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The value of Advice- Is it time to simplify your affairs?

The value of obtaining financial advice is not necessarily all about the investment returns. Retirement planning, superannuation and estate planning in Australia is complex and we were reminded of this recently with a client scenario that highlighted the hidden value of advice.

In the true case study below, savings of over $3,000 a year for the remainder of the client’s life were realised. Naturally, the personal details of the client have been changed to protect their privacy.

SMSF’s – from blessing to curse?

Self-managed super funds (SMSF) remain highly popular structures for retirement savings. From a standing start in October 1999, they now represent nearly one third of Australia’s total $2.76 trillion retirement system. New funds are established at the rate of around 34,000 each year, according to ATO stats. SMSF’s allow investors substantial flexibility and complete control of their superannuation savings and pensions, within the constraints of tax law, super regulations and trustee responsibilities. Typically the investor, as trustee and member, is responsible for organising the administration, accounting, audit and compliance functions.

They are not for everybody and they are not necessarily for ever.

In 2018, 22,730 SMSFs were wound up in Australia (ATO, 30 July 2019. Population table – annual data). The reasons may be a rationalisation of investments, escalating costs and declining fund balances. Also, health concerns – if the Trustee loses capacity to act may lead to disqualification, extra costs and penalties. For some the maintenance becomes a burden and with the assistance of today’s technology many of the traditional control advantages of SMSFs can be enjoyed through less burdensome structures.

When our client Bethany established a SMSF in 1999, a key attraction was that the rules permitted an investment into residential property. The property was sold a few years back and the investments were simplified into stocks and managed funds as she settled into retirement. It became evident that as the years past and Bethany drew upon the fund to meet her living needs, the SMSF structure was becoming less feasible. As the balance fell, there was an increasing portion of cashflow going towards fixed expenses. The fixed fees included the monthly fee to the superannuation administrator, tax return lodgement fees as well as auditor fees.

Bethany was also the sole director of the trustee company. As she got older, this was a cause for concern. Should anything have happened to Bethany resulting in her incapacity to operate the SMSF whilst still alive, there would have been complications in ensuring the compliance of the fund, potential disqualification and with that… penalty tax rates.

The value-

Having discussed the situation with Bethany, we carried out a full assessment on the practicalities of winding up the self-managed super fund. There are many factors that needed to be weighed up-

  • Given the fund size, the viability of rolling over to a publicly offered pooled super fund or just withdrawing the funds lump sum into a cash account (Super vs non-super investment).

  • Impact on Centrelink Age Pension eligibility and payments

  • Insurance implications

  • Ability to rollover existing investments without selling them

  • Capital gains tax implications

  • Alternative portfolio cost structures, to ensure that the process of wind-up was in fact worthwhile.

We provided Bethany with a range of scenarios and a balanced recommendation.

The outcome was very minimal impact on her current Age pension payments, and a net saving of approx. $3,300 each year from winding down SMSF. Importantly she still retained control of her preferred investments.

In addition, by now appointing a professional trustee should anything happen to Bethany there is greater certainty relating to her estate plans than if she herself was still the sole director and trustee.

As we get older, our needs change, and it’s our role to help our clients’ adapt their wealth structures as needed.

Disclosure Statement: This communication has been approved and issued by Sovereign Wealth Partners Pty Ltd ABN 18 607 071 367 Corporate Authorised Representative (No. 001233909) of Sovereign Capital Pty Ltd ABN 44 164 127 833, AFSL 456235.

General Advice Warning: Any advice included in this article and associated links is general in nature and does not take into account your objectives, financial situation or needs. If a product we recommend has a Product Disclosure Statement (PDS), you should read it before making a decision. Past performance is not a reliable indicator of future performance. We do not endorse any information from research providers that we provide to you, unless we specifically say so.

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