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Stefan Angelini takes a deep dive into the Superannuation industry to help you decide where you could be investing your superannuation fund. This includes looking into Industry Funds, Retail funds and even Self Managed Super Funds (SMSFs). You'll also find out how you can contribute, or getting money into, superannuation as well as the tax rates within Superannuation.
Stefan Angelini
Hello ladies and gentlemen if you don't know who I am, I'm Stefan Angelini I run the Investor Types Podcast. I also run a financial planning business called Angel Advisory and we're talking today about Superannuation.
Superannuation isn't really something that people forget about they might contribute their money there and then never look at it again until it actually becomes a sizable amount or until they realize that they might need it one day a lot of people I speak to have multiple funds in multiple locations but I just want everyone to remember one thing Superannuation will probably one day be the spot where you've got the most amount of assets whether you're a young person or whether you're an older person hopefully this can this episode can help you really decide for what to do with your Superannuation and the best way forward for yourself.
So when you talk about Superannuation there's typically three main areas you can hold your Superannuation through.
One's an industry fund that's one of these. One's a retail fund which is somewhere between a self-managed Super fund and industry fund and another one is a self-managed Super fund.
Now I'm going to go through the three different types but before I do that I'm probably gonna give you a bit of information about the Superannuation system and how you get money into there. So first off you'd notice that if you earn a wage say you own 100,000 dollars a year you were forced to put in 9.5% your income into Superannuation to build up your retirement savings.
Now what putting money into Superannuation does is it reduces the amount of accessible income you have or money you pay tax on personally and that contribution goes into superannuation but you're taxed at 15% on the way in so if you actually put in 10,000 dollars only 8500 dollars goes in because tax gets taken off there. This goes this is what's called a concessional contribution. Now you can increase the amount you contribute this way through salary sacrifice a lot of clients who are on the marginal highest marginal tax rate look at salary sacrificing into Superannuation simply because it's a great way to save on some tax as well as build that retirement benefit or that retirement bucket which might be your superannuation. What a lot of people don't know about is something called a Non-Concessional contribution. This is essentially putting money in that that's after tax dollars. Now when I say after tax dollars typically money that's in your bank account typically from personal investment assets or proceeds from personal investments now this goes into Superannuation as an after-tax contribution. What that means is you don't get a tax deduction for putting it in but you also don't pay any tax for putting it in. Now when you do put it in the only way to get it out is when you meet a condition of release and that might be by obtaining a certain age by being a certain age and retiring by being a certain age and and seizing work the rules around Superannuation are always changing. So if you're thinking about well how do I maximize my superannuation benefits and even how do I access my benefits then it's probably time to start speaking to a professional to help you do this. But let's talk about one of these. Let's talk about an industry Super fund. Now an industry Super fund is fantastic for people who don't want any control of their money. Essentially what you're doing is you're handing over your money to a big to a big industry or a big company to then go and invest your money on your behalf they typically charge really low administration fees. But what people don't realize is that there's actually costs of investing the money that these funds charge you. Now you're paying someone an organization to invest the money so they typically take take an investment. They might take them an investment management fee. Now this might be called a MER or an ICR. There's even some performance fees in there as well and typically we see them in anywhere between 0.5 and 1.5 percent. This is something that people don't realize until they actually dig deeper into what's happening with their Superannuation fund. While the admin fees are low and then and you're drawn in that way once you start building up quite a sizable amount of balance the cost of investing can really start to hurt you and then that's when a lot of people start to assess okay well I've got a hundred thousand or a few hundred thousand dollars in Superannuation what else is out there and this is where people start to go into things like retail funds.
Now retail funds is essentially a way to invest your Superannuation but you have more discretion as to how it's invested. You're not the ultimate trustee someone another company that you're investing through controls it all. Your tax returns lodged in this environment but what you have is you have more control over your investments.
An industry fund is where your investments are more likely pooled with other people so that if people are say pulling money out of Superannuation whether it be from pensions or whether it be from getting the cash out as a result of Coronavirus then essentially your assets have to be sell down, whereas if you had something like a retail fund where you chose how your money's invested then essentially it's your money if you've got if you've got 500,000 dollars there then that 500,000 dollars is invested the way you want it and only you're able to withdraw money out of it when you need. So that's the sort of difference between an industry fund and a retail fund importantly retail it's almost like being self-managed without having to lodge your own tax returns. You can't get as tricky as a self-managed super fund.
So as we go into retail to self-manage super funds well self-managed Super funds is where actually a lot of Australians have their money in Superannuation. Once you get above a certain balance it makes sense to have a self-managed Super fund because instead of paying all these different platform fees and all these different companies to manage it you essentially pay an accountant to lodge your tax return and an auditor to do an audit.
Now what's probably most important about an SMSF or a self-managed Super fund is that ASIC recently released the paper to say that you probably shouldn't have an SMSF if you have less than 500,000 dollars in that SMSF. Simply because of the cost of running it the time it takes to run it they just say it's not worth it. So think about that if you are thinking of starting an SMSF. Probably most importantly is that with a self-managed Super fund you can do some really really creative things. You can start not only investing in shares and managed funds and index funds like the other funds can do and those retail funds but what you can do is you can start investing in property you can actually take out loans to invest further whether it's into property or whether it's into share markets you can combine members into the one fund. So you can actually pull together your money with. Let's say you're a young person and you want to invest with your mother, your father, your brother, and yourself. You can combine four people's monies together and create a super super fund essentially and invest that money together. People don't realize this but you can even go into things like property developments. So what you've got to realize if you're ever going to think of these kinds of strategies is there's a lot of rules around the us of debt within super. Having earns like income so market rated income or market rate and investments. There's also rules around investing with yourself or key persons who are basically related to you and the restrictions around that. So while having a self-managed Super fund it can be fantastic and you can do some really creative things through there it becomes quite tricky when you want to start navigating through the system. So because you are essentially running another company, you need to abide by all the Superannuation rules.
Now there's a lot of rules around self-managed Super funds because let's look at Superannuation. You're taxed at a maximum rate of 15% in your super fund. If you're an accumulation so you're still building your assets and you sell something after holding it for 12 months you get one third discount so essentially you pay about 10% tax. But if you hold that asset until retirement so you're in pension phase then you can sell something and not pay any capital gains tax so getting out of things tax free and you start to earn income tax free. So because this is so tax efficient in such a tax tax-efficient environment. The government and the ATO have really had to create quite strict rules around how people can use it and what the uses of the monies are for. So in order to prove what you're doing with the money and what money is there you need to lodge annual tax returns and your financials and you need to get annual annual audits as well just to make sure everything's closure. And then what these audits do is they also track people's balances depending on who's got what Superannuation balance. It becomes quite tricky and as a trustee or as the person running the fund you are the one reliable for ensuring that all information is up to date and that your accountant has all the right documentation in place in order to lodge the right the correct returns.
So in saying that you can get tricky with your Superannuation you can do so many different things. It's a wonderful environment and I love it because it is the most tax efficient environment in Australia to invest through. As I said three main ways to hold your Superannuation fund it's a tax efficient environment, you can actually get control of your money if you really want to and it's what a lot of people as they start to get older through life and get a bigger balance there they really start to focus on what's happening with their Superannuation.
So in saying that if you've got any questions at all feel free to reach out to me email me directly [email protected].
One thing to keep in mind probably one action item to take out of this. If you haven't looked into your superannuation recently please go and do it. If you don't know where your Superannuation is, you can jump onto mygov and you can put in your tax phone number and it will locate where your Superannuation funds are that's a great way. But look into the fees that you're paying in your super fund but look into the amount of if you're managing it yourself look into the amount of cash you've got and what your investment strategy is especially if you have a self-managed super fund. The ATO is really cracking down on having an up-to-date investment strategy linked to your self-managed Super fund so make sure that's up to date. But then look at where you look at where you're investing the world's changing make sure you've got your money in the right places so hopefully you can maximize it for when the market turns and for whatever happens in the future. In saying that I really hope you enjoyed this I love talking about Superannuation.
I hope you have too. Thanks for listening. I'll see you soon