27/08/2015

PART ONE: Getting a sense for your super!

This is the first in a series of short articles that will help young people be a little bit more savvy about their own wealth, and make life a little easier for Mums and Dads who want their adult children to have the best start they can.

Part of raising a smart and responsible young adult is teaching them all about the facts of life, and that goes beyond the birds and the bees! It is important for young people to be taught about how to manage their financial situation, and to manage it early – saving for the rainy day, investing what you have wisely, understanding their superannuation, and having a valid and comprehensive estate plan. You never know what is coming around the corner. That is unless parenting comes with a crystal ball these days and then sure, all of the above can wait.

Superannuation – what is it and what can I do with it?

Most young people know that employers (generally) pay it, so they know they must have super accruing somewhere. However, it is important to know the details as well!

One thing that many people don’t consider is the investing. Whether you have an industry, retail, or corporate fund – you are entitled to have a say in how YOUR money gets invested. The main difference with many of the options is the level of risk you are willing to take on.

The main strength of superannuation is ‘compounding’.  As the money is invested and (hopefully) grows, that growth is invested back into the fund so that the growth is enhanced over time.

There is usually a default option if you do not want to choose your own investments, however if you do then consider the strategy of each investment option, the kind of returns the investment predicts, and the risks involved.

And carefully consider the costs.  The more money your fund manager takes out in fees the less will be in the fund compounding for your future benefit.  For more on fund manager fees check out the Stockspot website.

Also, how much time do you have before you intend to withdraw your super. Young people are often in the position where they are considering returns over a long period, therefore could consider all risk levels. By contrast, someone who will need their super within 5 years might not want a high risk.

Am I too young to do it myself? - TBCL’s Seven Sensible Suggestions

There is a common misconception that self managed super is only for well-established, middle-aged people and older. The truth is that age (once you are over 18) has nothing to do with your choice to have a self managed superannuation fund (SMSF). And don’t forget you can have a retail or industry fund for your employment super and a private fund to, say, invest in real estate.  

Here are some suggestions as to more appropriate considerations.

1. Do you have a reasonable amount of super, or are you looking to build that amount quickly?
   There is no magic number that you must have to start, rather your intention to grow your wealth is of primary concern.
    
2. Do you have the time to ‘invest’ in your investments?
   Being a trustee takes a genuine commitment to managing your Fund. You will need to monitor your investment strategy and adapt it as the markets and opportunities change. The trustee is responsible for ensuring that the Fund meets its obligations and deadlines. They must also keep an ear out for relevant changes to superannuation law.
    
3. Do you have a buddy in the business?
   Is there someone who can help you set up your SMSF such as an adviser or accountant?
    
4. Will it burn a hole in your pocket?
   The cost of establishing and operating an SMSF is dependent on your situation, things like balance, investment strategy and how you would like to manage it will affect your costs. More complexity = more cost!  As we noted above, high costs now can reduce the amount that is invested and compounding in the future and make a disproportionate difference.
    
5. The sole purpose of establishing this Fund matters!
   The primary requirement for any super Fund is that the fund is established and operated for the sole purpose of providing benefits to you and other members during retirement. A test for this is the “what if” scenario where either yourself or a dependent passes away – is the fund designed to help the situation?
    
6. Who can be the trustee?
   Any person over 18 can be a trustee of a superannuation fund – unless they are an undischarged bankrupt, mentally incapacitated or disqualified by way of criminal conviction or other reasons.
    
7. What happens if your residency changes, does your SMSF’s too?
   SMSF residency rules can be complex. Generally a Fund needs to meet three rules to ensure residency of the Fund: the SMSF must be established in Australia, the central management & control (the big decision making) must be ordinarily carried out by trustees living in Australia, and either at least 50% of the assets of the Fund are held by Australian residents or if not then the members do not contribute to the fund.

If this sounds like something you or your young person might be interested in, but you have other questions, don’t hesitate to contact us.  But please note we are not financial advisers and we cannot recommend that anyone establish their own private super fund nor can we provide financial services or financial product advice of any kind.