You’ve worked hard, and you’re hoping to have a big retirement nest egg to show for it. But have you selected the right super? Kerryn Ramsey reviews the current options—and recent changes.
Most financial advisers don’t have to run a restaurant, yet restaurateurs need to choose and manage their own superannuation funds. Control and flexibility have become crucial issues in the super field, particularly after the sweeping changes that were released at last year’s Federal Budget and come into effect on 1 July this year. According to Treasurer Peter Costello, the reforms should make superannuation simpler with more tax-free benefits. So easy, in fact, he coined it ‘Simpler Super.’
Despite the claims, sorting out super is as intricate as creating a full degustation menu. The right ingredients, serious research and a bold outlook are needed—and that’s the same for choosing a super fund. With options such as self-managed superannuation funds, industry funds and retail funds that include wrap funds and master trusts, it’s easy to get confused.
Simplification of super
Australians need to start saving for retirement much earlier—this has been Costello’s main message for years. From 1 July 2005, employers were required to offer a choice of super funds to their eligible employees. From 1 July this year, this role will be enforced.
Last summer, InTAX magazine’s superannuation writer Stuart Jones described the new super package as a “powerful combination for small business owners.” In a case study, a couple sold their jointly owned business and transferred the proceeds into super in order to gain a tax-free pension after reaching 60. In the Simpler Super reforms, people over 60 pay no tax on money taken out of super, either as a pension or lump sum, from 1 July 2007. Since baby boomers—including mature restaurant owners—have not had the benefit of the nine per cent super guarantee over their whole working lives, this reform is a catch-up.
Due to the reforms, you won’t need to head to your accountant as often—reasonable benefit limits were abolished, as well as age-based contribution limits. The payment of employer-eligible termination payments and death benefits were also streamlined and gave more positive tax treatment.
Another change is the treatment of undeducted super contributions. Originally, a $150,000 annual limit was to apply from 10 May this year. Under the final Simpler Super policy, this was changed to a maximum of $450,000 over a three-year period, and this will apply in July. It means that self-employed restaurant owners can claim full deductions for their super contributions.
A rash of superannuation choices can bamboozle anyone, so it’s important to understand the options.
Self-managed superannuation funds (SMSFs)—also known as do-it-yourself (DIY) funds—are popular with small business owners and the self-employed who want to roll their business property into the fund.
According to recent statistics from the Australian Prudential Regulatory Authority (APRA), there are now over 320,000 SMSFs in Australia, and the number is growing at a rate of just under 2,000 per month.
“Many people in the restaurant industry decide to set up their own businesses in an effort to gain independence and control,” explains Michael Houlihan, retail product and technical services manager at Vanguard Investments. “Many employers with this psyche are keen to establish their own super fund.”
Restaurant owners who become funds members get to control their retirement savings, and this is measured in high returns, low costs and tax savings.
To set up, a small number of individuals join, and either APRA or the Australian Taxation Office regulates the funds. While members get to control the investment, it’s still vital to hire a financial adviser to put the funds in place and an accountant as a separate auditor.
Members can put shares, property, cash, managed funds, fixed interest and other investments into their own fund, as long as it’s for the sole purpose of providing for retirement.
The cost of running an SMSF depends on its size, the type of assets it holds, and administration and management fees. According to research group Investment Trends, the average annual cost of running your own fund is around $3,500.
Some financial advisers suggest that people should have a minimum of $200,000 to invest. According to Houlihan, the lure of control, flexibility and investment choices may appeal to a well-organised restaurateur with a strong business nous. “It may seem difficult at first, but you are guided by an accountant,” he says.
However, it doesn’t suit everyone in this industry. Last February, a survey of SMSFs revealed that as many as one in 20 may be in breach of the superannuation regulations. According to Partners Superannuation Services, the most common transgressions included not keeping fund and personal assets separate, and not having investments in the name of the trustee.
“People considering self-managed super need to ensure they are familiar with the rules governing these funds,” says Umberto Mecchi, executive manager, strategy and marketing, at HostPlus, an industry fund which is geared to support the hospitality industry. “The term ‘self-managed’ means that you have to do the work. You must work out an investment strategy. You must be the trustee of your own fund. You remain legally responsible. This is a lot of time and effort in the busy life of a restaurateur.”
While terms such as wrap funds and master trusts are daunting, they actually offer a more hands-off approach when running a super fund. They let you pool resources to save costs and gain access to a range of investments at wholesale rates.
A master trust allows members to access a wide range of investments and direct shares to other than public offer retail funds. This is under the umbrella of a single trustee. Your accounting, reporting and tax are taken care of by the trustee, and you get an annual report.
Wrap accounts are similar, but they give investors ownership of the investments ‘wrapped up’ in one administrative bundle. Fortunately, both allow investors to hand over the administration to financial professionals. While this saves time and avoids stress attacks, it does comes at a cost. Many investors feel they pay a high price for expensive products they don’t need or understand.
The key difference between master trusts and wraps is the portability and tax treatment of the investments. In the early ’90s, they both had a lack of flexibility, but after recent advancements, the products now allow you to switch without selling your investments or paying capital gains tax.
An easy option
So, it’s apparent that control, flexibility and business knowledge are needed when joining an SMSF. Costs may be prohibitive when dealing with technology-driven products such as wrap funds and master trusts. Another option in this complex field is industry super funds.
This means that superannuation contributions will go into one of the large industry or institutional funds, or into a choice of investment options. Some industry funds even offer access to the ASX top 100 stocks. Overall, they provide a low-cost option that requires much less input from members.
In a recent survey, industry super funds could deliver $120,000 more retirement dollars to their members than retail master trusts. Superannuation researchers SuperRatings revealed last February that on average, industry super fund members received more dollars in their accounts after fees and taxes. The review covered 35 super funds, representing over $156 billion in funds under management and 7.5 million member accounts.
“Members can be better off in an industry super fund as they currently have lower average fees and don’t pay commissions to financial advisers,” says Garry Weaven of Industry Super Network. “They are run only to profit members and do not pay commissions, unlike most retail funds.”
According to Umberto Mecchi at HostPlus, many industry members don’t have time to juggle investments and don’t want to pay exorbitant fees.
“Our business is to provide for the retirement of our members, which means restaurant owners minimise the time taken away from focusing on the success of their businesses. Industry super funds, like HostPlus, long rejected paying commissions. This has made them an unattractive option for those financial planners who are remunerated through commissions.
“We feel the role of advice is critical in making important decisions about your super,” says Mecchi. “That’s why we offer our members access to fee-for-service financial planners through the Industry Fund Financial Planning network.”
He understands that it may be necessary for workers to change their investment mix as their situations change. “However, in some funds, members have a range so vast, they wouldn’t know where to begin.”
- Mecchi says making the right choice comes down to four key considerations:
- A super funds’ history of returns over the past three to 10 years
- Low fees and charges
- Extra benefits
Each of these alternatives have costs and benefits, and while there’s no single solution suitable for everyone, there is a super fund that will best suit your particular situation.