While self managed super funds are not for everyone, they do offer significant benefits. Running an SMSF successfully requires investment, legal, super and admin skills – or the ability to get help from people who have those skills.
Having control over how your retirement savings are invested is one of the many benefits of SMSFs.
On the flip side, the responsibilities and management skills required to run an SMSF are significant. This is because you’re accountable for your SMSFs regulatory compliance, not your accountant, financial adviser or solicitor.
What is an SMSF?
An SMSF is a private super fund you manage yourself, giving you more control over how your retirement savings are invested.
SMSF members must be trustees (or directors of the self managed super fund corporate trustee) and are beneficiaries of their SMSF. This means SMSF members are responsible for managing the fund’s investments and compliance with super and tax laws. This hands on approach sets SMSFs apart from public super funds, which are managed by financial institutions.
Benefits of SMSFs
- Access to more investment options
Having an SMSF provides more choice and freedom to access investment options that would otherwise be unavailable through a public super fund. This includes assets like real property, art and collectibles (such as stamps and coins), as well as physical gold.
Unlike investing with an industry, bank or retail super fund, your SMSF can borrow to invest in property, using a Limited Recourse Borrowing Arrangement (LRBA).
This strategy is a good option to help expand your investment portfolio. However, there are restrictions and compliance requirements. The Australian Taxation Office (ATO) has warned investors of the dangers of over investing (and over borrowing) into property within SMSFs.
- Control
If you’re a member of an SMSF, you have greater control over how your super’s invested while working, and how it’s paid when you retire.
This means you can invest in many of the products available to public super funds, as well as some products that aren’t. For example, SMSFs can invest directly in real estate, rather than being restricted to property trusts as many public funds are.
- Tax benefits
You’re entitled to the same reduced tax rates that are available through super so your investment return is taxed at a maximum of 15% (provided that your SMSF is a complying fund) rather than your personal income tax rate which could be as high as 45%. In addition, any payments received after the age of 60 are tax free.
These tax benefits are common to all super funds, not just SMSFs. However, SMSFs have more flexibility to use tax strategies around capital gains, taxable income or franking credits.
- More scale to access opportunities
Generally speaking, an SMSF can have up to six members. Bringing six investors’ money together, offers greater scale to access investment opportunities that may not be available to you as an individual investor.
Having scale may also help to keep fees down. This is because you can pool your assets and share expenses, leading to potential cost savings, which means you may have more funds available for investment growth.
- Estate planning
One often overlooked advantage of an SMSF is that they can provide greater flexibility or control with estate planning, if a member was to pass away.
An SMSF trust deed may also provide how and to whom death benefits will be distributed as long as these align with super law. The deed may also allow for cascading death benefit nominations or the exclusion of certain beneficiaries. Benefits could also be distributed to beneficiaries in a tax effective way.
Considerations to be aware of with SMSFs
- Responsibility
Managing an SMSF is not easy. As the trustee, you need to ensure the fund complies with all relevant regulations otherwise you could face severe consequences for getting it wrong.
If the fund is deemed to have breached its compliance responsibilities, penalties can include fines and civil or criminal proceedings. Depending on the offense, tax penalties could be increased, including fund returns being taxed at the top marginal tax rate as opposed to the concessional super rate of 15%.
- Expertise
What investors often overlook is the financial and investment expertise required to run, or be involved in running an SMSF.
As a trustee, you’ll be responsible for creating and implementing your own investment strategy – one that will need to deliver enough returns to adequately fund your retirement.
This means you need to:
- Understand how investment markets work, including share markets.
- Record your investments and transactions.
- Ensure your fund is adequately diversified to help manage risk.
You’ll also need to remain up to date on any changes to legislation that affect SMSFs as these may have compliance requirements.
An understanding of how to manage legal documents, such as a trust deed, is also beneficial. However, a legal professional could help you with this.
- Time
The administration and management of an SMSF is time intensive so if time is something you’re short of, an SMSF may not be a good option. On the other hand, many SMSF investors enjoy the sense of involvement and purpose that running their own fund brings.
- Higher insurance costs
Public super funds can generally provide cheaper insurance to their members than SMSFs. This is because they have large memberships and can negotiate discounted bulk premiums with insurance providers.
- Outsourcing your SMSF to professionals
If you find you don’t have the time or investment knowledge to manage your SMSF, you can outsource this to investment managers, financial advisers or other experts. This will come at an additional cost though.
- Minimum amount required for SMSFs
There is a lot of controversy around what should be a reasonable amount to set up an SMSF.
There’s no minimum amount required to set up an SMSF but depending on the fund’s complexity and structure, set up costs, administration, reporting and legal fees, it can become expensive. It’s generally more cost effective if your SMSF has a higher balance.
Source: MLC