Gear up for smooth sailing in your retirement

July 25th, 2012 | Retirement Planning, Self Managed Superannuation, Financial Planning, Investment Advice

Retirement – will I have accumulated enough assets for my retirement?  Although many people have a retirement plan, we are often distracted by the day-to-day responsibilities and conflicting priorities which push this plan down low on our priorities list.

Based on the Association of Superannuation Funds of Australia (ASFA), you currently need approximately $900,000 in investment assets to retire comfortably.  This also assumes that you own your own property and there are no mortgage repayments or rent commitments.

According to Mr Peter Quinn, Director of Quinn Financial Planning, people “leave the accumulation of their superannuation assets too late in life.”  Mr Quinn cites “based on the Australian Institute of Family Studies, the medium age couples get married is 29.6 years for men and 27.7 years for women. From the day a couple gets married to the day they reach age 50, a typical couple will concentrate on meeting their mortgage commitments, buy a bigger home for their expanding family, and pay the weekly living costs for themselves and their family including education, recreational and day-to-day living costs.  It is not until they turn 50 that they start seriously considering the next item on life’s agenda”, Mr Quinn explains.

Mr Quinn, a Chartered Accountant and Certified Financial Planner, is very concerned with the direction of government policy.  The May 2012 Budget revealed that for the next two years the concessional contribution limit will be lowered to $25,000 per annum for over 50 year olds.

Mr Quinn explains that in 2007 the government allowed over 50 year olds to make tax deductible contributions of greater than $100,000 per annum.  This allowed pre-retirees to contribute more to their superannuation fund at a time when their children had left home and their mortgage was repaid.  However with the introduction of this new government legislation, this contribution has been reduced by 75% for the next two years, at least.

“As a result of these changes we need to get more involved in our superannuation strategy.  With such a significant change in the law it means that we need to consider different strategies.”

Mr Quinn also says that a Self Managed Superannuation Fund (SMSF) may be “just the tool to put those dollars toward the future”.

As a direct result of the Global Financial Crisis and significant changes in tax legislation over the past four years, many people are considering taking more control over the investment management of their superannuation and establishing a SMSF.  Last December, 2011, the Australian Taxation Office (ATO) issued a report titled “Self-managed superannuation funds: a statistical overview 2008/09”, suggesting that Australians are choosing SMSFs because they want more control over their superannuation. The report indicated a significant shift away from listed trusts, other managed investments and listed shares towards safer asset investments in cash, term deposit and real property.

Australians typically have a love affair with residential property.  But many investors are unaware that as a result of changes to the SIS Act in 2007, it is now possible for people to purchase an investment property with their super. Mr Quinn highlights that this is not for everyone, but it is a strategy that is not difficult to implement as many people may think.

Where to from here?

Gearing within a SMSF must satisfy the precise requirements of the SIS Act.  With the right advice, the strategy is not as complicated as it sounds. Essentially, the property must be held in trust but the loan for the property must be in the superannuation in order to satisfy the key requirements of the SIS Act.  The property is purchased using the existing money in your superannuation and you may also need to supplement this money with additional borrowed funds.  As of September, 2007, the Government made gearing possible for SMSFs, meaning you no longer need to have sufficient cash in your Superannuation Fund to purchase a property outright.

If it makes financial sense for your circumstances, superannuation borrowing may be more feasible than you think. Superannuation borrowing is also arguably the fastest growing area of superannuation investment strategy.  Based on meeting specific criteria most banks will lend up to 70% of a property’s value.

For example, let’s say you wish to purchase a $550,000 investment property.  Then, let’s say, you and your spouse have a combined value of $180,000 currently in superannuation.  You then set up a Custodian Trustee to act as the legal owner for the property.  The existing cash is supplemented with a limited recourse loan of $370,000. Assume the interest of the loan is 7.5% (or $27,750 pa). Tenants will then pay an annual rental amount of $27,500.

Excluding property costs such as council rates, body corporate fees, repairs etc, this property is now neutrally geared.  The investor’s 9% statutory superannuation contribution and annual increases in rent can be used to pay down the loan.

In addition, all expenses such as stamp duty, legal fees and conveyancing costs are paid directly by the SMSF.  Over time, the asset will grow in value.

Management myth-busting

One of the most common misunderstandings about Superannuation is that there are only two ways to manage it; you have someone manage it, or you do it all yourself.

Mr Quinn insists that this is not the case.  The most important factor with superannuation is that you get advice in the following areas:

1.   Will we have accumulated enough investment assets for our retirement?;
2.   To accumulate sufficient assets, can we continue with our quarterly strategy, or do we need to consider a gearing strategy?; and
3.   What assets and investments should we invest in?

Mr Quinn explains, “My concern is that many people get suitable advice on product (that is, point 3 above), but little or no advice on accumulating sufficient assets (point 1) and strategy (point 2).”

This appears to be the main reason for today’s popularity and growth in the area of establishing a Self-Managed Superfund.

Here at The Quinn Group our experienced team of Financial Planners, Accountants and Lawyers can provide you with the total solution and assist you with all your Retirement Planning needs. For advice about whether a Self Managed Super Fund is right for you and to get the best chance at the lifestyle you want, contact Peter Quinn by submitting an online enquiry or calling us on +61 2 9580 9166 to book an obligation free appointment.

The information in this document does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it.  It is important that your personal circumstances are taken into account before making any financial decision and it is recommended that you seek assistance from your financial adviser.