Christine St. Anne: The government recently announced a number of changes to superannuation. Today, I'm joined by Westpac's David Simon to discuss these changes and strategies to best maximize your superannuation. David, welcome.

David Simon: Thank you, Christine.

St. Anne: David, the government recently made a number of changes to the contribution caps. What are the implications of these changes?

St. Anne: Yeah Christine, there are three primary considerations that members need to consider about superannuation, and predominantly those are over the age of 50 are really going to be impacted. So there are three considerations and implications that they need to consider. Certainly, transition to retirement, strategies need to be reviewed quite immediately. Their actual contributions themselves need to be reviewed and indeed, consideration around that actual nest egg and what the end result will be need to be reviewed.

So to detail those out, the transition to retirement strategy, a lot of members that are currently over the age of 55 years of age are contributing around 50 - are up to their maximum contribution of $50,000 into superannuation. They are attracting a concessional tax rate of only 15% on those contributions. Whilst they are going into superannuation, these members who're actually subsequently drawing a concessionally assist income from their pension to supplement the actual sacrifice into super and they are affectively in a much better and advantageous tax situation by doing that. Due to the government reducing their contribution cap limit from $50,000 to $25,000 they are affectively halving the benefit for those transition to retirement strategies, so they no longer as effective as they once were.

The other consideration is obviously for people that are making those contributions of $50,000 into super at the moment that aren't event doing the transition to retirement, so indeed those people from the age of 50. So whether they're making salary sacrifice contributions, or whether they are self-employed and making personal deductible contributions, and of course, inclusive of their existing employer contributions it all wraps up to make that $50,000 before tax. For those over the age of 50, it's no longer be going to $50,000, so they need to desperately reconsider their strategies and get it down to that cap of $25,000. Indeed if they don't, they will be hit with those penalties around excess tax on contributions.

And finally, the other implication, which is the most important one I suppose is what it's all going to mean to their retirement nest egg when they need the money most. They can no longer contribute as much money as they were previously, so, are they still able to meet their retirement aspirations with that?

St. Anne: So, against all these challenges David, will we see people, perhaps doing a bit more contribution splitting?

Simon: Yeah, look that's a really good point. So in 2014, there's going to be a $500,000 threshold. So basically for those members that are over the age of 50 and have less than $500,000 invested in superannuation, they will then again be entitled to access that $50,000 cap, which includes their salary sacrifice, self-employed deductible contribution, and employer contribution. So indeed, if there is a member of a couple that has a greater amount than $500,000 and a member of a couple that has an amount that's lower than $500,000 the idea would be for that member that has less than $500,000 to stay beneath that threshold.

So, what's likely going to happen is that member would then divert 85% of their contributions to be the maximum to the member of the spouse that has a greater level than $500,000 preserving their benefit beneath, so they can access that more generous threshold and cap from 2014.

St Anne: David, we know that these announcements are only new, but are there any strategies at the moment that people can adopt to maximize their retirement?

Simon: Yeah look, it's a good question and we've only started to look at those strategies right now. Some of those strategies would be for people that are actually contributing $50,000 now that actually continue to do so and incur the actual access contribution tax. So, I think for those individuals that are on the highest marginal tax bracket at the moment, they will maintain that tax bracket if they were to exceed the $25,000 cap. The benefit there is that it then goes into a more concessionally tax environment. So, there is still a viability there. It's certainly less than what would be before the budget announcement.

Obviously, investors need to be very careful they don't exceed both there before-tax contribution and after-tax because the penalties are then significant and up to 93%. Other strategies that we're starting to look at is to some clients that have that risk appetite to actually take on more risky assets, hoping that over the long term that will fill some of the void though having less money contributed into superannuation.

Another strategy would be to make after-tax contributions into superannuation rather than relying on that before tax which indeed has its own threshold. And finally looking at non-superannuation by strategies such as investment in shares or property could be considered as other alternatives.

St Anne: David, now, we know that June 30th is on the horizon, are there any pre-tax strategies that people can adopt?

Simon: Look, certainly for those individuals that are over 50 they are at a limited time where they can still access that $50,000 contribution, so I certainly encourage them to utilize that benefit whilst it’s still here. There are a series of other benefits that individuals can review that are non-superannuation based. Some of them being the prepayment of private health insurance, certainly for individuals that are earning certainly above the average, they could actually loose their 30% rebate. So the idea is to prepay the private health insurance; indeed other aspects such as bringing forward medical expenses, the government budget that's recently announced changes in the gap threshold, as well as the rebate to individuals and families, so it’s about bringing them forward and accessing those.

Other aspects such as ‘in-specie’ transfers of assets, such as shares that may be in an individual’s name into a more concessional environment to superannuation as an after-tax contribution, seeing as the market is relatively low by moving assets from one structure to the other will ensure they go into more concessionally tax environment with reduced capital gains tax impact. But certainly there are a variety of different strategies that individuals can explore, that certainly it does - does obviously come down to their own personal needs and objectives and overall investment timeframe and philosophy, and certainly risk profile. So, we encourage they receive quality financial advice.

St Anne: David, thanks so much for your insights today.

Simon: Okay. Thank you, Christine.

Christine St. Anne: Self-managed superannuation funds or SMSFs, continue to achieve spectacular growth in Australia. To give an idea about what are the pros and cons behind these funds, I’m joined by Westpac’s, David Simon.

David, welcome.

David Simon: Thank you, Christine. Good to be here.

St. Anne: David to begin with, can you give us some idea about this growth?

Simon: Yes, sure. Look, self-managed superannuation, the growth has been nothing short of spectacular. In fact, in 1998, about 12% of Australians owned a self-managed super fund. Yet today around 33% percent of Australian own a self-managed super fund. So by far it’s a growth - the fastest growing sector and we believe that some of that growth has been – catalyst being the global financial crisis.

So people that have had a bad experience with their previous fund have become almost despondent and looked at other areas, where they can effectively manage the money better themselves and are hence being attracted to that sector.

St. Anne: So what are the reasons behind the growth?

Simon: There is a whole array of advantages that have attracted people to owning a self-managed superannuation fund and control and choice is the primary one. So having a self-managed super fund allows people to access various assets that would otherwise not be offered through a public fund. So having access to assets such as direct property, indeed art and collectibles, direct shares, term deposits and manage funds, amongst many others, allows people that choice and that freedom around choosing their assets.

Indeed aspects such as asset transfer is also a really attractive part of a self-managed fund. So indeed that people that own assets in their own names will be paying tax at their own marginal tax rate, but being able to especially transfer these into a self-managed fund means that they are able to enjoy, the lower taxation rates that are available with superannuation and indeed quite often we’ve seen people that run their own businesses, and have a commercial property or business rule property, we’ve even seen people like that move those properties into their self-managed fund to free up the cash flow of their business and obviously, we’ve seen many people transfer assets like shares and managed funds from their own name into a self-managed.

We also find that other areas such as being able to pool - you are managing a self-managed fund, so typically your self-managed fund can have about up to four members. So having four members combine all of their money into one fund, that typically have the signed objectives and characteristics, really gives them scale. So it allows them to access opportunities they otherwise wouldn’t be able to access as an individual and indeed really keep the fees down by having that ability to pool the money.

St. Anne: What about tax advantages?

Simon: In a self-managed super fund, if there is an asset that’s grown and accumulated value through the accumulation phase. If they were to liquidate that asset and realize a capital gain they would need to pay tax. Now, if they are in a self-managed fund, that can effectively migrate that fund into a pension phase and then sell the assets that accrued to capital gain and not pay any capital gains tax at all. So there certainly are some significant advantages that have attracted people to that sector and indeed that’s being represented in those growth rates.

St. Anne: You mentioned a number of advantages, what are the key things that investors need to consider before entering into an SMSF

Simon: So, some of the aspects and some of the considerations that people need to consider are really serious. The first one is the responsibility of running a self-managed fund. Now the trustee of the fund and indeed the corporate director of a corporate trustee are obliged to be able to manage that fund in a compliant manner, and indeed, if the fund is deemed to have breached their compliance and becomes incompliant, then the penalties are rife. One of the penalties is the asset being taxed at the marginal tax rate, so not the actual income of the assets, but the assets that are contained in the fund itself can attract the highest marginal tax rate. I am aware of stories where trustees of self-managed funds have had to pay out hundreds of thousands of dollars in tax because the fund is being deemed incompliant.

There are even other aspects such as fines and even jail terms for extreme beaches of superannuation fund compliance. Another area is expertise. People may open a self-managed fund and roll over their money into cash and then say where do I invest it? So one of the disadvantages and what people often over look is the requirement of the investment expertise in accessing a self-managed fund to ensure that they are managing in a very smart way but also in a strategic fashion. So it's really important that they have the skills and the expertise to do so.

One other thing is time. I mean time is a precious commodity in this day and age, and it takes a lot of time to manage the ongoing concern of a self-managed fund. In fact, there was a recent study where the average trustee needs to spend about five hours every week in managing a self-managed fund. It is not too different to managing a private company, so that certainly one thing that's particularly overlooked as well.

St. Anne: The amount of responsibilities you mentioned David, can investors outsource these?

Simon: Yeah, sure. The whole aspect around time and expertise and indeed the compliance function can all be outsourced, but that would probably beg a question, say, if you're outsourcing all of those, is it a do-it-yourself or is it a self-managed super fund?

St. Anne: Do investors need a minimum balance to start up an SMSF?

Simon: Yeah, certainly Christine. There is a lot of controversy around what would be the reasonable amount that is required before you set up self-managed fund. Look, there’s no hard and fast rule when everybody has their own opinion, but certainly depending on the complexity, the purpose and the structure of a self-managed fund, whether it's a corporate trustee or public trustee or indeed if the purpose of the self-managed fund is to acquire direct property through - borrowing through an instalment loan, the set up cost can become quite material and expensive, and indeed if a fund is typically worth less than $250,000, the additional accounting, audit and legal fees, generally make it more expensive than a public offer fund. So, as a general rule of thumb, about $250,000.

St. Anne: David, thanks so much for your insights today.

Simon: My pleasure, thank you.

Jeffrey Hutton: Self-managed super funds; they make up third of the superannuation industry and they are only going to get bigger. So 2012, what are the big issues they need to be thinking about. Well, Andrew Baker joins us from Perpetual to talk about just that.

Andrew thanks of joining us.

Andrew Baker: Thank you, Jeff.

Hutton: So Andrew, how do you account for the popularity of DIY Super?

Baker: We've seen a huge growth in the self-managed super funds, participants over the past few years and I think, given that the turmoil out of GFC and the experience that people had, I think at the heart of it, it is about flexibility and control, and again that transparency. So, many will do it all themselves, many might seek assistance with certain aspects of the running of a fund compliance or administration. But at the end of day it's their call, so it's not a product that they are in necessarily, it's a structure that's their own. So, I think it's that that's driving that behavior.

Hutton: This year concessional caps are the lowering of them to 25,000 is going to be a big issue, right?

Baker: Wall Street's very important to take advantage of all of those strategic opportunities and the caps being of vey high profile one. It does in fact need to fit into your strategic goals and objectives that you've set for short, medium and long-term. So, it's not just about sort of rushing in and taking advantage of the caps, it's about saying 'does that fit into my strategy?, have I got my cash flows mapped for the year?'.

Its $25,000 and I mean a pre-tax or salary sacrificing that can be very powerful. But I think you did see some of that behavior in 2007 around the $1 million opportunity. So, putting money into super is one thing, but making sure that it's going to be efficiently invested is perhaps another. So, you do need to look at it holistically and not just sort of react to a deadline.

Hutton: That's all about the plan, isn't that right?

Baker: That's right and really understanding, what's the opportunity cost if I don't do it. So, if I'm not going to take that opportunity, what are the opportunities costs for me not doing that.

Hutton: That point you are making about the $1 million contribution, what was lesson of that?

Baker: If people were making contributions to super and not really thinking about the actual way that that was invested, they experienced severe loss of capital. So, if you adjust sort of piling significant amounts of money on top of your existing investment strategy without really considering that - do you see what I mean? You are separating strategic and tax issues from investment.

Some products, if you put money in it just basically sweeps across the investments that you are already in. Again with sort of breaking apart strategy from investment, you are able to say, well okay I can make the contribution but I might allocate it to cash as opposed to being in for a penny, in for a pound to that existing investment strategy.

Hutton: So, cash balances for the past couple of years have risen, I think to about 30% or so, those were the latest figures. Should trustees be moving out of cash and reallocating?

Baker: Well look, I mean, I think there's cash and then there's cash and fixed interest, and cash fixed interest and international fixed interest. Look, it's certainly been a consolidating program that many have gone through and waiting for investment markets to hit some level of perceived or real recovery before allocating through. Again, it comes back to the fundamentals: you really need to make sure you've allocated for short-term expenditure; you've got any capital expenditure in play. They're the must haves, understanding those decisions, understanding what you need, before you can start to say well should I start to reallocate.

Once you've gone through that process of figuring out what you do need in cash from a liquidity perspective and start to move to the portfolio, we'll sure, that's when asset allocation needs to come to the fore. What are we telling our clients? It's a balance of making sure that we don't make any rash decisions. It's about understanding what your true risk profile is, going through the GFC on your own or with an advisor, what was your actual behavior? What did you do? What did you feel? It's understanding those questions, and answers to those questions, which will then drive well, do we retire in the current asset allocation and risk profile or do we change?

Even if you retire in the current asset allocation and risk profile that you have, yet you need to then test what's going on in underlying investments within that risk profile. So, alternative investments, direct property, which we do believe smoothes return, reduces risk. Let's face it, the Australian investment community has a love affair with Australian shares, and you've got a couple of big names in that ASX top 50 that carry huge amount of risk in many people's portfolio. Again, I think it comes back to fundamentals and not sort of, I guess, bowing to people's popular opinion, which is as soon as I see some opportunity in the ASX, I'll dive back in there, because I don't like this asset class and I don't like that asset class. It's not a prudent approach.

Hutton: Andrew, I suppose the point that I'm trying to get at is, are people going to continue to be risk-averse or will appetite for risk improve?

Baker: Yeah. Look, I think there is a couple of things in play. I think clients do understand that bring in cash for ever is not going to achieve their goals and objectives. So, they are starting to head back in and probably six or eight months ago it was when we started to see people moving back in. But interestingly seeing people head back into international assets was very interesting. And, I mean we've always stuck to our guns from our recommendations point of view, but saying clients more open to that I think the currency helped.

Whilst we very much have their own views on asset allocation and investment selection, we also respond to our clients requests and particularly the high net worth space, they kin of know what they want, where their interests lying, and that's the space. Australian equities, looked they have remained very strong throughout. So, we will see rebalancing into Australian equities, but I think most of the clients that we've had experienced with have retained those allocations. They were very, very loathed to sell down those positions.

Hutton: So, what are the big bumps coming up in 2012, I suppose Europe will be one of them?

Baker: We do see tough times in Europe, there is no doubt about it and particularly potential recession. However, whether that will have the impact or massive impact that some people are saying, not sure. We do see the U.S. actually starting to improve. So, no recession in the U.S. really is our view. Then Australian markets, well some research is showing potential 10% returns and coming back to good growth and income.

What we do think though is that portfolio construction will be very much about income, and that's a bit of a change to the sort of addiction to growth that many have had in investment markets really over the past several years. We don't see huge growth being the driver of investment decisions. It needs to come back again to fundamentals, which is, what is this investment going to yield me? Which should also then drive the value of that - price of that asset, over the longer term.

Hutton: Andrew Baker, thanks a lot for joining us.

Baker: No problem. Thanks very much, Jeff.