Ask the Expert: What to consider before switching from an SMSF
An industry fund may be a cheaper option, but cost is just one thing to consider before switching from a SMSF, writes Craig Sankey.
Question 1
I am 79, with an self-managed superannuation fund account-based pension with $515,000 and an industry super accumulation fund of $13,000.
I also have a state government defined benefit income stream of $70,000, which is taxable.
The SMSF is managed by a financial advisory firm and the annual fees were $9200 last financial year.
With a 10-year plan, am I right in thinking that rolling over to an industry fund would cost me much less in fees than the predicted $9200 SMSF fees?
What are the pros and cons for rolling the SMSF into an industry fund versus leaving it where it is?
Many thanks.
Yes, an industry fund will be cheaper. However, that’s just one metric and it’s not really comparing apples with apples.
The first question should be why do you want or need a SMSF?
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Most people answer a combination of choice, control or flexibility. Some people have a specific investment that they want to invest in, or it’s their retirement hobby to run a SMSF.
If none of the above apply, then you could be adding costs and complexity for little gain.
These days, industry super funds have a large investment menu and some allow you to directly invest to specific shares or ETF’s.
All this is done at a low cost. There are additional consumer protections when in a fund regulated by APRA (such as industry and retail funds).
With a SMSF you are legally responsible for running the fund. Of course, you can outsource some of those functions.
As you get older, there will be a point when running a SMSF may be too much. You should look to wind up the SMSF before that happens.
Finally, in relation to the financial advisory firm you are using. Are you clear on what its fee entails? Is it admin costs or other aspects of running the fund? Investment advice for the SMSF? A combination of this?
Obviously, your financial situation will become simpler if you no longer have a SMSF.
The firm you are using could potentially assist in helping you close the SMSF. You can then decide whether you still need any ongoing advice, or potentially, seek one-off advice when needed and remove the ongoing costs.
Question 2
I’m a single 68 year old, earning $878 gross (working 26 hours a fortnight) and considering retiring in December, and claiming a part pension of about $800 a fortnight.
I own the unit I live in and have $270,000 worth of super in a balanced accumulation account, and $15,000 in savings earning 4.5 per cent.
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How does my future look?
It looks pretty solid.
You are receiving $1678 a fortnight but are probably paying a bit of tax as well.
When you retire, given your level of assets, you should receive the full age pension of $1178 a fortnight (including supplements). You can then start drawing down on your super as well. If you drew down $500 a fortnight from super, it would take you back up to $1678 a fortnight.
However, because super is tax free, you would not have to pay any tax.
You could probably afford to draw more than $500 a fortnight. In fact, that is below the 5 per cent minimum a year payment required from a super pension ($519 a fortnight).
It’s time to look forward to a nice retirement with a little pay increase.
Question 3
Hi Craig, how do people live off shares?
I would like to put my spare cash into a low-cost index fund.
I have maxed out my after-tax super contributions. Do dividends get sent to you or do you need to sell units to realise the money? Or is there another way of structuring it?
Thank you, Caroline
Hi Caroline,
With dividends from an index fund, you would have the option to either re-invest them (automatically buy more units) or have them paid directly into a nominated account. The same is true for direct ownership of shares.
Depending on the fund, it may distribute dividends quarterly or half-yearly.
Craig Sankey is a licensed financial adviser and head of Technical Services and Advice Enablement at Industry Fund Services.
Disclaimer: The responses provided are general in nature, and while they are prompted by the questions asked, they have been prepared without taking into consideration all your objectives, financial situation or needs.
Before relying on any of the information, please ensure that you consider the appropriateness of the information for your objectives, financial situation or needs. To the extent that it is permitted by law, no responsibility for errors or omissions is accepted by IFS and its representatives.
