Recently, Ulton Wealth Management Partner Kylie Wright spoke to The Australian Financial Review's (AFR) journalist, Jonathan Porter about the importance of younger people (under 45's) and women taking control of their own super.
In this blog, we share Kylie's responses to the questions.
We have also included a link to the AFR's special feature report 'Women lead the charge into self-managed super funds', in which Kylie's commentary features.
Q&A with Kylie Wright and Jonathan Porter
How important is it for people, particularly younger people (under 45) and women to take control of their own super?
We have seen an increase in women asking about establishing SMSFs. In the recent Federal Budget, there was an emphasis on improving women’s financial position. Catch up concessional contributions are particularly relevant for women aged 25-34 as they on average have 24% less super than men (ASFA Superannuation Statistics March 2021). If you have less than $500,000 in total super and have not used your full concessional contribution cap in any year since 01/07/2018 you may be able to make catch up contributions.
What is your advice for someone who is seeking to undertake an SMSF plan?
If you are considering an SMSF then get educated and get advice. Like anything, if you can understand the rules then you can successfully operate in the environment. SMSFs are not set and forget – they do need a time and education commitment for you to be successful. Aside from investing, the biggest risk is non-compliance in your Super Fund. The ATO has stepped up surveillance and penalties on SMSF Trustees in the last couple of years and ignorance is no defence. You need to understand the legal responsibilities of being a SMSF Trustee.
Where should they seek advice?
You should always seek advice from accredited SMSF Specialist Advisers. These advisers spend much of their professional working life advising on SMSF issues and most (like myself) are passionate about the benefits that an SMSF can bring to building family wealth.
What are the best potential avenues of investment?
There is not a “best” investment within SMSFs as each investment will have different returns and risks. However, the greatest investment is probably one that the SMSF Trustee has a keen interest in, and can use that interest to select winners. For example, if you have an in-depth knowledge of a particular type of property, then use that to purchase wisely. If you are an expert in your industry, then use that to purchase shares in that industry. The best SMSF outcomes usually occur when the Trustee is willing to be a participant in investment decisions rather than be a passenger. Don’t forget about the diversification of your investments - this is often a key risk for SMSFs.
What would your ideal investment look mix look like for a younger investor/worker?
Younger investors have time on their side and need to use the power of compounding returns. Often Shares, ETFs and managed funds provide a good entry into more aggressive asset classes like Australian and International shares and Real Estate Investment Trusts (REITs). A growing number of our younger clients (under age 35) are being given a leg up by starting off in their parents’ SMSFs. My daughter has been a member of my Fund since she was 15, allowing her to participate in non-standard returns from unusual investments she would not have been able to access elsewhere. She has also been protected from the fee erosion of her super balance that may have occurred in a low balance industry or retail fund. Parents often give their kids a hand up in housing, why not with super? If Treasury Laws Amendment (Self-Managed Superannuation Funds) Bill 2020 is passed into legislation – increasing the allowable number of members of an SMSF from 4 to 6, then this strategy may become more widespread.
There are many tax benefits involved with people's SMSFs, is it possible to briefly describe them in your own words?
If people were able to look at SMSFs as a tax structure rather than an investment, there would be many more people in SMSFs. For example, a Company pays tax up to 30% and an Individual pays tax up to 45%, while an SMSF pays tax at 15% in Accumulation phase and nil tax if fully in pension phase. Think about it, where do you want to hold long term assets if not in the lowest tax structure? Super is the lowest tax structure available. There is also a fundamental misunderstanding that the Transfer Balance Caps have somehow limited your super balance to $1.6M ($1.7M from 01/07/2021) each. However, an SMSF with $6.4M, and two members each in pension phase of $1.6M would still have an average tax rate of 7.5%.
How should people maximise their tax benefits?
One way to maximise tax benefits in an SMSF is to contribute early and to the maximum, you can afford. When you get a pay increase consider salary sacrificing the increase into super until you are at the maximum concessional contributions per annum (currently $25,000 per annum and $27,500 from 01/07/2021). This will allow you to purchase larger assets like property in the future. The other way is to consider blue chip shares which pay fully franked dividends. Franking credits on shares can be used to reduce or neutralise contributions tax within an SMSF.
Could you please describe your advice for people at different life stages with regard to SMSFs, say someone just out of high school or university (early 20s), someone establishing their career (mid-20s to late 20s), mid-career (mid-30s to mid-40s), late-career (40s to mid-50s) and in the run-up to retirement say (55 to 65).
School leavers could be members of their parents’ SMSFs if in that lucky position. Otherwise, often Industry Super Funds are very sensible as they are generally low cost. If you make small voluntary contributions early the compounding returns may allow you to set up an SMSF earlier. Industry and retail funds may continue to suit until into your early 30s when if you have been committed to growing your super and are partnered, you may then have sufficient funds to make an SMSF worthwhile. Purchasing your business premises in an SMSF and using the high rental income to then diversify into other assets is often a great way for those in their 40s and older to supercharge their retirement savings.
What should their investment goals be and how can they minimise risk and maximise returns at each stage of their career.
Minimising risk in the early years can often be as simple as making sure you have contributions going into the SMSF and being invested monthly. This is a form of dollar-cost averaging that smooths out returns and reduces risk. If investing in more speculative investments then limit the risk of a total loss to a small percentage of your Fund. In the 5 years prior to retirement, you may want to consider building up cash reserves and reviewing your asset allocation in preparation for retirement. Once in pension phase, you can no longer dollar cost average into markets, and are moving into a de-accumulation phase.
What are the rewards at starting early with your SMSF and what are the challenges?
Starting to maximise super early rewards you with choice at a much earlier age. This is a major reason for not ignoring your super. For many young people super is actually their biggest asset and yet they often give no thought to it. Ensure you understand what fees you are paying, how much of your contributions are being spent on insurance premiums, and whether your asset allocation appropriate. Ensure your super is working hard for you. If you’re buying a house or car how much time do you spend researching that, versus researching your super?
What does this mean for investors in the future – both advised and non-advised? What changes will SMSF professionals need to make to accommodate this shift in SMSF demographics?
Younger people are much more interested in non-standard investments like cryptocurrency or even gold and silver bullion. They are also much more tech-savvy and want information at their fingertips and in real-time. Younger people are also much more interested in ethical and sustainable investing. SMSF professionals will need to continue to upskill and stay at the forefront of technology in order to advise this demographic.
As the cities become untenable with the advent of COVID should tree or sea change property be given more consideration by super investors?
I think it is interesting that everyone understands that residential property is more affordable in regional areas. However many people do not understand that commercial property is also much more affordable in a regional area. As more Australians have a sea or tree change, I think regional commercial property will be a growth area within SMSF investments.
Source: Australian Financial Review, Jonathon Porter, Monday, 31 May 2021, Women lead the charge into self-managed super funds https://www.afr.com/companies/financial-services/women-lead-the-charge-into-smsf-20210527-p57vt3
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