The 5 Benefits of Having a SMSF
So, you’re thinking of getting a self-managed superannuation fund? You are not alone
Did you know about 1.1 million people have their own self-managed super fund (SMSF) and that accounts for $700 billion in funds under management, making the SMSF sector the biggest super sector, controlling 30 per cent of Australia’s superannuation assets. That’s according to the SMSF Association
So why are self-managed super funds (SMSF) a smarter way to save for your retirement? It’s like a ‘do-it-yourself’ super fund that puts you in the box seat.
So, we put together five reasons why people are increasingly talking to financial advisers to get their own SMSF.
1. Complete Control
First up, SMSFs are regulated by the Australian Taxation Office (ATO) but are managed by the fund’s trustees. So, if it’s your SMSF you’re the Trustee. This differs greatly to retail superannuation funds, industry funds and government funds, which are regulated by the Australian Prudential Regulatory Authority (APRA). Those funds are managed by large organisations, often adopting a cookie cutter approach, a one size fits all for investments, whether you are you still working or in the golden age, pension phase.
What does the SMSF Association CEO John Maroney say? “SMSFs allow trustees to create a tailored investment and retirement strategy with substantial diversification benefits”. That allows you to personally align your retirement goals with your investment portfolio, putting you in the driver’s seat of your retirement nest egg.
In the APRA-regulated sector (retail and industry super fund sector) trustees, or those that manage your money, find it difficult to consider everyone’s personal circumstances, for knowing how they want to invest and what investments best suit them. But, with a SMSF, trustees can make these decisions at a time that suits them. So, If you noticed key investment themes or sectors of the market that were boding particularly well, you could adjust your portfolio to take advantage of growth opportunities, bullish trends and stocks on the rise.
It’s not just about gaining power and control over your investments, Deloitte’s Audit Director Vimbai Mhlanga says SMSFs allow you to choose the type of pension that you establish and that can lead to tax savings. “A SMSF gives you the ability to grow retirement savings as you see fit, subject to the observance of relevant legislation, regulations, trust deed and investment strategy,” she says.
2. Lower Fees
While it can sometimes be more time-consuming, effort and responsibility, when you run your own SMSF, there are potential cost savings.
When your superannuation balance is low, costs are typically higher when compared with a APRA-regulated fund. However, there can be cost benefits when SMSF balances exceed $200,000. “As super balances grow, the difference in costs narrows to a point where there is no discernible difference,” says John Maroney.
Fees for establishing and maintaining a SMSF are generally a fixed flat rate instead of as a percentage of a member balance, and that leads to cost savings, according to Deloitte.
“Retail or industry superannuation funds usually charge administration fees, investment fees, advice fees, switching fees, buy/sell spread, exit fees, activity fees and other indirect costs, all of which are percentage based,” says Deloitte’s Audit Director. But for SMSF trustees, they can often benefit from lower administration and investment advice fees, at a fixed fee per year.
3. Tax Savings
SMSFs offer flexibility and simplicity in minimising tax. In retirement, we all know, income and capital gains tax is not payable on balances up to $1.6 million, in other words if you are over the age of 60, you can draw a tax-free pension. But there are also tax advantages in the lead up to retirement. For SMSF trustees, they can do this too but find it easier to minimise tax, with less products and less admin.
For example, in the lead-up to retirement, people can take advantage of several tax strategies, such as salary sacrificing and using a transition to retirement pension, contribution splitting with a spouse, and contribution timing, all of which can minimise tax and maximise savings.
In the retail and industry super fund world, two products will be needed for a transition to retirement pension, one superannuation fund and one pension fund. But for SMSF trustees, only one vehicle is needed. This is because the SMSF can split into components, accumulation phase and pension phase. This is something industry and retail funds cannot do.
“The tax strategies people use depend on age, assets, income and personal retirement goals,” says the SMSF Association CEO John Maroney.
For those that are still working and not of the golden age, capital gains in superannuation accumulation phase are effectively taxed at 10 per cent rate (after 12 months), a massive saving compared to the 22.5 per cent effective rate* when a transaction is completed outside the SMSF environment, according to Deloitte’s Vimbai Mhlanga. (*The 22.5 per cent rate applies if your marginal tax rate is 45 per cent).
4. Investment Advantages
SMSF trustees have complete control over what they invest in, whether its shares, properties, or even artwork.
“A SMSF provides the ability to choose investments and adopt your own investment strategy to achieve retirement goals,” Vimbai Mhlanga says. “It enables direct investments in some quite exotic assets, the ability to borrow via an instalment warrant or Limited Borrowing Arrangement and invest in real businesses and property.”
Investment choices are only limited by legislation, the Investment Strategy and Trust Deed that are set, says Deloitte’s Mhlanga. Such things are often set in conduction with a financial adviser and their associates.
As SMSF laws are quite flexible, trustees can select investments from listed shares, term deposits, residential and commercial property to managed funds and unlisted investments, all for the sole purpose of providing retirement benefits, says the SMSF Association.
5. Flexibility Over Your Assets
SMSFs give you greater control over your estate planning by allowing the purchase of business properties directly through your fund.
For example, “the ability for a trustee to have their business property owned by their SMSF and then leased back to them is one of these advantages for building retirement benefits,” says John Maroney.
Members of a SMSF can make in-specie contribution, which is the process of transferring shares, business properties or managed funds without selling the underlying investment. Those who are small business owners can also take advantage of capital gains tax (CGT) concessions.
Such measures not only reduce tax but offer sound estate planning, so your assets are well managed for the current and future generations, Deloitte’s Vimbai Mhlanga says.
The Responsibility is Yours
The ultimate responsibility lies with the trustee to ensure their fund is compliant with super and tax legislation and that it meets all the conditions of the trust deed. For some trustees, they choose to outsource such things to financial advising firm, all so they keep the perks of having a SMSF but can spend precious time with their families and loved ones.
The SMSF Association says, “We generally recommend that all SMSF members should seek advice from a SMSF specialist whenever significant decisions are being made, due to the significant complexity that is often involved”.