Owners in the hospitality industry are among the hardest-working people in Australia. But how well are they looking after their retirement savings? Mark Abernethy reports.
When it comes to retirement, what should business owners be doing to make sure they have as much as they need? It’s a vexed question, says accountant and consultant to restaurateurs, Peter Sheehan of BDO Kendalls.
“Restaurant owners would typically rather keep money in the business than have it going into their own super.”
There are two ways that business owners usually provide for their retirements: they build up the restaurant or café and when they sell it they use the nest egg to fund retirement; or, they reach into the business cash flow to fund a regular payment into a superannuation account.
“Ideally, business owners should be looking at both,” says Sheehan. “Having the discipline to regularly put a bit aside—maybe at the same time that you do the staff contributions—is a tax-effective way for capital to compound and accumulate.”
Building a business for trade sale has the advantage of attracting capital gains tax exemptions if the proceeds go into a complying superannuation fund. These CGT exemptions up to $5 million apply on the first $500,000 of the sale proceeds if the owners are under 55, and a full exemption if over 55 and money goes into a complying fund.
The drawbacks to relying on either method, says Sheehan, is that business owners can always find something better to do with the money than put it into super. In terms of using the sale of the business as a nest egg, it is highly risky to rely solely on this ‘cash-out’ strategy.
“Perhaps you’ve had a restaurant for 30 years, but the market is down when you want to sell so you can’t get your price.”
Sheehan advocates that business owners have a two-pronged approach and that they use independent professionals at least two years before they plan to sell. He says restaurants, cafés and catering firms have to be prepared and positioned for a sale in order to get the best results.
When it comes to deciding how to invest for retirement—the main choices being a self managed superannuation fund (SMSF), a wrap account with a financial adviser or a managed fund—Sheehan says the basics still apply. “All the options have costs. You have to be realistic about these because in the end you want a certain return when you retire and those costs you incur on the way through will affect the return.”
Self managed is a popular route for business owners—there are more than 300,000 SMSFs in Australia and they must have less than five members in order to have their special legal status. They enjoy all of the tax benefits of the large managed funds, but they also have the compliance burdens and the members are the trustees—a legally responsible position in terms of making investment decisions and complying with superannuation laws. It’s for this reason that Sheehan suggests many owners in the hospitality business are too busy to optimise a super fund. They may also baulk at the $1500 to $3500 in fees they have to pay each year.
“You may be able to predict your costs, but what about your returns? If you have an SMSF, is buying a property on the coast really an investment decision? I’m not sure this is the best option for people who are already too busy with the business and who don’t have investment expertise,” he says.
Zdenkr Simonic, director of SuperEasy in Melbourne, says the self managed option creates flexibility and control of retirement assets. Simonic’s company provides establishment and administration services for SMSFs and many different types of people use the service, from young people beginning their careers through to seniors.
“They want to control the assets and have flexibility in how they are bought and disposed of,” he says.
SuperEasy provides an online portfolio tracking service and annual reporting services for trustees of SMSFs. His clients hold mainly share portfolios and the minority hold property and managed funds.
A drawback of self managed super funds is that they can’t borrow to buy their assets. So an SMSF with $150,000 under management may be able to buy one apartment, and nothing else, rather than a diverse portfolio of shares. This may contravene superannuation laws that require diversity and liquidity in SMSFs.
One of the superannuation options that combines professional management with the more tailored, hands-on approach of the SMSF is the wrap account. Wrap accounts are electronic portfolio management and reporting platforms developed by large financial services groups such as BT, Macquarie and Asgard, and operated by financial advisers on behalf of their clients. They attract fees—up to two per cent of funds under management—and allow the investor much more flexibility and agility in their investing than those who go direct to a managed fund.
“A wrap structure sits in between a managed fund and do-it-yourself super,” says Sam Henderson, director of financial planning firm Henderson Maxwell. “It gives you access to wholesale funds and direct share ownership as well as advice, but you don’t have to take on the legal and accounting burden of being a trustee.”
Henderson says many business owners rush into SMSFs, only to rush out again. “SMSFs are growing, but 10 per cent of them are leaving each year. People get talked into having one [SMSF] but then they have the compliance, the regulation and the investing strategy—they can buy shares or property, but do they know what they’re doing?”
Like Sheehan, Henderson thinks business owners with no experience in investing or time for compliance should think carefully before going into an SMSF. On the other hand, he says, while large bank or life funds such as AXA and BT, or industry funds such as HostPlus, are good set-and-forget solutions, some are middle-of-the-road performers. He says a wrap account is the best of both worlds. “The average return last year for industry funds was eight per cent; the average return on our wrap accounts was 12 per cent.”
He says about 30 per cent of his clients use SMSF structures, but many of them also use a product called Invest Wrap to manage their investments. The other kind of wrap is the Super Wrap, which allows individuals to invest their super in direct shares and wholesale managed funds.
He says the clients are charged for the advice they receive on their investing, but because the wholesale funds are so cheap it is money well spent.
“If you go through a wrap account you have access to wholesale funds [which charge management fees up to one per cent], whereas you’d normally have to have $500,000 to have access.”
Henderson says clients get the best returns from wrap accounts when they have $100,000-plus to invest, and the 2.5 per cent annual management fee in a wrap includes strategic advice and daily reporting. “The do-it-yourself fund is the cheapest if you have $200,000 and you know what you’re doing; the managed fund—especially the industry fund—looks cheapest, but you’re getting no advice. The wrap account will cost 2.5 per cent but you get advice, control and the best deal on life and disability insurance. A fund sells you the insurance they have; we go to a panel of 15 to get the best solution.”
A canny fund
HostPlus—the $4.3 billion, 670,000-member industry fund for the hospitality industry—has also reached out to the business owner market. While the fund recently created HostPlus Executive for senior managers in the industry, it’s the ‘public offer’ part of the fund that has been luring in the proprietors. HostPlus public offer is part of the fund that allows the self-employed to avail themselves of $1.50 per week fees and the choice of 20 sector or pre-mixed funds, says HostPlus chief executive, David Elia.
“We have business owners, high net-worth people and sophisticated investors moving funds into the public offer. They either change from the life companies and banks to us, or they roll their SMSFs into HostPlus public offer. There are a lot of proprietors in this industry who have realised they don’t have the time for the compliance or the expertise in investing.”
Elia says HostPlus public offer is considered a canny choice by people who have worked hard for their money: it costs only $66 per year regardless of funds under management and has benefits such as a 12.5 per cent discount on Manchester Unity health insurance; access to Members Equity banking products such as business lines and mortgages; access to the bargain price industry-only travel service called Breakaway Travel; cut-price life and TPD insurance and $400 worth of financial planning.
“There are some multi-million dollar balances in the public offer,” says Elia. “The business owners are smart about their money: they know that what you get back depends on returns and costs. We’re a top quartile performer for $66 per annum and with all these benefits.”
Sheehan says whichever super solution a proprietor uses, they should be honest with themselves. “There’s no magic to this. You have to know what the service is, know how the service will be delivered and how they charge for it.”