Self Managed Superannuation Funds†Free Samples to Students

Question: Discuss about the Self Managed Superannuation Funds. Answer: Introduction Tertiary sector is service sector and other economic sectors are- primary sector which deals in raw materials; secondary sector which deals in activities related to manufacturing. In this report, discussion is done on two important questions. One of the question lays emphasis on some important factors which should be considered while selecting superannuation fund. Another question is about the role of pension fund manager in efficient market hypothesis. What are the important factors that should be considered by tertiary sector employees when they are deciding whether to place their superannuation contributions in the Defined Benefit Plan or the Investment Choice Plan? What issues relating to the concept of the time value of money may be important in this decision-making process? Explain. Tertiary sector can be defined as that part of industries which arrange for finance and transport services. Employees of tertiary sector have responsibility to deliver services and they also have to make and manage superannuation funds by their own as they do not work under any employer. In order to maintain superannuation funds, employees can select any of the plan from the two major plan for their contribution of superannuation(Snelleksz, 2016). The two major plans from which employees can select for the superannuation are- investment choice plan and defined benefit plan. It is important to consider several factor while choosing the superannuation plan. In order to select the suitable plan for superannuation it is crucial to understand about these plans- Defined benefit plan: In the first stage of the defined benefit plan, amount which will be received by the employees is well-defined. Defined benefit plan lies emphasis on employees requirements i.e. what amount they want to receive at the time of retirement or in the phase of superannuation. Particular amount of contribution is contributed by both employer and employee in defined benefit plan. This contribution is done on the basis of various factors such as- employee`s age, earning of employee, service tenure (years served in the services by employees or years which are going to be served) and employee`s age. Employers can use this plan as a tool in order to increase pay of employees or budget for the company. In defined benefit plan, ultimate salary plan is the most common strategy for superannuation (Clitheroe, 2013). In this plan, employees pension is use to be calculated by considering on three main variables which are stated below- Pensionable service- no of years are considered for which pension is mandatory to be salaried to the employee. Pensionable earnings- estimation of employees salary is done as what amount they could draw at the time of superannuation or retirement. Accrual rate- employee will receive the share of earning at the end of year under the particular scheme.In order to calculate employee`s pension income under defined benefit plan following formula is used: Tenure of working* Accrual rate * Salary at the time of superannuation or retirement It can be evaluated that in tertiary sector, employees get pension funds which depends upon the variables such as- tenure of service, salary and accrual rate. However, employees can contribute in the funds under defined benefit plan consequently to receive pension at retirement or superannuation. Employees can be benefitted from the plan at the time when the plan has been created(Venkatraghavan, 2011). Certain incentives for tax are also available with this plan and for that reason this defined benefit planis suitable for the employees working under tertiary sector. In order to select the defined benefit plan, it is required for employees to choose an individual plan from unfunded defined plan or defined benefit plan. In this plan, no investment or asset is created for investing in the fund. In contrast to this, a fund for investment is being created in the defined benefit plan. Both employer and employee contributes in that fund. When the time for retirement benefits or payment of p ension arrives, then the investment which was created earlier is sold out and the employees will receive the funds. In defined benefit plan, amount which will be received by the employee at the time of maturity cannot be known earlier and this is one of the drawbacks of this plan. Separate investment account is use to be opened under investment choice plan as well as the investments can also vary from any amount. In the investment choice plan,contribution of both employer and employee plus interest, any gain or the earned units during the period of service are invested totally in the particular or several investment. Employees enjoys the command in investment choice plan to make change in their investment procedure by considering some crucial factors(Waring, 2011). By choosing investment choice plan, employees get advantage of managing their funds for superannuation; as the employees can make investment in the fund they want to. One of the other benefit of choosing investment choice plan by the employee of tertiary sector is that investment portfolio can also be created by the employee. In order to choose investment choice plan, employee can adopt some strategies. Some example of the investment choice fund are- stable fund, trustees selection fund, shares fund , secured fund etc. Employees under tertiary sector should consider some factors in order to decide contribution for superannuation in the Investment Choice Plan or Defined Benefit Plan- Inflation rate prevailing in the market place: Rate of inflation makes impact on the cost living. It is crucial to consider the rate of inflation at the time of superannuation contributions. Defined benefit plan is long term in nature therefore rate of inflation play important role in this plan. As the investments in the defined benefit plan are done for long term period and the value of money drops year by year.For that reason this necessitates more involvement from employees in terms of contribution. Investment`s time frame: Investment`s tenure also play an important role while making selection of contribution plan for superannuation. It is requisite that the employees should consider that they want to invest for the short time period or for longer time period. Better results can be achieved in the investment choice plan in short time period(Newnham, 2010). On the other hand, higher benefits can be provided by the defined benefit plan when investment is done for longer time period and employee`s age should also be less. For that reason it is important that the employee should consider time frame or duration of superannuation funds and investment before making decisions for choosing plan between desired benefit plan or investment choice plan. Risk taking ability: The foremost consideration which should be consider by the tertiary sector`s employee is risk level they can afford. There is difference in contribution and superannuation fund. In comparison to investment choice plan there is less risk in defined benefit plan. As in the defined benefit plan there is no link with the market which makes this plan less risky. In contrast to this, there are enormous option or investments in the investment choice plan. A number of them can be linked with market or equity(Iverson, 2013). Hence, it is important for the employees of tertiary sector to consider risk before choosing the plan. Financial target of Employee: Variations in terms of financial goal can be observed from individual to individual. It is important to consider some financial factors while making decisions to invest in superannuation. In case, the employer want to make higher profit and also ready to take risk of higher level than the employee can choose investment choice plan. In contrast to this, if the employee wills to take stable risk and needs adequate pension level then it is best for those employees to choose defined benefit plan. Issues are related to the notionof the time value of money Time value of money is an idea or thought which means value of money diminishes as the time passes or in the upcoming period. Money`s time value plays role in selecting the contribution fund for superannuation(Dixon, 2012). In order to manage time value of money there is different procedure for mitigation as well as treatment of investment choice plan and defined benefit plan. The concept of time value of money is used to make decisions regarding superannuation funds. The dominant rate of inflation in the market as well as the irregular conditions of the market are some of those factor which facilitates in making decisions by using concept of time value of money. Through this concept, the current amount for contribution or pension which will be receivable at the time of superannuation can be calculated(Zask, 2013). The amount which is going to be received as well as the existing contribution`s value are being adjusted with the rate of inflation as a result in real values. Hence, the time value of money concept concerns for the cash flows of contribution for superannuation in addition to the amount desired at the time of superannuation. Recommendations: This can be analysed from the explanations and definitions of investment choice plan and defined benefit plan, which are discussed in the above points that investment choice plan is extremely customized plan for superannuation. It is being recommended that in order to deliver extreme flexibility in terms of developing and planning for the plan of superannuation and cash flows i.e. cash inflow (amount for pension) and cash flow (amount of contribution), investment plan can be chosen by the employee(Jorion, 2010). One of the other reasons for selecting investment choice plan over defined benefit plan is that the upcoming plan for superannuation can be altered or the amount of contribution or pension amount can be increased as per the requisites or according to the market situations. If the efficient-market hypothesis is true, the pension fund manager might as well select a portfolio with a pin. Explain why this is not the case. Efficient-market hypothesis is that situation of the market in which stock or commodity`s price is the replication of the information available about the business organization. Simply, efficient-market hypothesis can be defined as that market situation in which business organization`s shares or stock`s price is determined by integrating and analyzing the information about company. Hypothesis of efficient market states that price of stock or asset is, by this time at unbiased value which means none of the investor can make loss or profit in the stock market(Gemmell, 2016). The theory of efficient market hypothesis is being contrasted on the basis of several factor which has made the price of assets all together. For that reason, skills are not required to be applied to invest in the shares or stock. In order to determine the price of asset or stock in the efficient market hypothesis, consideration is not laid on trend analysis, market condition, information available in the market or past information about the company. Due to this situation, the asset or stock`s price do not fluctuate because of market trends or some other conditions. In this type of market, the role of pension fund managers has become very informal. There is probability that the requirement of manager for managing portfolio could come to an end; as need for consideration is not there(Waring, 2011). The role of fund manager to manage the portfolio will be hindered and the importance will also be get thinned. As consideration for past information as well as market trends analysis is not required in the efficient-market hypothesis, which in turns leads to lessen the role of fund managers(Belmont, 2011). On the other side i.e. in investment choice plan there is need of updating the portfolio which is used to be done by the manager therefore in the investment choice plan there is need of pension fund manager. But then again it can be evaluated that, the situation of efficient-market hypothesis do not subsists in the market or will certainly not exist in the market for instance there are number of factors which are required to be considered in advance, in order to make investment or to select fund for contribution of superannuation. In any kind of market, the efficient-market hypothesis can certainly not be the case as the market forces are very resilient(Iverson, 2013). In addition to this, interaction and integration of these market forces can put an impact on the shares and asset`s value. Beside this, in situation of efficient-market hypothesis, it is also recommended that none of the investor would be able to make higher profit in comparison to other. This circumstance will result as the investors would make profit of same amount for that reason the question of hiring pension fund manager to manage the portfolio do not arise. Conclusion It has been concluded that several factors are required to be consider while selecting a plan for superannuation fund. Efficient market hypothesis do not consider upon the information available in the market about the company. So, it can be concluded from the discussion that there is no case for efficient-market hypothesis, that which can exist in the investment market for the reason that of its imprecise as well as unproved basis. References Belmont, D.P., 2011. Managing Hedge Fund Risk and Financing: Adapting to a New EraSep. Wiley. Clitheroe, P., 2013. Control Your Own Super Fund. Penguin UK, 2014. Dixon, D., 2012. Securing Your Superannuation Future: How to Start and Run a Self Managed Super Fund. Willy. Gemmell, R.T., 2016. Self-Managed Superannuation in Retirement: A Personal History through the Global Financial Crisis. XLIBRIS. Iverson, D., 2013. Strategic Risk Management: A Practical Guide to Portfolio Risk Management. Wiley. Jorion, , 2010. Financial Risk Manager Handbook. willey. mbachtsheer, K.P., 2016. The Future of Pension Management. Wiley. Mees, Brigden, , 2017. Workers' Capital: Industry Funds and the Fight for Universal Superannuation in Australia. Kindle. Mitai, S., 2013. Your Guide to Finance and Investments. Network 18 Publications. Newnham, , 2010. Self Managed Superannuation Funds: A Survival Guide. Kindle. Paleveda, N.A., 2015. Fully Insured Defined Benefit Plans. Wiley. Prince, J.B., 2016. Tax for Australians For Dummies. For Dummies. Snelleksz, , 2016. The Collapse of Self-Managed Superannuation FundsMar. Willy. Venkatraghavan, D., 2011. Step by Step Guide to Start Investing. Network 18 Publications. Waring, M.B., 2011. Pension Finance. John Wiley Sons. Zask, E., 2013. All About Hedge Funds. McGraw-Hill Education.