|Summary: Investment returns from super have been on the rise, and that trend is set to continue in 2014. But that doesn’t mean you can set your fund on cruise control. Knowing your asset allocations, making changes accordingly, and ensuring your contributions strategy is on track are just some of the things needed to ensure your SMSF is ready for whatever is ahead in 2014.|
|Key take-out: Part of your planning as a SMSF trustee should be goal setting. Put some dollar figures around how much you think you’ll need to retire, and start having plans to get there.|
|Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation.|
In life, you can look forward or you can look back. But it usually pays to do a bit of both.
While the final results aren’t in yet for calendar 2013, it was a fine year for investors and self-managed super fund trustees who kept the line and stayed invested in growth assets (shares and property).
This will have meant that reasonably balanced super funds will have risen by somewhere in the mid-teens for their underlying investments. Those more aggressively invested should have got into the high teens, if they didn’t top 20%.
Those taking the biggest risks – without resorting to gearing – might have even reached the mid-20s.
That was the second consecutive calendar year of strong superannuation returns. We know that can’t last. It will, eventually, end with a bang. It always does. It might not be soon, though. At around 5,300 points, Australia’s sharemarket would still need to rise around 28% from here to reach its pre-GFC peak.
With 2014 now two weeks old – and the majority now back into our usual work routines – it’s time to get your SMSF ready for 2014.
Categorise your investments
What exactly are your SMSF assets? What are they invested in? Could you draw a pie chart and split the investments into the major categories of cash, fixed interest, property and shares?
If you can’t ... shame, shame, shame.
You need to know what percentage of funds are invested in each asset class for two main reasons. The first is that you need to understand the level of risk that you’re taking. Are you aware of exactly how much you have in Australian shares, versus the other asset classes? If you have categorised them, do the results surprise you?
The second reason is actually a legal requirement. The way that your assets are invested needs to match your fund’s “investment strategy”. (While this article Time to review your strategy is a little old, it is still largely accurate.) Rising markets can push you outside of the boundaries you nominated in your investment strategy. And that can lead to trouble with the Tax Office if you are audited.
Consider consolidating gains
It’s a wonderful feeling to dwell on gains. But, as research has showed, we feel losses twice as much as the joy of investment wins.
The Australian market started 2012 at around 4,200 points, started 2013 at about 4,700, and started this year around 5,350. The gains have been good. And if you’ve had money in foreign equity markets, you would have done even better.
I’m not suggesting that that Australian equities are currently overpriced and it’s time to sell – far from it. What I am suggesting is that you should have an eye on consolidating your gains as opportunities arise.
If you’re actively selecting your stocks, you might want to have some stop losses in place to take gains and roll into different sectors. If you’re taking a managed or index fund approach, perhaps have a level for the ASX in mind when you start to take some gains and diversify.
Cash and fixed interest are lifeless, but still safe
Australian cash rates are unlikely to fall further. But at 2.5%, it will be a long time before any life is breathed into that sucker, even though it seems the next move is probably north.
Fixed interest, the superstar of the investment world for five years through the GFC and until about a year ago, spent the year struggling under the weight of cheap cash. Returns for the 2013 calendar year in these two asset classes were around 1-3%, even including their income.
These two asset classes have their place. Their relative poor recent performance has still been positive. SMSFs need to hold cash to pay expenses, but holding too much in these asset classes will likely come at your peril in 2014.
Keep residential property in your deliberations
Residential property bottomed in the first half of 2013 and, according to RP Data, has put on about 9.61% in the last year.
Property is a big, lumpy asset class (that I love) and will not be suited to all SMSF trustees. But when property runs, it tends to run for a few years.
Residential property can be bought ungeared in a SMSF. But gearing has become a lot more palatable.
Interest rates are low and the sector lending to SMSFs has become a lot more competitive in recent years. If you love residential investment property and haven’t already partaken, 2014 could be your chance.
Despite calls from the Institute of Chartered Accountants Australia, and the promises of the previous Rudd/Gillard government, there doesn’t seem to be any great rush to review gearing in super by the Abbott Government. It would seem the super gearing rules are here to stay.
Contribution limits – stay up to date
Contribution rules have been changing at an alarming pace in recent years. Down, then down further. And down even further still.
It started to turn back the other way on July 1, 2013.
There was the lift in the Superannuation Guarantee rate to 9.25% and the introduction of a higher limit of $35,000 for the over-60s for the current financial year. We have had no word on any cancellation by the current government of the plan to extend the $35,000 limit to the over-50s from July 1 this year.
You need to stay up to date with your concessional contribution limits and be aware of what you can and can’t get in to your super fund. Not only is the tax rate on contributions 15% (instead of up to 46.5% in your personal name), but the rules can be changed regularly.
Have an eye on the final prize
There was a disturbing survey published late last year by Suncorp. It was called “Rise of the Grudge Years” and asked Australians at what age they thought they would be able to retire.
Nearly a quarter of Baby Boomers believed they would be working into their 80s because they won’t have enough super. And about 35% of Boomers said they would need a further $300,000 more in their super before they could retire.
Part of your planning as a SMSF trustee should be goal setting. How much do you think you’ll need in super (or outside of super) to retire? Sure, inflation will raise that figure over time and governments will do what governments do best and super rules will be fiddled with, but the closer you get to retirement, the easier it is set those goals.
Put some dollar figures around what you think you’ll need and start having plans to get there.
Understand the ins and outs of salary sacrifice
Getting as much as you can into super without copping tax penalties can be hard work.
But for anyone who is salary sacrificing, you need to have a solid understanding of the salary sacrifice rules in order to make the most of them.
If you’re an employee, you need to keep an eagle eye on what is being contributed by your employer to your super fund (SMSF or APRA fund) and how that plays in with your own salary sacrifice strategy. See Salary sacrificing’s traps for what to look out for with employers and their contributions.
Planning this properly requires plenty of work. Ideally, it should be managed all year round. But for many, managing contributions towards the end of the financial year (from April onwards) will be required.
Plan ahead for your pension/TTR strategies
Pensions are what superannuation is all about. It’s the end game. And plenty of Eureka Report’s readers will be within striking distance of turning on a pension from their SMSF or regular super fund.
Planning for your pension should start several years earlier. Sure, you’re always planning to make the most of your super, but in the last five years – if you’re that far away – before you retire, you need to start paying even more attention.
Going a little harder on your salary sacrifice strategies, holding off selling some big profits until after the pension is turned on, in-specie transfer of assets into your SMSF and transferring cash into super as non-concessional contributions are just four of the things that you should be considering in the final five or so years before the pension is turned on.
Get professional advice
You can’t know everything, and only a fool would think that they do. And the consequences of getting things wrong in your SMSF can be horrendously costly.
If you need help with aspects of your SMSF, pay for some advice, preferably before you make any big changes or commit yourself to particular investments.
There is a range of professionals – including accountants, financial advisers, lawyers, mortgage brokers and auditors – who can give advice, depending on their qualifications, to assist you with running your super fund. And some will charge by the hour for consultations, without requiring long, ongoing relationships.
A bill for a few hours of a professional’s time could save you many, many times that.
The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.
- The SMSF sector was the only superannuation division to increase its member numbers for 2012-13, according to the Australian Prudential Regulation Authority’s (APRA) annual superannuation statistics released last week. While all other superannuation sectors reported a slight decrease, the number of SMSFs grew by 7.1% to 509,362 funds. However, the data also showed industry fund assets increased by the most at 21.5%, while small funds (which include SMSFS) grew by 15.5%.
- The SMSF Professionals’ Association of Australia (SPAA) has labelled the $10,200 penalty on non-profit superannuation fund Media Super by ASIC as a “warning shot” to super funds about public commentary on SMSFs, as comparisons between them is an “apples and oranges approach”. The corporate regulator had fined Media Super for making comments that it found to be “potentially misleading” as they “inaccurately represented the costs and benefits of the Media Super funds compared to SMSFs”.
- SMSFs are set to benefit from the scrapping of Labour’s SMSF changes, says Middletons Securities principal David Middleton. Middletons told SMSF Adviser that with the new government shelving the plans – which he said were always going to be hard to implement – the superannuation system will remain generous for SMSF trustees.