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What are the different types of superannuation funds?

Need advice? Contact Macarthur Wealth Management for expert financial advice in Parramatta and Sydney wide on (02) 9683 2869. www.macarthurwealth.com.au

There are several different types of superannuation funds. Knowing the different types of funds will make it easier for you to choose a fund that is appropriate for your purposes. Superannuation funds can be grouped into several categories. Features differ in each category.

Retail Funds

These are usually run by banks or investment companies; their general characteristic are as follows:

Anyone can join;
They often have a large number of investment options, sometimes in the hundreds;
They are usually used by financial advisers who may receive a fee or commission;
They offer both accumulation and pension fund options most Australians have their superannuation in an accumulation fund. They are called ‘accumulation’ funds because your money grows or ‘accumulates’ over time, but with the ageing population, many Australians are now using their superannuation to provide regular income payments in retirement;
Most retail funds range from mid to high cost, but some are now offering a low cost alternative;
The company that owns the fund aims to retain some profit.

Industry Superannuation Fund

Larger industry superannuation funds are open for anyone to join. Some others are restricted to employees in a particular industry. The main features of an industry fund are:

They usually have a range of investment options, which will meet most people’s needs;
They are generally low to mid cost funds although some have high fees;
They are ‘not for profit’ funds which means all profits are put back into the fund for the benefit of all members.

Public Sector Funds

Public sector funds were created for employees of Federal and State government departments. Most are only open to government employees. The main features are:

Some employers contribute more than the 10% minimum;
A modest range of investment choices that will meet most people’s needs;
Many long-term members have defined benefits, newer members are usually in an accumulation fund;
They generally have very low fees;
Profits are put back into the fund for the benefit of all members.

Corporate Superannuation Funds

A corporate fund is arranged by an employer, for its employees.

Some larger corporate funds are ’employer sponsored’ funds where the employer also operates the fund under a board of trustees appointed by the employer and employees.

Other corporate funds will be operated by a large retail or industry superannuation fund (especially for small and medium-sized employers).

Features of these funds include:

Funds run by the employer, or an industry fund will return all profits to members. Corporate funds run by retail companies will retain some profits;
If it is managed by a retail or industry fund it may offer a wide range of investment options;
They are generally low to mid cost funds for large employers but may be high cost for small employers;
Some older corporate funds have defined benefit members, most others are accumulation funds.

Eligible Rollover Fund

An Eligible Rollover Fund (ERF) is a holding account for lost members or inactive members with low account balances. These funds often have low investment returns and may charge high fees.

Your money is likely to grow faster if you consolidate your ERF with your active superannuation fund.

Self-Managed Superannuation Fund (SMSF)

SMSFs are essentially DIY superannuation for those that want the hands-on control with their superannuation. Of course, with added control comes added responsibility and workload.

SMSFs can be suitable for people with significant superannuation savings and skills in financial and legal matters. You must be prepared to research and track your superannuation investments regularly if you want to manage them yourself.

You can set up your own private superannuation fund and manage it yourself, but only under strict rules regulated by the Australian Taxation Office (ATO).

A SMSF can have one to four members. Each member is a trustee (or director if there is a corporate trustee).

Running your own fund is complex so think carefully before setting one up. If you set up a SMSF you must:

Carry out the role of trustee or director, which imposes important legal duties on you;
Use the money only to provide retirement benefits;
Set and follow an investment strategy that ensures the fund is likely to meet your retirement needs;
Keep comprehensive records and arrange an annual audit by an approved SMSF auditor.

If you’re running a SMSF, you will typically need:

A large amount of money in the fund to make set up and yearly running costs worthwhile
To budget for ongoing expenses such as professional accounting, tax, audit, legal and financial advice;
Plenty of time and energy to manage the fund;
Financial experience and skills so you are more likely to make sound investment decisions;
Separate life insurance, including income protection and total and permanent disability cover.

You can pay an adviser a fee to do the administration or help with the investment decisions for your SMSF. However, you cannot pass on the responsibility of being a trustee or director.

Need advice? Contact Macarthur Wealth Management for expert financial advice in Parramatta and Sydney wide on (02) 9683 2869. www.macarthurwealth.com.au

General Advice Warning

The information provided on this website is general in nature only and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information on this website you should consider the appropriateness of the information having regard to your objectives, financial situation and needs. Before making any decision, it is important for you to consider these matters and to seek appropriate legal, tax, and other professional advice.

Disclaimer

All statements made on this website are made in good faith and we believe they are accurate and reliable. Macarthur Wealth Management does not give any warranty as to the accuracy, reliability or completeness of information that is contained in this website, except in so far as any liability under statute cannot be excluded. Macarthur Wealth Management, its directors, employees and their representatives do not accept any liability for any error or omission on this website or for any resulting loss or damage suffered by the recipient or any other person. Unless otherwise specified, copyright of information provided on this website is owned by Macarthur Wealth Management. You may not alter or modify this information in any way, including the removal of this copyright notice.

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What is superannuation?

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Superannuation is a tax advantaged way of saving for retirement and makes up two of the three “pillars” of the Government’s retirement income policy. The three pillars are:

A Government funded means-tested age pension
Compulsory superannuation contribution (i.e., the Superannuation Guarantee)
Voluntary superannuation contributions

Superannuation is often simply referred to in everyday conversation as “super”. The Australian superannuation sector has grown to become one of the largest private pension funding arrangement in the world with assets exceeding $3.5 trillion as at the end of December 2021.

Superannuation consists of two distinct components:

Are over 18 years of age, working on a full-time, part-time, or casual basis; or
If under 18 years of age, you are employed for more than 30 hours per week.

Compulsory Superannuation

If you work in Australia, your employer may have to contribute to a superannuation fund for you under the Superannuation Guarantee system if you:

In certain limited situations, and industrial award or workplace agreement may impose additional superannuation obligations of an employer.

Superannuation payments are paid by your employer in addition to the salary or wages you receive. If you are eligible for superannuation, your employer will pay your superannuation directly into a superannuation fund.

Voluntary Superannuation

In addition to compulsory superannuation contributions, individuals may make their own personal and tax-deductible contributions and employers may make additional contributions for an employee, generally structured under a “salary sacrifice” arrangement. Salary sacrificed contributions are made from an employee’s pre-tax salary

Need advice? Contact Macarthur Wealth Management for expert financial advice in Parramatta and Sydney wide on (02) 9683 2869. www.macarthurwealth.com.au

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What are the different investment styles?

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Growth or Value Investing

Investors must consider whether they prefer to invest in fast-growing firms or under-priced industry leaders. Each will have varying risk and return characteristics and will perform differently at different times in a market cycle. Investors must determine which strategy best suit their individual needs.

The growth style of investing looks for high-quality companies that have high earnings growth rates, high return on equity, high profit margins and low dividend yields. There are however no guarantees going forward. Companies that have all of these characteristics are often innovators within their field/industry and make lots of money. It is thus growing very quickly, and reinvesting most or all of its earnings to fuel continued growth in the future.

The value style of investing is focused on buying strong companies at reasonable prices. Their price however has fallen due to the company or industry falling out of favour with investors or perhaps the economic cycle not favouring a particular industry at that point in time. Investment managers look for a low price to earnings ratio, low price to sales ratio, and generally a higher dividend yield. The main ratios for the value style show how this style is very concerned about the price at which investors buy in. The idea behind value investing is that stocks of good companies will bounce back in time when the true value is recognised by other investors and the market.

Quality and Lower Volatility Investing

In recent years, we have noticed an increase in other styles of investing. These styles include Quality and Lower Volatility investing and, in many cases, some products will focus on both.

Investing in Quality companies is usually associated with companies with efficient management, sound balance sheets, low debt, profitability, and strong cash flows. Quality strategies seek to provide excess returns by investing in companies that are better positioned for short- and long-term growth.

Lower Volatility investing targets companies with less volatile share prices that typically fall less than the share market during share market declines.

Higher quality and lower volatility portfolios aim to deliver strong up-market participation and down-market protection. These portfolios also tend to blend well with growth and value portfolios to improve overall portfolio diversification.

Need advice? Contact Macarthur Wealth Management for expert financial advice in Parramatta and Sydney wide on (02) 9683 2869. www.macarthurwealth.com.au

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Benefits and disadvantages of managed funds

Need advice? Contact Macarthur Wealth Management for expert financial advice in Parramatta and Sydney wide on (02) 9683 2869. www.macarthurwealth.com.au

Benefits of Managed Funds

Managed funds have a number of advantages that allow you to select options that suit your specific needs and objectives. These benefits may include:

Diversification: Managed funds can provide you with a diversified portfolio that may invest across a range of asset classes and securities
Wide choice of investments: Wide choice of asset classes and diversified portfolios
Specialists: Access to specialist investments and investment styles
Tailored portfolio: Can have a tailored portfolio where specialist managed funds are chosen (e.g. infrastructure, emerging markets, small caps)
Professional investment manager: Team of professional investment managers responsible for the investment selection, review and monitoring. This also includes risk management
Active performance: Active managed funds will actively manage investments to take advantage of the changing market outlook and therefore have the potential to outperform their index
Low level of participation: There is a low level of participation and time involvement required by you in the management of the managed fund compared to investing directly
Regular investments: Many managed funds allow regular investments including small minimum amounts. This can assist you if you are investing using a ‘Dollar cost averaging’ approach and/or a regular savings plan
Tax statements: Managed funds provide tax statements to assist with you with completing your tax returns

Disadvantages and Risks of Managed Funds

There are a number of risks and disadvantages of managed funds to be aware of. The key risks will be determined by the nature of the managed fund including the asset classes and securities that it invests in. The risks and disadvantages include:

Market risk: The performance of the managed fund will be affected by the assets and securities that it invests into. If it invests in ‘growth’ assets like shares and property, it has the potential to provide higher returns over the long term but will also have a higher level of risk including the risk of capital losses compared to more secure investments like cash and bonds.
Limited control: You have no control over the individual investments that are bought and sold.
Tax management: You have no control over the timing of sales and purchases of assets or assets selected to be sold. This may affect the capital gains tax outcome of the managed fund.
Capital gains in distributions: The distributions paid from a managed fund may include a return of capital which can be less tax effective for investors.

Limited transparency: There is limited transparency of the underlying portfolio and investments. A managed fund will tend to report of the securities and assets held in the portfolio but this tends to be reported with a lag.
Higher fees: Fees can be high due to the management and administration fees and buy-sell spreads.
Currency risk: Movements in the relative value of international currencies can influence the value of international assets.

Gearing risk: Some managed funds may borrow funds to increase potential returns. This gearing can magnify both gains and losses.

Need advice? Contact Macarthur Wealth Management for expert financial advice in Parramatta and Sydney wide on (02) 9683 2869. www.macarthurwealth.com.au

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What is a transition to retirement (TTR) pension

TTR strategies make use of a transition to retirement (TTR) income stream, which can be started as soon as a person reaches preservation age, without having to satisfy a full condition of release like retirement. A TTR income stream is subject to the same regulations as an account-based pension however the following limitations apply:

In general, lump sum withdrawals are not allowed.
Each fiscal year, there is a 10% restriction on income stream payments.

The most popular TTR strategy is the usage of concessional contributions along with it.

The advantages of employing a TTR approach can include:

Maximizing a superannuation balance tax-effectively in the years leading up to retirement (TTR and concessional contributions strategy).
Improved superannuation benefits by balancing the superannuation accounts of a couple’s members.
Reducing debt, including mortgages.
Cutting back on work hours before retiring and making up the difference in income with tax-efficient or tax-free income stream payments.

Need advice? Contact Macarthur Wealth Management for expert financial advice in Parramatta and Sydney wide on (02) 9683 2869. www.macarthurwealth.com.au

General Advice Warning

The information provided on this website is general in nature only and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information on this website you should consider the appropriateness of the information having regard to your objectives, financial situation and needs. Before making any* decision, it is important for you to consider these matters and to seek appropriate legal, tax, and other professional advice.

Disclaimer

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How to set goals

The starting point for any plan is to set your personal goals. Financial goals are likely to be different for each person and need to reflect your specific preferences, aspirations and needs. Your goals may vary from short-term goals (less than one year) like buying a car, paying off your debt or going on a holiday, medium term goals (1-3 years) such as saving for your children’s’ education or long-term goals (5 years or more) like saving for a comfortable retirement and leaving behind a legacy.

Your goals will be more real and achievable if you can apply the following attributes:

Specific: Make them specific to you and your family.
Measurable: Ensure there is a measurement in place to determine whether the goals have been met.
Achievable: The goals need to be achievable so while you may set a stretched target which requires you to be diligent don’t set the target too high.
Realistic: Your goals can be an aspiration but must still be grounded.
Time-targeted: You need to set time targets to achieve your goals.

Once you have determined where you are heading, you can work with your financial planner to develop the pathway to achieving your goals.

Need advice? Contact Macarthur Wealth Management for expert financial advice in Parramatta and Sydney wide on (02) 9683 2869. www.macarthurwealth.com.au

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Claiming a tax deduction for carry forward concessional contributions

From 1 July 2018, individuals who don’t fully use their basic concessional contributions cap in a financial year, accrue an unused concessional contributions cap amount.

Unused concessional cap amounts are available to carry forward and (if eligible) apply (use) in any of the following five financial years.

If an unused concessional cap amount accrues during a financial year and is not then applied in any of the five following financial years, it expires.

USING CARRY-FORWARD CONCESSIONAL CONTRIBUTIONS

A individual can carry forward and apply available unused concessional cap amounts from any of the previous five financial years to increase their concessional cap in the current financial year if:

their concessional contributions for the current financial year exceed the basic concessional cap (currently $27,500), and
their total superannuation balance (TSB) just prior to the start of the current financial year is less than $500,000.

Where an eligible member makes concessional contributions that exceed the basic concessional cap, the amount necessary to accommodate the contribution is taken from the earliest unused concessional cap amounts within the five-year period first.

Last updated in September 2022

Need advice? Contact Macarthur Wealth Management for expert financial advice in Parramatta and Sydney wide on (02) 9683 2869. www.macarthurwealth.com.au

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Ten tips for setting a good budget

To put you on the path to building your wealth you need to start saving money. This may mean working out how to find more money. The best way to do this is to set yourself a budget.

Setting a budget is important for everyone no matter your age or how much money you have. It is especially important for people who are struggling to meet their goals or who keep building up debt.

A budget is not about just cutting expenses. It is about finding a good balance between your income and your expenses and deciding what is important to you so that you have money left over to save.

A budget is not a fixed forever plan. You can continue to make adjustments over time until you reach a comfortable outcome and have a good strategy in place that will meet your goals.

There are two sides to a budget:

Your income – includes income from all sources such as salary, interest, rental income and dividends, but only include your regular income and make sure you use after-tax income or allow for tax payable in your expenses.
Your expenses – includes mortgage repayments, bills and general living expenses.

Tip

Go through the following documents to check you have captured all of your income and expenses:

Bank account statements
Credit card statements
Pay slips (for both income and deductions)
Cheque book details
Expense receipts
Bills and insurance certificates

You could also consider keeping a diary to record all your expenses – and don’t forget all the little ones as this is where you can often make some significant savings.

Setting a budget is a simple step but sticking to the budget can be harder.

Below are ten tips for setting a good budget:

Make it realistic or you will never stick to it
Budget an amount for fun, leisure and personal expenses so you can avoid impulse buying
Save your pay rises, bonuses, special payments or tax refund
Look for small savings – for example, take your lunch to work, or use internet banking to reduce bank fees.
Pay by cash or EFTPOS to avoid credit card fees (and also avoid accumulating debt)
Reduce fees and charges – combine bank accounts to reduce fees
Put your change into a savings jar at the end of every day
Shop around and compare prices on insurance policies. Look for companies that offer discounts for multiple policies
Use lay-by options instead of debt and credit cards
Update your budget each year

Need advice? Contact Macarthur Wealth Management for expert financial advice in Parramatta and Sydney wide on (02) 9683 2869. www.macarthurwealth.com.au

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Equity markets rise on Fed speak

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Local and global equity markets trended higher this week with investors reading into US central bank minutes that a rate hike slowdown or pause may be on the cards come the September quarter.

In local stock news, Crown Resorts shareholders overwhelmingly approved its takeover by US private equity group Blackstone for $13.10 a share.

Incitec Pivot shares fell after the company announced plans to spin its fertiliser business into a new company, Incitec Pivot Fertilisers, and will rename itself Dyno Nobel, after its mining explosive subsidiary. Not sure how this benefits shareholders.

Tabcorp traded this week as two separate companies for the first time, with the lotteries business spun out and trading as The Lottery Corporation, whilst the wagering assets remain with Tabcorp.

BHP shares fell during the week as its share went ex-dividend from the demerger of its oil business to Woodside.

Fisher & Paykel Healthcare shares fell after the respiratory products company declined to give any guidance for fiscal 2023, given the uncertainty regarding covid in the period ahead and the possibility its hospital customers might face more personnel shortages.

The Aussie dollar rose against the US dollar on rising expectations of the US central bank fading their rate hike program later this year.

The oil price took another leg up this week as US petrol demand is likely to be high over Memorial Day long weekend whilst US officials talked up banning US oil exports.

Economic

Total Australian construction work done fell by 0.9% in Q1 with building construction the major drag. Engineering construction also contracted. Both private and public sector work fell.

Australian private sector capital expenditure volumes fell by 0.3% in the 1st quarter, with both mining and non-mining investment falling by the same amount. The outlook for business investment remains strong, but headwinds of capacity constraints and rising costs will hurt.

A key US central bank official said they expect the bank to raise interest rates to 2% by August. That would imply another two 0.50% rate hikes over the coming months, which the market has already priced in. Uncertainty remains as to where rates head after that, with some members citing a pause or slowdown in rate hikes may be necessary come September.

The US central bank minutes from their May meeting showed broad agreement from members regarding moving rates higher and faster towards a more ‘neutral’ stance, that the US economy was very strong with a tight labour market, but that risks remain with the Ukraine conflict, China’s covid-zero stance, and restoring price stability given very high inflation.

US existing home sales in April fell 2.4% from March levels, boosting inventory of unsold existing homes to 1.03 million homes. First home buyers were the largest component of sales at 28%.

The US economy contracted at an annualised 1.5% in the first three months of 2022, slightly worse than initial estimates of a 1.4% decline, with the biggest drag coming from trade.

Most market predictions now have a 30-40% of the US entering recession sometime in the next 2 years. The US central bank will need to convince investors it can tighten monetary policy and reel in inflation without tipping the economy into a recession. Not an easy task.

A US manufacturing indicator fell in May from the previous month, coming in at the lowest level in 4 months and below market expectations. The reading remains at expansionary levels, but the pace of expansion was weight down by hikes in selling prices and concerns over higher rates. The rate of growth in new sales was the slowest since August 2020.

The European central bank president said that the bank was likely to lift the Euro area deposit rate out of negative territory by the end of September and could raise it further. Recession fears will need to be overcome.

UK consumer confidence fell to its lowest level in at least 48 years after surge in cost of living. Falling consumer confidence would usually result in more fiscal stimulus, but it can’t when you’ve got inflation surging and central bank needing/wanting to raise rates.

Chinese banks cut a key interest rate for long-term loans by a record amount. The cut is a significant move to boost loan demand. The lower rate will be applied to new mortgages immediately whilst existing mortgages won’t be repriced until next year at the earliest.

China will offer more than US$21 billion in additional tax relief mainly aimed at businesses as it seeks to offset the severe impact of covid-zero policies on the economy.

Politics

Labor’s Anthony Albanese is the 31st prime minister of Australia after the weekend’s federal election results with Labor yet but likely to form government, breaking the Coalition’s almost decade long run. Interestingly, both major parties received some of the lowest primary vote totals seen in some time. Four seats are still yet to be called.

The Chinese Premier gave his starkest warning yet about the economy as it comes under severe strain from covid outbreaks and lockdowns. He said the situation is worse than in 2020 and urged more efforts to reduce a soaring unemployment rate.

The US energy secretary said the Biden administration hasn’t ruled out a ban on oil exports to tame domestic fuel prices.

Need advice? Contact Macarthur Wealth Management for expert financial advice in Parramatta and Sydney wide on (02) 9683 2869. www.macarthurwealth.com.au

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US Fed hawkishness sees US dollar falter

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A mixed week in equity markets with global developed markets lower, the Australian market flat, whilst Asian and emerging markets saw investor support as the US dollar weakened.

In local stock news, Viva Energy shares rose to all-time high after the Shell petrol station operator announced that it was enjoying unprecedented profit margins from its Geelong refinery, which allows the company to import crude oil rather than rely on overseas refineries.

Brambles shares surged to an 8-month high after the pallet’s giant confirmed it had received an unsolicited tentative takeover offer from global private equity firm CVC Capital Partners. CVC later confirmed that would not be pursuing a takeover. Aussie companies with lazy boards/management getting picked off by cashed-up foreign raiders. More to come.

James Hardie shares fell after the building products company announced sales of US$3.6 billion in the 12 months to end of March, up 24% from a year ago but slightly below market expectations. The company reaffirmed it’s 2023 financial year guidance.

Andrew Forrest will take the reins of the company he founded almost 20 years ago after an extensive global search for a new leader failed to yield a better alternative, as current CEO Elizabeth Gaines exits the role in August.

Woodside Petroleum shareholders overwhelmingly approved the company’s $41 billion merger with BHP at Woodside’s annual general meeting in Perth. Shareholders also backed a name change to Woodside Energy.

Australian wages grew by 0.7% during the March quarter according to the Australian Bureau of Statistics. The lift was slightly below market expectations but did move the annual rate up to 2.4%. Private sector wages came in above public sector wage growth in the quarter. Interestingly, wages growth is not yet broad based and real wages growth (net of inflation) are deeply negative.

The Australian economy added 4,000 jobs in April, coming in well below market consensus, with a sharp decline in part-time employment. By state, there were small gains in NSW and VIC, whilst there were falls elsewhere. The unemployment rate was unchanged at 3.9% given the downwardly revised March number.

The ANZ bank has made a major revision to its house price forecasts for 2022 with a fall of 3% now expected on average across the 8 capital cities. Contrast that with their previous prediction of an 8% rise in 2022. The Australian housing market is always very sensitive to rate movements given the predominance of variable rate loans.

The US central bank chair reaffirmed that the bank is likely to raise interest rates by 0.5% at each of its next 2 meetings in June and July in an attempt to bring inflation under control. He said the bank was prepared to hike until there was clear and convincing evidence that inflation was starting to roll over. Those signs may be nigh.

US data showed signs of economic resilience, with US shoppers increasing retail spending in April for the 4th consecutive month, whilst US home prices reached a high in April. In contrast, new applications for unemployment benefits rose for the 3rd week in a row whilst the number of home sales fell.

According to the Institute of International Finance, the world economy will essentially flatline this year as Europe heads towards recession, China slows, and US financial conditions tighten.

Annual inflation in the UK jumped to 9% in April, the highest level since 1982, prompted by rising prices for electricity, gas and other fuels, and second-hand cars, in another sign consumers’ living standards continue to squeeze. The April reading compares with March’s 7% reading.

China’s economic activity is collapsing in the face of tough covid-zero rules with industrial output and consumer spending sliding to the worst levels since the pandemic began. Expect a big bazooka of stimulus over the coming weeks and months, which is likely to coincide with an easing of covid restrictions in some of their major cities.

Some European Union nations are wanting to delay a push to ban Russian oil so they can proceed with the rest of a proposed sanctions package if the bloc can’t persuade Hungary to back the embargo. Germany has said they will stop importing Russian oil by the end of the year regardless of the bloc’s moves. Russia’s oil revenues are up 50% this year even with various trade restrictions. Whilst there is general agreement that Putin needs to be punished, likely energy rationing and soaring energy bills don’t sound like a good idea for some European countries.

NATO members have rallied around Finland and Sweden after they announced plans to join the alliance, marking another dramatic change in Europe’s security structure.

China’s top economic official gave an unusual public show of support for digital platform companies, suggesting Beijing may be ready to let up on a long campaign against the tech giants. A good move, but also shows Beijing getting desperate on the economic growth front.

The US is preparing a military aid package for India to deepen security ties and reduce the country’s dependence on Russian weapons, according to people familiar with the matter. If true, it would make India one of the largest recipients of such aid behind Israel and Egypt.

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