.8 million Australians who were members of a super fund at June 2017, the tax office reports that 40 per cent had more than one super account. More than 28 million super accounts exist – almost double the number of Australians with super.

And 6.3 million super accounts with a total value of almost $18 billion were classified as “lost” or “inactive”. These accounts are held by the tax office (earning interest) or by super funds, depending upon the circumstances.

While 60 per cent of fund members held one account, 25 per cent had two super accounts. One per cent (63,000 members) had six or more.

This tax office data suggests that many young members begin collecting multiple fund memberships shortly after first joining the workforce, often working in a succession of part-time or full-time jobs. A common trap is to join a new default super fund whenever taking a new job.

Those working in the gig society and holding a portfolio of part-time jobs would often have multiple super accounts.

The numbers of members with multiple accounts tends to markedly increase as members move from job to job during their typically long careers, peaking at 48.17 per cent of members in the 41 to 45 age group. Having three or more super accounts is not uncommon, mostly for members in their mid-careers.

Fortunately, the proportion of members with more than one accounts begins to reduce as they enter their fifties, falling to one third of members age 61-65 and down to under 18 per cent of members age 66 or more.

As actuaries and consultants Rice Warner point out in a recent commentary, some individuals have a need for two super accounts – typically for insurance coverage or because they are unable to combine a defined benefit account with an accumulation account. But this would not explain why millions of multiple accounts exist.

Certainly, the consolidation of your multiple super accounts is unlikely to dramatically improve your super savings. Yet as Rice Warner comments: “Recovering lost super can improve retirement savings bit by bit”.

The tax office's website has a useful feature, Keeping track of your super, which includes a useful video about how to find your multiple super accounts and how to get rid of excess accounts using the MyGov website. ASIC's consumer website MoneySmart also useful tips in an article, Consolidating super funds.

 

Written by Robin Bowerman
Head of Market Strategy and Communications at Vanguard.
09 March 2018
vanguardinvestments.com.au

Downsizing requires holistic tax planning

For many it's more than just issues to do with Superannuation.

           

 

Advisers and their SMSF clients need to be mindful of some of the wider tax planning implications of the federal government’s downsizing measure, according to a specialist industry lawyer.

DBA Lawyers director Daniel Butler said the measure will require advisers to consider tax planning measures outside of superannuation, including the impact of the potential loss of franking credits. 

In addition, Butler revealed he had noticed a reduction in clients opting for structures outside of super.

“Everything went into super because that was where everything was destined to go and was more efficient,” he said at the law firm’s recent SMSF Strategy Seminar in Sydney.

“But now with all these caps, we’ll be back to some of the old planning. 

“Clients again will have that family trust or they’ll have the corporate beneficiary, and there’s more tax advice to that.”

He again reminded advisers the major downside to contributing the proceeds of the downsizing measure to super would be the impact on members’ Centrelink entitlements, mainly the age pension.

Regardless of the value of the member’s family home, it remains outside of the assets test, he warned.

“Once you attain pension age, super is assets tested and has the deemed rate of return. So it [the downsizing measure] really isn’t that wise for some people because they’re going to burn their Centrelink entitlement,” he said.

“But for people who have never had the opportunity of getting Centrelink, it’s one of those opportunities you may want to think about.”

The measure presented an opportunity for clients with low superannuation balances to boost their super by selling the family home, however, the initiative may not be permanent as Butler believes Labor does not support it and will likely scrap it if it wins the next election.

 

 

By Malavika Santhebennur
​22 March 2018
www.smsmagazine.com.au

What your age should say about your super

Significant birthdays are either met with a high level of excitement…or dread.

         

 

And the emotional response is generally driven by how high the birthday number is.

So an 18th or 21st birthday is usually embraced as a celebration of coming of age/entry to the adult world with all the accompanying hope for what the future may bring.

The birthdays that follow that mark the start of new decades – the 30s, 40s, 50s, 60s and so on – tend to be celebrated to varying degrees and with at least some level of ambivalence.

There is another way to think about birthdays – as a personal financial planning and investment tool.

Discipline is a key part of any investment strategy. The challenge of staying the long term course when there is so much else going on in the world is something most investors grapple with.

Recently, a family member had all the fun – and expense – of celebrating her 21st birthday. Somewhere in the midst of the celebration, sage advice was offered that she should review her superannuation fund balance and investment strategy at her 50th birthday party.

Fair to say that free piece of financial advice did not make the social media highlights reel.

But age is an important input into any financial plan.

For a young person with (hopefully) more than 40 years till retirement, a growth/high growth asset allocation makes good sense.

There is much about the Australian superannuation system that is world class, if not world-leading. But one common criticism is about the level of “engagement” by fund members. Given its mandatory, near universal coverage of the workforce, it is not surprising that the majority of fund members are in the “default” or MySuper product category.

The challenge with engagement is that it is often measured by the number of fund members who are actively choosing investment options from the fund's investment menu.

While that sounds reasonable, there is a considerable body of research that says when members choose their own investment options they actually underperform the professionally managed default offerings.

So perhaps the better measure of member engagement is how well they understand their fund's default offer, or even if they chose that particular fund because of what the default offers.

The typical default MySuper fund has a static asset allocation – meaning it is the same whether you are 21 or 65 – and classified in the growth category with a 70/30 growth/defensive split. But some funds take a more aggressive approach and because it is up to each fund to determine what they classify as defensive assets and growth assets, the offers can vary considerably.

In contrast, the US 401(k) retirement system is undergoing a significant shift in the way the default funds are managed.

In 2017 around 51 per cent of the default offers in US 401(k) plans are so-called target-date offers.

This is really putting your birthday to work on an institutional scale. These funds set the asset allocation mix between growth and defensive assets based on your age.

So for our 21 year old, the growth/defensive split would typically be in the range of 90 per cent growth/10 per cent defensive. Using Vanguard's glide-path as a guide, that asset allocation would begin to take a more defensive stance after that 50th birthday. By the time you are 65 the blend is 55 per cent growth/ 45 per cent defensive.

The logic is simple enough – when you are young you have time on your side to ride out even dramatic market movements like a global financial crisis, so you can afford to be more aggressive and hopefully be rewarded with higher returns for having taken the higher level of risk.

When you have just celebrated your 60th birthday, and perhaps begun thinking about retirement, dramatic market falls can severely impact your retirement savings pool and then time becomes more of a concern than it does a friend.

Some Australian super funds have implemented target-date approaches to their MySuper offer but the take-up has been relatively low compared to the US system.

So perhaps when you next celebrate a significant birthday it is worth investing the time and engaging with your super fund to understand what the default asset allocation is and whether it lines up with your stage of life.

Written by Robin Bowerman
Head of Market Strategy and Communications at Vanguard.
26 March 2018
vanguardinvestments.com.au

Gig economy spike prompts calls for super policy changes

The federal government is again being lobbied to extend the superannuation guarantee to include the self employed, as the gig economy becomes a staple of the Australian workforce.

         

 

The Association of Superannuation Funds of Australia (ASFA) is currently developing proposals to formally include self-employed and gig workers in the SG regime, following its initial calls for change in 2017.

A statement, released today, says ASFA will be engaging with major gig economy employers before taking a policy paper to government on the matter.

ASFA’s figures show about 19 per cent of the self-employed have no superannuation savings, compared to eight per cent of PAYG employees.

Further, the average super balance for self-employed men at age 60-64 is around $143,000, compared with $283,000 for male wage and salary earners. Similarly, self-employed women in that same demographic have about $83,000 in superannuation savings, compared with around $175,000 for female wage and salary earners.

At present, about 1.3 million Australians are self-employed, which is about 10 per cent of the national workforce. However, this is predicted to sharply increase across multiple industries, which ASFA CEO Dr Martin Fahy believes poses a significant issue to the nation’s superannuation savings.

“Most new gig workers will be self-employed contractors,” he said. “Without reform to provide SG for these workers, many will end up with insufficient retirement income.”

Products have started springing up in the market which cater to gig economy workers, including the superannuation fund gigSuper, which was founded on the belief that there is no APRA-regulated fund in the market which effectively caters to the self-employed.

“What we have discovered through talking to self-employed people is that every year they are having conversations with their accountants, who are saying to them that they should put some money into superannuation,” gigSuper co-founder Peter Stanhope told sister publication Accountants Daily earlier this year.

“Every year they are saying they’ll do it, and then then every year they don’t,” he said.

 

 

By: Katarina Taurian
​26 MARCH 2018
www.smsfadviser.com

 

How likely is a global trade war?

US President Donald Trump's recent announcements of tariffs on imports of steel and aluminium as well as on an array of consumer goods from China have sparked a frenzy of concern over the risk of a global trade war.

         

 

Vanguard expects minimal direct economic impact from the new tariffs, however. We feel their real importance lies in the broader and longer-term implications for international trade policy.

Putting the tariffs in context
The Trump administration first announced it was imposing import tariffs of 25% on steel and 10% on aluminium – products that together represent less than 2% of total imports to the United States. And even that estimate is high, as Canada, Mexico and other allies including the European Union have been temporarily exempted.

On 22 March, the administration announced a package of taxes and trade penalties on goods from China. As with the tariffs on steel and aluminium, these tariffs would likely affect only a small fraction of bilateral trade between the world's two largest economies.

To better understand what escalation of these disputes might look like, it's helpful to consider trade in a historical and global context.

US tariffs have been falling since the 1930s and have been below 5% for more than four decades, as shown below. According to the World Trade Organisation's latest report on tariffs, the current average US tariff is 3.5%, the second-lowest in the G20.

Note: Data shown are annual from 1900 to 2015. Source: US International Trade Commission.

Although the United States has in place non-tariff trade measures such as anti-dumping and national security safeguards, it remains one of the world's least protectionist countries, alongside the members of the European Union.

Some market observers extrapolate the policy tilt of the tariffs to mark the onset of a trade war, similar to the vicious cycle sparked by the infamous Smoot-Hawley Tariff Act of 1930, which dramatically reduced trade flows and economic growth in the early years of the Great Depression.

Given the history of lowering trade barriers and realising the benefits of economic integration, Vanguard believes it is unlikely that the current US administration will dramatically shift trade policy at the risk of disrupting domestic growth.

Benefits of a slight rise in tariffs fast diminish
Although we assign a trade war scenario a low probability, our analysis in a 2017 Global Macro Matters research paper (“Trade status: It's complicated”) estimated the impact of varying escalations in trade tensions. A slight increase in tariffs has a short-term marginal benefit to the issuing economy in the absence of retaliation. These benefits quickly diminish, however, and can be offset by retaliatory tariffs and market volatility.

With tariff increases offsetting one another, the end result would be higher consumer prices and lower growth from reduced trade activity – a lose-lose scenario.

Although unlikely, a trade war environment could reduce US GDP by 1.7 percentage points and increase inflation by 0.4 of a percentage point annually. In this case, the impact would be significant enough to force the US Federal Reserve to pause its tightening of interest rates and choose between suppressing excessive inflation and bolstering low growth.

Tariff fallout could put US in lagging position
Outside of these estimates of the direct impact on the US economy, reduced cooperation on trade over the next few years could hurt cross-border investment flows and place the United States in a lagging rather than a leading position in future economic and political partnerships.

Investors can reasonably assume that trade rhetoric will remain a source of volatility throughout 2018 as the Trump administration tries to set a new course on trade policy without triggering retaliation from America's global trading partners.

Although trade wars are still a low likelihood, it is worthwhile to closely monitor policy decisions – and the responses to them – for signs of escalation.

 

27 March 2018
vanguardinvestments.com.au

ATO issues update on cryptocurrency compliance traps

The ATO has provided further details on some of the regulatory considerations with cryptocurrency for SMSFs, including valuations, in specie contributions and ownership of assets.

       

 

Following some of its earlier comments around cryptocurrencies and SMSFs, the ATO has discussed some of the specific regulatory considerations for SMSF trustees and professionals with cryptocurrency in an online update.

The ATO explained that where an SMSF transacts in cryptocurrencies, SMSF trustees and members need to be aware of the tax consequences in each case, which will depend on the nature of the circumstances of the SMSF.

“SMSFs involved in acquiring or disposing of cryptocurrency must keep records in relation to their cryptocurrency transactions. There are also super regulatory considerations for SMSF trustees, members and SMSF auditors,” the ATO said.

Investment strategy and trust deed

While SMSFs are not prohibited from investing in cryptocurrencies, it said, the investment must be allowed under the fund’s trust deed, be in accordance with the fund’s investment strategy and comply with SISA and SISR regulatory requirements concerning investment restrictions.

Before investing in cryptocurrency, the ATO said SMSF trustees and members should consider the level of risk of the investment and review their fund’s investment strategy to ensure the investment being considered is permitted.

“Trustees and members also need to ensure that investments in cryptocurrency are allowed under the SMSF’s deed,” the update said.

Ownership and separation of assets

SMSF cryptocurrency investments must also be held and managed separately from the personal or business investments of trustees and members, the ATO added.

“This includes ensuring the SMSF has clear ownership of the cryptocurrency. This means the fund must maintain and be able to provide evidence of a separate cryptocurrency wallet for the SMSF from that used by trustees and members personally,” said the ATO.

Valuation

In terms of valuation, the ATO said SMSFs must ensure their investments in cryptocurrency are valued in accordance with ATO valuation guidelines.

“The value in Australian dollars will be the fair market value which can be obtained from a reputable digital currency exchange or website that publishes its rates publicly,” it said.

“The value of cryptocurrency can change constantly. For the purpose of calculating member balances at 30 June, the ATO will accept the 30 June closing value published on the website of a cryptocurrency exchange that reports on historical cryptocurrency values.”

Related-party transactions

The ATO also noted that cryptocurrencies such as bitcoin are not listed securities and therefore cannot be acquired from a related party.

“It follows that SMSF trustees and members – being related parties of the fund – cannot make in specie contributions or other transfers of cryptocurrency to the fund,” it said.

Sole-purpose test

The ATO also reminded SMSF professionals that an SMSF is unlikely to meet the sole-purpose test if trustees or members, directly or indirectly, obtain a financial benefit when making investment decisions and arrangements.

“For example, it may be a breach of the sole-purpose test where affiliate fees or commissions associated with the fund’s cryptocurrency investment are paid to a trustee or member personally,” it explained.

Pension or benefit payments

The ATO also confirmed that where a trustee or member satisfies a condition of release, the SMSF can make an in specie lump sum payment by way of transfer of cryptocurrency. However, pension payments must be made in cash.

“Trustees and members will need to consider the fund’s trust deed and any CGT implications associated with the transfer of assets such as cryptocurrency,” it said.

The ATO added that any SMSF trustees who think they may have breached the super laws “should work with their professional advisers to rectify the breach as soon as possible”.

 

By: Miranda Brownlee
19 MARCH 2018
www.smsfadviser.com

Non-lodgement numbers slashed, 30,000 funds still in ATO’s sights

There’s been a 38 per cent reduction in non-lodgers for SMSFs, but about 30,000 funds remain on the compliance agenda for the next financial year. 

         

 

Surveillance activities this year have so far identified about 12,000 SMSFs that have either never lodged an SMSF annual return or had more than two years of overdue lodgements.

“To date, over 6,000 funds have re-engaged with us and brought all their lodgements up-to-date; but we took harsher action against some 8,600 funds which resulted in the windup of the fund and the cancellation of their ABNs,” ATO Deputy Dommissioner James O’Halloran said in an address to the SMSF Association’s national conference.

As part of this process, the ATO contacted about 3,000 tax agents.

Overall, Mr O’Halloran said the ATO has seen a 38 per cent reduction in non-lodgers.

The remaining funds will be a key compliance target in the 2018-19 financial year.

SMSF lodgement has been a consistent area of focus and surveillance for the ATO for several years, but the advent of changes such as the transfer balance cap requires the tax office to have significantly more up-to-date data on a fund’s assets and activity.

Late last year, the ATO told SMSF Adviser that since the latest round of superannuation reforms, non-lodgement has become “a bad thing times 10” for the regulator.

“Non-reporting by SMSFs is a significant issue. It’s been a bad thing. With the advent of the retirement phase reporting in relation to the transfer balance cap… it’s become a bad thing times 10,” said outgoing director at the time, Howard Dickinson.

 

By: Katarina Taurian
​22 FEBRUARY 2018
www.smsfadviser.com

Confusion lingers over post-death insurance

There is a lack of clarity around the post-death receipt of insurance and questions remain over which member accounts it can be credited to, according to the SMSF Association.

         

 

SMSF Association head of education and technical Peter Hogan said questions lingered over practical issues in relation to post-death insurance.

These issues include reversionary versus binding death benefit nomination pensions and transfer balance cap credits, whether insurance proceeds are credited like ordinary income for administration and tax component purposes, and whether pensioners are likely to retain insurance after commencing an income stream. 

“Whether it’s intended that insurance would be able to be added to a pension account but not be added against or be credited against a transfer balance cap has very much a question mark over it,” Hogan told delegates at the SMSF Association National Conference 2018 in Sydney last week.

“The alternative may well be that Treasury’s intention without spelling it out was insurance proceeds can only be credited to an accumulation account and can only be paid out as a death benefit lump sum and can’t be added to a death benefit pension account of assets.”

He said the issue needed resolving and there was clearly a difference between reversionary and non-reversionary pensions.

“We will be continuing to pursue that with Treasury to see if we can come up with some solutions to that and how insurance proceeds need to be sensibly dealt with going forward,” he noted.

 

By Malavika Santhebennur
​22 Feb 2018
www.smsmagazine.com.au

Potential pension minefields

It has been a big year for the SMSF industry given the major policy changes the federal government made to super in the 2016 budget.

         

 

Last week the Self-managed Super Fund Association held its national conference in Sydney and it provided a natural forum for the leading practitioners in the SMSF industry to reflect on and debate the impact of the changes on SMSF trustees and how it will affect the operation of funds in the future.

Industry practitioners – be they advisers, accountants or lawyers – have had a busy 12 months getting to grips with a myriad of technical changes in the way funds can be managed and reported on.

A persistent theme running through the three day conference was that industry practitioners are concerned that their clients, the SMSF trustees, do not appreciate the complexity of the changes the government's policy changes bring with them.

At the core of the reform package was the reduction of concessional contribution caps and the introduction of the $1.6 million tax-free pension limit.

The government argued at the time the changes were announced that it would only affect about 4 per cent of superannuation accounts. No doubt many people with considerably less than $1.6 million in their super fund account filed the changes away under the category of nice problem to have, or wake me up when I get there.

But as always the devil is in the detail – particularly when unforeseen circumstances happen.

The SMSFA technical director, Peter Hogan, provided an overview of the administration of pensions under the new rules.

For example a key technical change that took effect in July last year was to the definition of a death benefit. The result is that upon the death of a fund member the death benefit has to be cashed out of the super system either by payment of a pension or a lump sum.

But complexity arises depending on the type of pension that is setup and how that works with other estate planning issues.

To illustrate this, consider a couple who are both comfortably under the $1.6 million cap in pension phase. Joe and Jane each have $1 million in their member accounts. As they are nearing retirement and about to commence pensions they are not concerned about the $1.6 million cap – now referred to in industry parlance as Total Balance Cap (TBC).

But if one of the couple was to die and leave their remaining superannuation to their spouse then the $1.6 million cap suddenly comes into calculations.

The cap is an individual entitlement and not transferable/inheritable to beneficiaries. So if Joe has died unexpectedly, Jane is in a position of now having $2 million in her pension account – her original $1 million pension balance plus the beneficial pension left by Joe.

People with accounts with much lower balances may well be unsympathetic to Jane's situation. However when you consider that a woman living beyond 90 is far from unusual today, Jane is looking at funding her retirement lifestyle for around 30 years. In this context, making her $1 million last that long can look challenging, particularly in a low-return world.

The complexity of the regime becomes painfully clear when you consider there are a range of different options available to Jane that involve cashing out her surplus pension amount (and therefore losing its concessional tax treatment), commuting part of her existing pension back into the accumulation phase, and using Joe's reversionary pension to pay the majority of her superannuation income to maximise the superannuation assets that are tax free.

There are complex regulations and potential minefields for the unsuspecting in making sure the SMSF fund is managed efficiently from the trustee's perspective and remains compliant with the new laws.

But depending on Jane's individual circumstances and needs, the differences between options chosen can involve significant amounts of money.

The regulations do not apply solely to self-managed super funds. The same rules apply to retail and industry super funds so these are challenges the entire super industry will have to grapple with over the foreseeable future. However, due to the role of trustees and their responsibility for the administration of the fund, this is emerging as a critical area for SMSF trustees to get specialist advice.

Estate planning has always been part of a professional financial plan but what emerged at the SMSFA conference is that the rule changes in the pension phase have opened up a new area where technical structures and strategies can have a significant impact on income in retirement.

 

Written by Robin Bowerman, Head of Market Strategy and Communications at Vanguard.
20 February 2018
www.vanguardinvestments.com.au

 

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