Is advice worth paying for?

MY WIFE and I opened up a self-managed super fund (SMSF) via our accountant. This involved a financial planner, who receives an ongoing commission from the SMSF. Can we remove the financial planner and his ongoing commission and stay within the fund we have now, which he helped set up? If not do you recommend a discount broker? J.Y.

The only reason you may need to pay a trailing commission is if the fund is invested in a wrap account or an advisory group's private investment service. If the investments are instead placed in the name of the trustees of the fund (you and your wife) or a private company trustee (of which the two of you are directors), then you can invest directly. By investing directly into wholesale funds, or term deposits, direct shares (though these involve brokerage when buying and selling), index funds and the like, you do not need to pay any trailing commission. However, do not discount the value of good advice in terms of selecting investments, minimising tax and avoiding the temptations and subsequent problems faced by DIY trustees.

Make the most of windfall

I have inherited $250,000. Should I pay off my mortgage ($170,000, with three years left on a fixed-interest contract), or should I consider buying an investment property or a share portfolio? I am 52 and my wife is 50, our incomes are $60,000 and $110,000 (gross) and we hold superannuation of $60,000 and $130,000, respectively. G.C.

I generally prefer paying off the home mortgage because it is both non-deductible and a risk to the family in the event that one or both breadwinners becomes incapacitated. However, taking into account the break fees, it may not be feasible to pay off your fixed mortgage, so check this out first. If you can pay off part of the mortgage without penalty, then I suggest placing about $100,000 into the mortgage. Your main problem is that you are about eight years away from retirement, assuming you retire at 60, and have nowhere near enough in super. You are together bringing in after-tax income of about $130,000 a year and if you want to retire on just half of this, you will need $82,300 a year in 2017 dollars, if inflation averages 3 per cent a year. When you are 60, your wife will be 58 and will have the longer statistical life expectancy, about 28 years. But if she chose her parents well, and lives healthily, she could fall into the 50 per cent of women who live longer than that. To provide an income in retirement of half your current income, indexed at 3 per cent a year, you will need about $1.65 million in super at retirement, so I suggest that, after putting as much as possible of your inheritance into your mortgage, place the rest into super and start salary sacrificing. If your wife can reduce her taxable income to $80,000, then the marginal $50,000 now being taxed at 40 per cent would instead be taxed at just 15 per cent going into the super fund, a 25 per cent saving, though only for another three years until the cap is reduced for the over 50s. If you want to invest in shares, you can find funds that allow direct share investments, or you can use share funds (I suspect the better funds earn more than most direct investors) and if you want to leverage your investments, there are geared share funds and geared property funds.

Selling yourself short

I turn 54 this year and my wife is 51. We own a unit that is rented out. We would like to sell the unit to our SMSF so that future capital gains and rental income can become tax-free after we turn 60. Is this allowed? We are confused as to whether rental properties are allowed to be owned by SMSFs. I was of the belief that the rules had changed recently to allow rental properties to be owned by SMSFs? T.V.

An SMSF cannot buy a residential property from an associated party (although it is permitted to buy one from a non-associated party). So, no, you cannot sell your unit to the super fund without getting into trouble.

If you have a question for George Cochrane, send it to Personal Investment, PO Box 3001, Tamarama, NSW, 2026. Helplines: bank ombudsman 1300 780 808 pensions 13 28 00.