Self Managed Superannuation Funds (SMSF) have a number of benefits if you’re looking to take control of your retirement investments. For many Australians, planning for retirement is often an afterthought that is frequently left too late. The government’s superannuation plan that requires you save for retirement is such a part of life for most of us that we often don’t think about whether our super is working to our benefit.
Super contributions aren’t optional, so it’s easy to forget it’s not another mandatory chunk out of your paycheck, but that it’s there to work for you. You can direct how that money is invested, you don’t have to rely on anonymous fund managers to make the decisions that will have a direct impact on your retirement income.
So what about investing in your own industry funds, bonds, and real estate? If you’re a relatively high earner, that may be the route you take as your super contributions cap at $25,000 before you pay taxes on that money. Younger professionals with no dependents may also be looking for investment opportunities once they’ve capped out.
SMSFs should be a consideration when you need investment options beyond your super. If you’re wondering if this is some sort of scheme, it’s not—according to the ATO, there are almost 600,000 SMSFs in Australia, with over one million members.
What is a Self Managed Superannuation Fund (SMSF)?
SMSF is quite similar to a trust fund. In fact, the first step in setting up an SMSF is to establish a trust with the singular purpose of providing retirement benefits for the members (or their heirs) – one to six people may participate in an SMSF.
Why is a trust necessary? One of the reasons you’d invest in an SMSF is for the tax advantages, and a trust—a legal tax structure—allows you to operate as any other investment fund. The trust must abide with compliance rules for yearly auditing, reporting, and tax obligations, as well as super and tax legislation.
How does an SMSF work?
When you set up an SMSF, you’re responsible for making all the investment decisions. This isn’t to say that any of the trustees can invest in anything they want; you must file an investment strategy document when you set up the trust. Since an SMSF can be a one-person entity, you can be entirely responsible for ensuring that the SMSF is meeting its goals.
What to include in the investment strategy profile
If you’re not an expert in investing and finance, here’s a primer on the factors to consider when you’re developing your strategy, keeping in mind that the sole purpose of the trust/SMSF is to provide retirement income:
- Characteristics of each fund member—age, financial situation, and risk profile
- Identifying major investment options—fixed-interest products, shares, managed funds, and real estate—and balancing the assets in the portfolio to minimise risk
- Liquidity of the shares to pay future benefits
- Assessing the insurance needs of each member and ensuring adequate coverage
Funds from the SMSF cannot be used to purchase insurance policies.
Benefits of SMSF
An SMSF is not for every investor, but as you get closer to retirement, or own your own business, establishing one has several advantages beyond the tax savings.
Super consolidation
The ATO estimates that over 36% of Australians have more than one super. Every job you’ve had (since 1992 at least) where you worked 30 hours weekly has had a mandatory super contribution. Most people forget those early summer jobs, but that money you paid in is still sitting there, accumulating interest and growing. If you have several small supers, think about the lump sum they would all add up to—possibly enough to justify an SMSF when you consolidate them all.
SMSF rules also allow you to combine the member’s super assets—boosting the balance even more—while opening up more investment opportunities with that larger balance, and reducing fees since everything has been consolidated into one account.
Investment Flexibility
Controlling investment decisions is a key factor in setting up an SMSF. Not only do you have a broader range of assets, such as high-yield cash accounts, income investments, unlisted assets, international markets, and unlisted assets, you have the flexibility to redirect investments during changing market conditions, and when personal circumstances change. SMSFs also have access to derivatives as a hedge against risk.
Small business owners appreciate that when they have an SMSF, the fund can have its own business property and lease it back to the business; providing an income stream to the SMSF and freeing up capital for growth.
Tax advantages
SMSF members also enjoy tax minimisations, but every situation is different and you should consult with your tax advisor before you make any SMSF decisions. In general, the fund allows members greater flexibility than other super funds to allow strategic investing and tax decisions based on contributions, distributions, and reserves.
What’s the difference? When you’re invested in a regular super with a million other people, your unique circumstances are not taken into consideration when the fund managers are making decisions. When you’re running the show, that’s exactly what you’re legally bound to consider.
Estate planning with an SMSF
Finally, an SMSF puts you in greater control of your estate, ensuring that your wishes are carried out per your requests, and not at the whim of some random fund administrator—and with the most advantageous tax structure for your beneficiaries.
How does this happen? Simple—you keep the SMSF out of your Will, so it’s not considered part of your estate. This way, your heirs avoid any unpleasant squabbling over your bequests, especially if you are dealing with blended families.
Consult your financial advisor
Deciding whether to set up an SMSF is complex, and you should consult with a financial advisor to go over your situation and how an SMSF may benefit you. Once you’ve established the trust and have your super assets under your own management, make a standing appointment with Super Network to review your investment strategy and implement any necessary changes.
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