Retirement fund co-contribution arrived

DW had made a $1,000 "undeducted" contribution into her BT superannuation account last financial year, so she was eligible to receive a $1,500 "government co-contribution" from the ATO. The tax office wrote last month stating that they couldn't pay the contribution into her old BT account (because she had closed it and rolled her retirement savings over into our new SMSF in July) and asked for details of a complying fund which would accept the payment.

I sent in the details of her SMSF account and a cheque arrived via the E-SuperFund administrator yesterday. I was relieved to see that there were no problems accepting the payment -- apparently not all SMSF Trust deeds cater for recent changes such as the co-contribution, TRPs and so on.

I deposited the cheque into our SMSF bank account at lunchtime on Friday. Hopefully our employer's superannuation contributions owed from last month will also turn up next week and I'll be able to transfer the cash into our Vanguard HighGrowth account.

I also made an undeducted contribution into my Superannuation fund last FY (not the full $1,000 since my taxable income was too high to qualify for the maximum $1,500 co-contribution). I should be entitled to some amount of co-contribution, but I haven't seen it turn up in my BT Superannuation account as yet.

Copyright Enough Wealth 2008

ESuperfund closing our SMSF's E*Trade account

After initially requiring SMSFs to open a trust bank account and trading settlement account with ANZ, and do any superannuation account share trades via E*Trade, ESuperfund shifted to using Macquarie bank (I think) and Comesec as broker for new SMSFs. Existing SMSFs weren't affected initially, but I doubted that ESuperfund would support the old relationships in the long run. Sure enough, a letter yesterday advised that our SMSF would no longer be able to use E*Trade from next month, and enclosed a batch of paperwork to sign authorising a new brokerage account be established with Comsec, and to transfer existing SMSF stock holdings from E*Trade to Comsec. Fortunately we've only invested in Vanguard Lifestages High-Growth index fund and have no direct stock investments with our SMSF, so there's no need to complete the paperwork to transfer any shares.

I will get DW to counter-sign the paperwork setting up a trading account with Comsec, as we might choose to invest directly in some stocks in the future (or I may do an in specie transfer of some stocks I own individually into my SMSF account, although there would be capital gains tax implications).

There is a small amount of money sitting in the ANZ trading settlement account which will need to be transferred into the main trust bank account, but I'll just log into our E*Trade account and do this manually rather than completing the extra paperwork.

Over the years I've noticed that this is the normal way that financial companies close off unwanted account options - first they make the new provider compulsory for new accounts, but let existing accounts stay with the old provider if they choose not to change services. After six to twelve months they usually make the change compulsory for existing account holders as well. I can only guess that it's done this way so that most existing account holders see the change as "optional", and only those accounts that are still with the old provider after twelve months are forced to change, and may therefore get annoyed.

I can't see that this change of banks and broker services is of any benefit to ESuperfund SMSF account-holders, so it's probably being done for the benefit of ESuperfund (they dress it up as a way to "maintain their low fee structure", which is their main competitve advantage over other self-managed superannuation account administration service providers).

Copyright Enough Wealth 2007

SMSF Update - New Trust Deed

ESuperFund (the administrator of our Self-Managed Superannuation Fund, or SMSF) has sent out a new Trust Deed for DW and I (the trustees and members of our SMSF) to sign. Apparently the recent changes to "Simpler Super" last June have made the original Trust Deed so out of date that there's a chance our SMSF could become "non-complying" and lose it's tax-benefited status if we don't update the Trust Deed. The new trust deed costs $199, which isn't a huge amount, but I would have expected it to be free since it's been less than a year since we setup our SMSF and signed the original Trust Deed. At least ESuperFund has promised to not make any additional charges if another Trust Deed update is required within the next five years.

Last year's SMSF tax return and member statements were very simple as I had only made a $200 undeducted contribution into the SMSF bank account before 30 June to check that everything was setup and working correctly. This year we have rolled over our most of our existing retirement savings from the BT fund (our employers fund) and have had our SGL and salary sacrifice "tax deducted" contributions paid into our SMSF bank account. Our employer sends these payments to BT "super choice" which then forwards them to our SMSF bank account. For some reason the SGL contributions for DW and myself get rolled together into a single monthly deposit, and the salary sacrifice amounts have also been sent through as a single transaction for both members. This means that I have to keep an accurate spreadsheet showing the breakdown of each transaction into member components, as ESuperFund will need this information at the end of the financial year in order to prepare the member statements and financial accounts.

Most of our SMSF balance has now been invested into the Vanguard High Growth Fund. By investing in a single Vanguard fund we will maximise the available fee rebate. Having only one cash account and one investment account for the SMSF also makes the record keeping much simpler. If we started directly investing in stocks or CFDs we would probably have to spend some extra money on SMSF specific accounting software. Since software such as MySF costs over $300 pa this would defeat the "low cost" rationale for setting up a SMSF in the first place.

The rollover statements for the money we transferred from BT to the SMSF are quite complicated, so I'll have to check the annual SMSF paperwork very carefully when it's produced by ESuperFund next August. It's important that all the information has been correctly transferred from BT to ESuperFund as there can be adverse tax consequences during retirement or when death benefits are paid to non-dependant beneficiaries.

Copyright Enough Wealth 2007

Effect of Retirement Age on Retirement Savings

How would early (or delayed) retirement affect your retirement savings and retirement income? I had a play around with the figures for my situation, and it suggests that I could retire "early" at 57, assuming I keep adding to my retirement savings at the planned rate and achieve the expected investment returns. However, I'm not sure that I would retire early just because I could afford to - I'm contemplating changing career (again) in a few years time to try my hand as a high school science teacher. If that role suits me I'll keep working until it's no longer enjoyable.

Looking at the figures, if I retire at 57 I'd probably run out of funds in my SMSF account sometime in my mid 80's. That wouldn't really be a problem as I also would have some other stock and real estate investments to draw upon if necessary.

If I continue working until "normal" retirement age of 65 I would probably never exhaust the SMSF, although the tax law requires a pension payment rate that would shift all the funds out of that account before I hit 100, so the extra pension amounts would be reinvested outside the superannuation system.

If I change careers and enjoy teaching enough to keep working until 70 (a nice thought, but modern teaching isn't quite like "Goodbye, Mr Chips") I'd end up with around $3.4m balance (in today's $) still unused at age 94 (I've used 94 as the limit to my projections as my paternal grandparent's lived to that age).

The calculations are based on the following assumptions:
current SMSF balance: $330,000
annual retirement savings: $19,250 (9% SGL + 13% salary sacrifice)
real ROI in SMSF account: 5%
SMSF pension in retirement (PV): $52,000



Copyright Enough Wealth 2007

Why you need to Double Check everything that Payroll does

For some reason our payroll department has a hard time getting things right the first time. In the past couple of years I've been emailing a request for making salary sacrifice into my superannuation each year before the new financial year, and each year the change has either been forgotten or that amount taken out of my pay was incorrect. This year there was the added complication of changing from our employer's superannuation fund (BT) to our new SMSF. The first monthly payment (from July) when through to our SMSF bank account with ANZ correctly by the middle of August, but the August contribution didn't arrive in September, and there's been no payment made in October yet either.

I'm sure that payroll will eventually clear things up with BT and the money will flow through to the SMSF bank account, but, in the meantime, we're not receiving any interest on these monthly contributions. As DW and I are both salary sacrificing large amounts into super this year, we miss out on around $22.50 for each month that a monthly contribution is delayed. Not a huge amount, but it would help offset the admin costs of maintaining our SMSF. Our most recent fortnightly pay was processed last Wednesday, and I heard payroll discussing superannuation payment processing at that time. If our contributions for August and September haven't arrived in our ANZ bank account by the middle of next week I'll have to chase it up (again) with payroll.

Copyright Enough Wealth 2007

I think they need another form letter.

My employer's superannuation fund just sent me a letter stating that they'd been notified that I had left my employer, and that I had 45 days to notify them of which superannuation fund to roll my fund balance into, otherwise it would automatically switch into their retail fund. I guess that now my employer is paying my superannuation contributions (SGL and salary sacrifice) into my self-managed super fund, I can't stay in the BT employer fund. I don't mind being automatically switched into the retail fund as I can keep my current life insurance policy, which is why I left a small balance in this fund anyhow. But since I haven't actually changed jobs (just super funds) the letter they sent out isn't really suitable.

You'd think that since "choice of superannuation fund" legislation came into effect many months ago they'd have a suitable form letter arranged by now. Perhaps they do, and my employer just sent them the wrong info. It wouldn't surprise me - the employer contributions for September still haven't been transferred into my SMSF yet, and when I asked payroll about it they admitted that they'd been some sort of snafu.

Copyright Enough Wealth 2007

SMSF Investment Update

The confirmation notices from Vanguard for our initial investments into the High Growth Fund finally arrived. The initial $5,000 investment was processed on 4 Sep at a unit price of $1.7417, and the first of our regular weekly $25,000 investments was processed the following day at a unit price of $1.7306. The weekly contributions will continue until the bulk of our SMSF balance has been invested into the High Growth fund. With the current market volatility I (we) decided to dollar cost average into the fund rather than invest all our cash at the current price. We will be watching the price with interest while these regular investments are being processed - the best outcome would be a short, sharp drop in unit prices over the next couple of months followed by a rapid rebound to current prices by the end of the year. It's just a likely that the unit price could go up over the next couple of months, in which case a lump sum investment would have been better. Whatever. Once the bulk of our SMSF fund has been invested we'll reduce the weekly investment amounts to match amount we are contributing.

Copyright Enough Wealth 2007

My SMSF finally Invested some of its Cash

The application form to invest $180,000 of our SMSF in the Vanguard High-Growth fund was successfully sent via eSuperFund to Vanguard. I received an email from Vanguard today advising the Biller code and Reference number to use to send our money to them. I had intended to start off with a $180,000 lump sum, and then dollar cost average (DCA) the remaining balance of our SMSF into the Vanguard fund over the next couple of months at the rate of $5K each week. However, when I went online to transfer some of the $330,000 I'd previously moved from the ANZ SMSF bank account into the trading account held by E*Trade I found out that funds transfers take 1 business day to process, IF you make the transfer request before 1pm. It was 4pm when I read this, so the $180K won't be back in our SMSF V2 bank account until next Tuesday. Meanwhile we only had a little over $6K available balance in the V2 account, so the initial BPay transfer to Vanguard was only $5,000. I'll transfer another $175K to Vanguard when the funds are available next week.

Meanwhile I finally managed to reconcile the amounts paid by our employer for SGL and salary sacrifice in July with the amount deposited into our SMSF in mid-August, so it looks as if everything is working fine from a contributions point of view. As no tax had been deducted from the contributions, I assume that the SMSF tax return next August will tell us how much to transfer to the ATO for this financial year. There will be 15% tax on our pre-tax contributions and any income, so I'm keeping track of how much to put aside for the eventual tax bill. I think it's better to leave this amount sitting in the ANZ bank account earning a reasonable amount of interest, rather than transferring the entire contribution amount to Vanguard each month and ending up having to make a withdrawal from Vanguard next August to pay the tax bill.

Copyright Enough Wealth 2007

SMSF Investment

I finally sent off the paperwork to invest some of our retirement account funds into the Vanguard LifeStages High-Growth Fund last Friday. Although eSuperFund had said I should send a cheque with the application form (for them to endorse and forward to Vanguard) I didn't want to have to request a cheque from ANZ (the SMSF bank account doesn't have a cheque book). The Vanguard application has an option to make the initial contribution via BPay, so I ticked that box and hope that I can just transfer the initial $180,000 investment once they email me an account number.

I ultimately decided to make the initial contribution amount $180K rather than the entire $330K we have available to invest after Moomin commented that he would dollar cost average (DCA) into the investment given the current market volatility. Since I really have no idea if the Australian and International stock markets will rebound to new all-time highs over the next few months or drop lower by another 5-10% or more it makes sense to DCA. By investing the remaining $150 of our current SMSF cash balance into Vanguard at the rate of $10K each week via BPay I'll avoid the risk of having invested at too high a price if the markets continue to drop, but by the same token have missed the chance of getting fully invested at the bottom of the correction. Somehow using DCA to achieve an truly "average" buy-in price seems in keeping with our decision to invest in an Index Fund to ensure we get typical market returns. I don't think my ability to time the market is any better than my ability to pick individual winner stocks.

Copyright Enough Wealth 2007

SMSF - the Devil is in the Details

No wonder they call it "Self-managed". Even with the fund administration, auditing and tax returns out-sourced to eSuperFund there is a fair bit of "paper warfare" involved (at least initially).

Investing our SMSF money into the Vanguard fund is turning out to be less simple than I had initially thought. Just when I was about to apply to invest in the Vanguard Fund online through our SMSF's e*Trade account, I noticed in the fine print that e*Trade would be charging an annual 0.66% "portfolio fee" for managed fund investments. This makes a mockery of our attempt to minimise fees and charges using a SMSF, and would have come as a big shock at the end of the year if I had skimmed over that part of the "fine print". Managed fund investments made via e*Trade would be at the "wholesale" fund management rate, but this isn't a significant benefit when investing in the Vanguard Fund as the retail fees are quite low anyhow (not as low as in the US, but that's a whole other story).

For example;

Investing via e*Trade Managed Fund Service:
Amount     Vanguard Fee  e*Trade       DOLLAR
Invested   Wholesale     Porfolio Fee  COST pa
 $50,000   0.37%         0.66%           $515.00
$100,000   0.37%         0.66%         $1,030.00
$200,000   0.37%         0.66%/0.55%*  $1,950.00
$500,000   0.37%         0.66%/0.55%*  $4,710.00
*e*trade fee is 0.66% on amounts up to $100,000
and 0.55% on amounts from 100-500K, then 0.5% on
amounts above $500K. Vanguard Wholesale fee via
e*Trade is 0.37% on all amounts invested.

Investing via direct application to Vanguard
(application lodged via eSuperFund):
Amount     Vanguard Fee  DOLLAR
Invested   Retail        COST pa
 $50,000   0.90%           $450.00
$100,000   0.775%**        $775.00
$200,000   0.5625%**     $1,125.00
$500,000   0.43%**       $2,150.00
**Vanguard Retail fee is 0.90% on amounts
up to $50,000 and 0.60% on amounts from
$50-$100K, then 0.35% on amounts above $100K.

So we could have ended up paying a couple of thousand dollars in extra fees each year if I hadn't been paying attention.
The other problem with investing via e*Trade is that you can't choose automatic reinvestment of distributions, and any additional investments in the same fund have to be made through the same process.

Investing directly by sending an application to eSuperFund should allow the initial investment to be made direct from the SMSF via BPay. The automatic reinvestment of distributions is possible, and I should be able to 'set and forget' an automatic additional investment by BPay each month.

The other bonus of investing directly (via eSuperFund) is that eSuperFund will have electronic 'read only' access to the Vanguard account, so I won't have to forward a hardcopy of the annual fund report.

The other wrinkle I found out when I tried to transfer the $300,000 back from our SMSF investment sub-account into the main account was that the ANZ bank hadn't correctly setup the accounts. Our 100-pt ID check data was confirmed for the main V2 bank account, but hadn't been set for the investment sub-account. This meant that while I had been able to transfer funds INTO the investment account, I wasn't able to transfer the funds back OUT into the main account electronically! Luckily this won't matter until the Vanguard application form has been processed and I need to make the BPay funds transfer for the investment.

Finally, it also turns out that when eSuperFund said that the normal $5,000 account balance minimum for an ANZ V2 account was "waived" in actually just means that we get paid interest on balances below $5,000. The ANZ bank system is still setup so that the "available balance" is always $5,000 less than the account balance. This means that there will always be $5,000 sitting in the ANZ V2 account that can't be invested into the Vanguard Fund or other investments (such as direct share purchases through e*Trade). It's not a huge problem since the $5K will be earning interest, but it still means an extra 1.5% of our SMSF balance is unavoidably allocated to "CASH" on top of whatever allocation to cash exists within the Vanguard High-growth fund (around 4%).

Copyright Enough Wealth 2007

Decisions, decisions

The funds in our SMSF bank account have finally cleared, so I was able to transfer $330K into the investment sub-account which is used to settle any e*Trade transactions. I can now apply via e*Trade to make our initial investment into the Vanguard LifeStrategy High-Growth Fund. Of course I don't know if the unit prices will go up from here in the short term or maybe drop even further, but at least I can be 100% sure that the current price is around 10% off its peak from earlier in the year, and that we gained a couple of percent by being in cash for the past two weeks. I'm sure that in 20 years time the current dip won't even be noticeable in the chart. The important thing is to be invested in our chosen asset allocation and remain invested for the next 20 years. One good thing about investing all our SMSF funds in the one fund is that rebalancing between the underlying asset classes should be done automatically by Vanguard to stay close to the target asset mix for this fund. This is even better than using a mixture of Vanguard Index Funds to achieve a desired asset mix because rebalancing between funds would cost the 0.5% buy-sell spread in unit prices, although since rebalancing would generally only require a small fraction of the total investment to be moved, the effect would be negigible. All we need to do on an ongoing basis is to periodically adjust our automatic investment plan to reflect the amount of money we are depositing into our SMSF bank account each month via salary sacrifice and the SGL contribution from our employer.



Copyright Enough Wealth 2007

SMSF Update

I deposited the cheque for my transfer into our SMSF today, and the current balance showing online in the SMSF bank account is now around $340K. The funds haven't been cleared yet, but I expect that will only take three business days (the transfer from our old super account with BT was via a Westpac bank cheque). Once the funds clear I'll switch $340K into the sub-account that is linked to our e*Trade account for the SMSF, and will then be in a position to invest in Vanguard's High-growth fund. If the market continues to drop early next week I may be tempted to wait and see before investing, but the risk with doing that is that there may be a sudden 'bounce' as soon as it appears that the worst is over. Then again, I'd rather wait a bit too long and buy in a few % above the bottom of the correction, than get in too early and watch the market correction continue down another 10%...

Copyright Enough Wealth 2007

Self-Managed Superannuation Fund get Funded

We're in the last stages of transferring our retirement funds from our employer-sponsored fund (with BT) into the Self-Managed Superannuation Fund that we setup a few months ago. I mailed in the paperwork to BT at the start of last week and the funds had finally disappeared out of our BT accounts yesterday. Luckily that means that the withdrawal was probably processed on Friday using the unit pricing from COB on Thursday - that would mean that we just managed to escape the 4% drop in the Australian market that happened on 'Black Friday'.

So far only the funds from DWs BT account have appeared in our SMSF's bank account. As DW was closing her BT account the transfer was done electronically. I'm keeping a small amount of money in my BT account (enough to pay my life insurance premiums for a while) so I had to fill in a different withdrawal form which went to a different address at BT. The withdrawal appears to have been processed at the same time as DWs but will be sent via Cheque, so I probably won't receive the cheque until later in the week and have to deposit it into the ANZ bank account of our SMSF.

Some additional funds have also appeared in the SMSF bank account, so it looks like the compulsory SGL contributions from our employer are successfully being redirected into our SMSF. The amount doesn't reconcile with what I expected to be paid in for July, but I'll have to wait for the bank statement to try and work out exactly what has been paid in.

Once the cheque for my transfer has been processed I'll invest the entire balance of our SMSG in the Vanguard Lifestages High-Growth fund. The asset mix in this fund is broadly what we want, and by having the entire balance in this fund we'll save a lot on management fees.

The target asset allocation for the High-growth fund is:
4% Australian Fixed Interest
6% International Fixed Interest (hedged)
48% Australian Shares
29% International Shares
10% Property Securities
3% Emerging Market Shares

Vanguard in Australia charges 0.9% fee on the first $50,000 invested in any fund, 0.6% on the next $50,000 and then 0.3% on the balance above $100,000. This is a lot better than the 1.3% or more growth-oriented funds were charging in the BT scheme. In addition the BT fund admin fee was around 0.75% (even after a hefty employer-rebate). The SMSF in comparison will only pay eSuperFund $599pa plus another $150pa to the ATO. The total admin cost for our SMSF ($749pa) is therefore only 0.23% of our initial balance and will decrease over time as our SMSF balance accumulates. While we will be missing out on the dubious benefits of active fund management, I think the net saving of fees will exceed the typical outperformance of fund managers compared to the relevant indices.

Copyright Enough Wealth 2007

Retirement Funding

We're still waiting for our employer contributions to start appearing in the bank account of our Self-Managed Superannuation Fund. Apart from the intial $200 deposit I made last June nothing has appeared in the account yet. We notified our employer to direct our 9% compulsory employer contribution plus our "salary sacrifice" amounts into the SMSF from 1 July, and the payroll department has apparently made the change. The employer contributions still go initially to the company's superannuation administrator, who is then supposed to redirect it into the SMSF bank account within a couple of days. As no funds had appeared in the account yet I asked payroll in what timeframe I should expect the money to appear in our SMSF account. It turns out that although the superannuation contribution amount is printed on each fortnightly payroll slip the contributions are only sent in at the end of each month. So I should see the July contributions hit the SMSF bank account by the middle of August. As soon as I know that no additional contributions are going into the old fund we can send in the paperwork to close DWs account and "rollover" the entire balance into our SMSF. I'll also send in the request to rollover the bulk of my account balance into our SMSF, just leaving enough in the old fund to cover my insurance premiums. It's cheaper to get death & TPD cover through our company superannuation scheme as we get group rates and the premium is paid out of pre-tax dollars. Outside of superannuation life insurance premiums are generally higher, and aren't tax deductible. In contrast, income protection insurance is tax deductible, so it's generally better to obtain it outside of superannuation.

Copyright Enough Wealth 2007

A Nice Opportunity for Beginning Investors

It's a pity that I already have several online savings accounts and mututal fund investments, because the new offering from rabobank looks very attractive. They offer an online savings account with no fees or minimum balance with an interest rate of 6.6%, and from this account you can invest in wholesale mutual funds for a low entry fee of only 0.75% (compared with up to 5% entry for retail funds going direct or via a planner, or 0% for a retail fund investment via a discount broker). They are offering 0% entry fee, but only until the end of July. But the 0.75% fee is still good value as it gives access to wholesale funds (which usually charge lower management fees than their retail fund equivalents) with a minimum investment of only $250.

I'd try out this account and fund investment option if I didn't already have more accounts than I know what to do with. They do offer the account for use with a DIY Superannuation account (SMSF), but I'll have to check carefully how their costs and range of available funds compares with accessing mutual fund investments via e*Trade (I already have an e*Trade account setup for use with our SMSF). One benefit of making out SMSF mutual fund investments via e*Trade is that eSuperFund (which administers our SMSF) has access to transaction data from our e*Trade account. If we invested for our SMSF via Raboplus we'd have to send copies of all the relevant financial info to eSuperFund each year.

I was also thinking about opening a Raboplus account for DS1 and/or DS2, but unfortunately you can't open a raboplus account if you're under 12, so the kids will have to make do with their St George bank accounts and Commonwealth Bank 'dollarmite' savings accounts. It's funny how some banks and Superannuation funds have no problem with opening accounts for a minor (with an adult having authority to operate the account), while others either don't handle accounts for minors at all, or insist on the account being opened in the name of the adult trustee(s).

Copyright Enough Wealth 2007