Golden Rule of SMSFs: Minimise Costs, Maximise Savings
Golden rule of SMSFs: Minimise Costs, Maximise Savings
It seems self-evident that the less you spend, the more you save. However, during the life of an SMSF there are a lot of factors, of which, we are either unaware or not in control. Those things we know and can control should be our primary focus.
So, what can we manage so that we get the most out of our SMSF? With a few good, well researched, decisions and ongoing shrewd management you can maximise your savings.
Here are our Top 8 costs you can control:
- Personal Insurance
- Investment Fees
- Adviser, management & fund administration costs
- Complex asset management costs
- Interest costs & Bank fees/charges
- Rolling Out Fees
It is not unusual to see insurances that are either overpriced or simply unsuitable for members, and if you knew what they were you would probably agree. For you to get the most out of your money, you should regularly review your insurance to make sure it remains competitive and meets your needs.
For example, if you are single and in your 50’s or 60’s your insurance is likely to be costly. Why? Well, the reason is simple. When you bought the policy many years ago, while your kids were at home, you decided that cost was worth it to take care of your dependents. However, now that they are grown up you might find that the cost and benefit of maintaining the policy is something you need to revisit due to changing circumstances.
Also, sometimes we see income protection insurance as being paid for by the fund. You should understand that if the fund owns the policy, the income will be paid to the fund, not to the member directly. The member, then, needs to meet a condition of release under the terms of the fund’s trust deed before the payments can be released. In some cases, it can be more beneficial to hold income protection policies directly rather than through a super fund.
So, if you think you are paying too much, or if you are simply unsure, we can recommend an adviser to help provide you a quote so you can test the market.
The power is in your hands, why not make the most of it?
At Sequoia, we know that investment fees can start adding up, particularly for active traders. Brokerage fees can range from $30 per trade to as low as $5. Of course, you want to know that you are holding the shares in your name (the fund’s name) and that the broker isn’t holding your shares as custodian then using them to take other positions, like lending them out for additional revenue.
Sequoia Direct offers trades from as low as $9.50, funds enjoy personal service and an online platform to help you manage costs. Plus, they don’t lend your shares out, thanks Sequoia!
Adviser, Management and Fund Administration Fees
We believe that fees charged to your fund should reflect the service provided. Do your own research and if you feel like you are not getting a value for your money, we encourage you to question the fee.
First, adviser fees cannot be charged where a service is not being provided. So, if this is happening to you, speak with us directly or raise a complaint with your adviser’s compliance officer to resolve the issue and potentially seek a refund.
Second, management fees on products such as managed funds are often charged as a percentage of the funds invested. What trustees should look at is the net return. If the fund manager is providing a strong return, then perhaps the fee is justified. However, if the return on the investments is simply going to pay the managers wages, you might want to look at another manager or consider investing directly.
Finally, administration costs can vary, sometimes a lot. Professional SMSF administrators tend to charge fixed fees to manage funds and have practices to enable them to be efficient and focussed on fund administration. Accountants, however, often charge by the hour which can result in high fees depending on the activity. Our preference is to work with a business which charges a fixed, transparent and fair amount to maximise your savings.
Also, keep in mind that the fund audit should be included in the total cost of the administration. For good or bad, audit fees are largely commoditised, so overpaying is an option you do not need to accept. ASIC has stated that SMSFs with a balance of less than $200,000 should ensure the costs being charged do not absorb all their return. So, it could be wiser to join a retail or industry fund until you have sufficient savings.
We believe that when investments grow above the $200k level it starts to make sense to go your own way as doing so can help keep costs low. Check out this article drafted by industry heavyweights on their views on APRA vs SMSF costs.
So, make sure you understand the costs being charged to your fund, reviewing them at the point of implementation and then annually. It can make a big difference!
Complex Asset Management Costs
Complex assets can have strong returns. However, they can also have high initial, ongoing, and exit costs. Understanding the costs is important, particularly when profits do not go up or according to plan.
A good example is investment properties that require costs such as property valuations, body corporate fees, legal costs for purchase and sales, letting fees, maintenance costs and building depreciation reports. We encourage trustees to contact their real estate agent and request a complimentary annual appraisal instead of approaching a valuer for comprehensive valuation reports. Alternatively, we can provide a desktop residential property valuation for $99.
Yeah, it is time to talk about that dreaded of all costs, taxes. Tax is charged on the net income of the fund, which includes concessional contributions, investment income, realised capital gains, minus deductible expenses and fees.
Where money is taken out of the fund in the form of a pension or lump sum, tax may be payable based on the member’s age and circumstances. Generally, if a member is aged 60 or more, then any pensions or lump sums will be tax free. However, the ability to take money from super will depend on the member’s age and employment status.
There are many strategies that can be considered once a member reaches their preservation age, which is 57 for those born before July 1960, rising incrementally to age 60 for those born after June 1964. So, you may need to seek advice to assess your options.
You cannot really plan for disputes because most of us do not plan to fail. However, we can put a few things in order to reduce the impacts of disputes, should they occur.
One thing that can reduce the impact is getting your estate documents in place, including binding death benefit nominations. If you need a hand, and you are currently using our deed, we can provide templates for free, or we can assist for a fee. In addition, we have a relationship with an Estate Attorney if you need your estate documents reviewed or initiated.
Our friends at the ATO thought it was important too, check out their video, showing how planning might help you hang on to your savings in the event of relationship breakdown, incapacity or an untimely death.
If you need a hand with an issue you can’t resolve yourself, we might be able to help by providing a referral and potentially minimising the impact of unforeseen and unplanned circumstances.
Interest and Other Bank Charges
Fees charged by banks can vary, particularly on failed transactions. Trustees should shop around for a financial institution that charges little or no monthly fees.
With decreasing interest rates, we can often find ourselves paying too much. Make sure you speak with your lender about reviewing your interest rate if it is too high or look at refinancing if that is unsuccessful. We have been working with the guys at Control Finance who provide very sensible advice and service.
By maintaining monthly payments, to your administrator and insurer, you allow the fund to stay in the black. Lumpy payments to suppliers can cause cash flow shock and can give you the feeling that you are just chasing your tail. Or worse, bank charges for defaults on payments.
Remember: staying on top of our commitments empowers us to make decisions when we need to make them.
Rolling Out Fees
Many trustees feel they need an industry fund in parallel with their SMSF. It may be to maintain existing insurance cover, or if you are part of an industry EBA that specifies the fund for employer contributions. This situation may require money to move between funds by rollover.
It is important to be aware that fees may apply for each rollover, so it is best to plan your needs to limit those fees or, where possible, arrange the rollover yourself.
That is a lot of information, right?
Well, we at Sequoia feel that the more information you have, the better decisions you make and the more money you save. We try to keep all our SMSF Trustees informed of any issue that can affect them saving and investing, the most amount possible. After all, you have chosen us because you want to have more control of your money, not less. You have the power to create your own financial future, and we are here to help in any way we can.
So, in conclusion, keep an eye on those costs. As we said before, there are so many things we cannot control, why not get on top of the things we can? Minimise cost and maximise savings for you, and your families.