Self-Managed Superannuation Funds - Assignment Example

Superannuation Requirement B Bettina’s life expectancy is 65 years By the time Matthew reaches his preservation age she will be 58 years. Therefore their income after retirement will be distributed in 7 years. Pre retirement income for Matthew is 742,247.36 Pre retirement income for Bettina is 742,247.36 Therefore their combined just before retirement culminates to 1484494.72 If this combined pre retirement income is invested, it is anticipated to earn a 7.11 % nominal return after the fees have already been deducted Hence their retirement income stream is calculated to give; 7.11 % of 1484494.72 = $ 105547.57 And therefore in a year it will be; $ 105547.57/ 7 = $ 15078.22 Requirement C There are many strategies that can be employed in order to boost the retirement income of the couple. The common strategies, among others, are discussed as under: Strategy 1 Having a salary sacrifice of $ 10,000 into superannuation rather than after tax contribution of $ 10,000 to superannuation. There are basically two ways through which people contribute in superannuation. Namely; Salary sacrifice contributions Lump sum contributions Salary sacrifice into superannuation is basically any arrangement between a person and his employer through which the employee agrees to reduce his gross salary in order to top up the contributions made by the employer in the superannuation. Salary sacrifice contribution is essentially the making of contributions to the superannuation from a person’s salary before tax but not from the salary after tax as is the case with the regular/ lump sum after tax contributions (Piggott and Bei, 2006). Thus, this strategy is good since it has the effect of reducing the amount paid for tax by the couple. This means a person is effectively paying a lesser income tax since the total taxable salary is reduced. It is worth noting that the employer superannuation contribution is taxed at a fixed rate of 15 % which is equivalent to the least tax margin rate. Therefore if Bettina sacrificed $ 10,000 this amount would be taxed favourably than if it was to be taken purely as the cash salary. In spite of the small amount of cash Bettina may be having it cannot be overlooked since it can make a very big difference. The chart below shows how the salary sacrifice contributions can really boost a person’s super savings in the long run. Just $25 extra a week from age 35 would add $58,500 to a person’s ultimate retirement amount. An extra of $50 a week would make an addition of $117,100. That is a little extra saving as of now in order to get a lifestyle of his choice in retirement. The assumptions made are based on the Australian Super calculator: Opening balance = $50,000 at age 35, the annual salary = $60,000, employer contributions = 9 %, before tax salary sacrifice contribution = $25 and $50 per week, Balanced Option investment return = 7.5 %, Weekly administrations fee = $ 1.50, investment management’s fee = 0.72 %, Age at retirement = 65. The ultimate balance expressed in current dollars, calculated within a 30 year’s investment period. NB: Investment return is not assured as all the investments usually carry some level of risk. Also the past performances do not give an indication of the future returns. * The source of this information is the Australian Super Calculator, January, 2009. To start a salary sacrifice, Bettina needs to; 1. Talk to her employer about the salary sacrifice 2. Complete a salary sacrifice proposal form. 3. Hand over the duly completed form to her employer It is important to note that the money contributed in the superannuation cannot be accessed before a person reaches his preservation age (Piggott, and Bei, 2006), thus consequently retiring from the labour force. There are some crucial facts, however, that Matthew and Bettina need to suffice with regard to salary sacrifice; Salary sacrifice is not that effective for the low income earners. For instance if you earn say below $ 25,000 there will surely be very little tax that you could take advantage of since the rate of tax on his salary is more less the same to the tax charged on his superannuation contribution (Barrett and Yi-Ping, 2007). Some other benefits like the shift allowances, holiday loadings, compulsory employer super payment, overtime and so on, which might be based on the actual level of salary might reduce under the salary sacrifice arrangements. In this case, Bettina should secure some written agreement between her and the employer which details basis upon which the payment is to be determined. Since the employer makes the contributions, a person cannot claim any deduction or even tax deduction to offset the salary sacrifice contribution. Still Bettina cannot claim deduction for any administration fees cost paid to her employer so as to enter in and maintain the salary sacrifice superannuation. As the salary sacrifice contributions are not fringe benefits and thus not subject to the tax benefits on fringe benefits, it should thus, not be declared as such on her pay as you gain payment summary. Strategy 2 Placing the superannuation in industry fund as opposed to the retail fund The retail super fund is a retirement fund that was started by the financial institution and the insurance companies which originally were for the white collar workforce. Industry super fund is a non profit making organization which were established by some unions and industrial organization of employees in the industries which they represented. The aim of the industry fund is not to make profit and they therefore charge a lower fee as compared to the retail fund. The retail fund, however, has a tendency of offering great ranges of investment choices. Industry funds usually do not charge any commission for financial advisory services unlike the retail funds which charges a corresponding commission for any financial advice they give, which reduces the value of the super (Henry, 2006). On the other hand, in the issue of advice, the retail funds usually have a strong focus on the promotion of advisory services and they provide advice through adviser channel with adviser network. In industry superannuation, the funds are generally invested such unlisted assets like private equity, direct property and infrastructure. However the retail superannuation usually invests in more liquid assets, for example, bonds, property and shares which are all credit tied. This is particularly risky when there is a global economic crisis, for instance, the one that was witnessed in the beginning of year 2008. Both the retail and industry funds provide insurance services. Industry funds, however offers cheap premiums and it is not a requirement to have a medical check up. Generally a rational person will choose the superannuation fund which charges him a low investment and management fees and at the same time gives him some good return on the investment. Strategy 3 Self-managed superannuation funds These are basically funds which are put up for a very small number of persons, it can be fewer than five, and is generally regulated by Australian Taxation Office. Generally, fund members are the trustee of this fund. In a case whereby there is any corporate trustee, fund members become the directors of the company. Matthew and Bettina can change their fund in favour of this one so that they can have control over the investment they make in the superannuation fund. This also minimizes the costs connected to the management of the superannuation fund (Superannuation Circular, 2006). Strategy 4 Public sector employees’ funds These funds are usually established by the government for the benefit of the civil servants. They should both join this fund as the level of investment risk is low since the government is its custodian. This is because the government can never be declared bankrupt as its credit standing is high and it has unlimited means of raising funds. Nowadays, employees can make a choice of the fund that their employer is going to make their superannuation contributions. Generally the choice of a superannuation fund will allow the workers to: a. Change their funds especially when the current fund is completely not available with the new employer. b. Make consolidation of their superannuation accounts so as to cut down the rates and also reduce too much paperwork. c. Have an opportunity to change their fund from a higher fee to a superannuation fund that charges a lower fee and also offers better services d. Change their current fund to another superannuation fund that reports better performance. That is, a fund that makes a good return on investment made. References Barrett, G. and Yi-Ping, T. (2007), Retirement Saving in Australia, SEDAP Research Paper No. 177, McMaster University. Henry, A., (2006), The Who, What, When and Why of Generation Y, Sidney: AH Revelations. Piggott, J. and Bei, L. ( 2006) Pension Reform and the Development of Pension Systems:An Evaluation of the World Bank Assistance, IEG Working Paper, World Bank, Washington, D.C.  Superannuation Circular (2006), Payment Standards for Regulated Superannuation Funds, retrieved 12.04.2011 Read More