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Superannuation – Advantages and Disadvantages
As per case study Aaron who is 32 years of age and employed in IT sector , he has a habit of saving and investing a small amount from his early age of 18 years and due to this currently he has holding a current value of $165000 of holding. He also have superannuation fund from his industry as $172000. But he found that there are certain charges which are levied, and now he is also looking to establish a SMSF as his brother Toby was started working as apprentice and will be earning $55000. Aron now is looking for an guidance on establishing a SMSF i.e. self-managed superannuation fund
It is money saved by in a fund during working life to support the financial needs after retirement. Superannuation is intended as a compulsory means of saving for your retirement. (Australian Government , n.d.)
Compulsory superannuation was introduced in 1992, before that the income after retirement was mostly done on personal savings whereas investments with a Government pension system to ensure the safety.
Superannuation savings are considered as one best tax effective option of saving for one’s retirement. The government is concerned with people retiring without savings and thus has developed various tax breaks around superannuation to allow people to save.
The superannuation savings tend to reduce the tax that one is paying on the income. Making superannuation savings make only liable to 15% tax on the saving and thus one saves 30% that would have gone to the government
Resources are generally pooled with different investors, allowing you to make investments impossible for an individual investor. It also helps you to easily diversify your investments. (The shape of Money, n.d.)
There were set of reforms which was aimed to address Australia’s retirement income policy, compulsory Superannuation Guarantee (SG) scheme was introduced into industrial sectors where a a pool of savings is created and designed to provide smooth income after retirement.. And now the ATO has also extended some more benefits like extending the age to 67 and Employers who are taking advantage of this amnesty will no more incur the normal interest or admin charges and penalties for non-payment up to 200%., one can claim a tax deduction for the SG payments made before 7 September 2020. (MACE, 2020)
The cons of the superannuation savings include the fact that it is hard to access the funds before one is 55 years. Also there is constant tinkering by the government which leaves people cynical about the savings plan. The administration of the fund is time consuming
Addressing the legislative risks:-Legislative risks can be addressed by lack of interference by the government in the fund. Also the strict access of fund until 55 years should be reviewed to make it more attractive to people
(Industry Super Funds, n.d.), The Australian Govt. decides the SG (Super Guarantee) rate which, in 2020/21, is fixed as 9.5% of OTE. IT includes regular wages of employees and any overtime or additional amount paid in lieu of leaves and other allowances.
(Chan, 2018) has mentioned in his article that there are some risk or disadvantages like Lack of access e.g. , till one reaches preservation age one cannot have the access to that fund and it a person is temporary resident , it will be taxed approx. 65% of the funds at the time of payment.
Multiple Super accounts:- If an employee is not in permanent employment with one company , it will not be of much benefit as he or she changes the job one has to open another super account, and in case of Aron it quite evident his age which is 32 and his industry i.e. IT that he may grow and would like to have more job opportunities in future which will create more super account in his case also. So managing multiple accounts may be an issue at the senior age.
Higher super management fee :- Administrative and management charges are also on higher side in this case as other funds generally have different rates and sometimes it is performance based but here it is fixed charges every year
Return on investment –It purely depends on the fund manager and generally it is put into non risky portfolios and returns are also low whereas if funds are managed by ARON himself as SMSF, it will surely get some good returns as he has experience also
SMSF or self-managed superannuation fund
Self-managed superannuation funds are the fastest growing sector of the superannuation industry. According to the latest figures of APRA ie. Australian Prudential Regulation Authority, SMSFs now account for approximately third position in total superannuation assets in overall Australia.
Aaron shall enjoy certain comparative advantages as a result of having a lower opportunity cost in remaining in the industry fund. These advantages include running costs for the fund.
In the industry superannuation funds, there are benefits accrued to economies of scale. There are reduced transaction costs. In SMSF the cost of running the fund is relatively high especially when the assets held are of low value. (H&R Block, n.d.) as per Australians SMSFs offer better and a wider range of options for investment as compared to other superannuation options.
Since management costs of SMSF are fixed, the low value of the assets can be eroded, leaving Aaron disadvantaged.
The decision to establish an SMSF, surely is an important step and it is very essential for the investor to thoroughly understand the time, resources, required compliance and other obligations, risk associated as per APRA regulated environment.
Following can be the reasons to establish the SMSF:-
There are many cost involved in the creating SMSF as follow:-
If Superannuation Vs SMSF is to be compared on the basis of Cost then surely the Cost of SMSF will be less , because though establishment cost will be there but it will be one time cost but as per one of research done by (Seeto, 2020) following is average maintenance cost for industry based accounts
And the return in Superannuation is almost fixed whereas in SMSF it is flexi and also depends on choice of one’s portfolio, and expect higher rate of return with lowering the average cost of maintaining the funds.
For Aron lot depends on this future plan and goal , any fund which is creates should be with the aim that how much he is expecting in future and what is his income or return goal from this investment, because both type of investment has its own benefits and limitation. It purely depends on personal ambition and experience of the person, e.g. if whether he is planning to stick in the same company for long or his plan is to change his job for some more opportunity. Whether he want to take the responsibility and will have time to give to do analysis and invest in his own SMSF.
SMSF is a better option in seeing overall profile of Aron and his brother as there are different options of superannuation investments available.
Aaron should consider the following in investing his superannuation saving
1.Additional Cost:- Moreover if Aron would sell his current portfolio and put the funds in his industry superannuation fund, there will be additional cost of maintaining will come to his account which is approx. 0.61% and investment fees was 0.21%. The fund charges an admin fees of $78 per year plus 0.19% that comes to around (.61%*165000+.21%*165000+0.19%*165000) = $1666.5
Admin fee is something which he anyways paying for his current industry funds
By setting up a SMSF will help him get out in a range of ways. Even if the cost of starting is more compared to industry, it gives the advantage of control over the investment and also helps to gear into more investments
One way of investing is adopting an age-based investment considering he is 32 years, he should come up with a plan based on when he wants to retire and his returns. Therefore he is supposed to pool his savings across diverse means and also adopt the best risk strategy to maximize his retirement returns
In SMSF where you manages your savings, you have the privilege to monitor your funds long-term returns. Through this you have alternatives of either to change plan if its poorly performing compared to other funds. You need to switch fast to get a fulfilling option and maximise returns
By directing part of his pre-tax into saving will help more in returns as contributions made to this fund by or on behalf of staff and which can be financed out of pre-tax income , in effect, of more than 10%, It helps in generating a good amount of tax saving for many people under a particular tax bracket i.e employees with a marginal tax rate of 31.5% which includes Medicare levy and the investment returns as generated on super savings which gets tax savings.
Australian Government , n.d. Your-superannuation-basics. [Online]
Available at: https://www.ato.gov.au/General/Other-languages/In-detail/Information-in-other-languages/Your-superannuation-basics/
Chan, L., 2018. Superannuation: Advantages and Disadvantages. [Online]
Available at: https://www.nestegg.com.au/retirement/superannuation/advantages-disadvantages
H&R Block, n.d. Advantages & Disadvantages of SMSF. [Online]
Available at: https://www.hrblock.com.au/tax-academy/smsf-advantages-and-disadvantages
Industry Super Funds, n.d. Superannuation obligations for employers. [Online]
Available at: https://www.industrysuper.com/for-employers/super-rules/
MACE, J., 2020. Superannuation rule changes: Your guide for 2020/21. [Online]
Available at: https://www.superguide.com.au/how-super-works/superannuation-changes-rules-apply-current-year
Seeto, T., 2020. What fees do Australian super funds charge. [Online]
Available at: https://www.canstar.com.au/superannuation/fees-explained/
The shape of Money, n.d. advantages-and-disadvantages-of-investing-in-a-superannuation-fund.asp. [Online]
Available at: http://www.theshapeofmoney.co.nz/investments/super-funds/advantages-and-disadvantages-of-investing-in-a-superannuation-fund.asp
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