Self-managed super funds are becoming popular investment choices, particularly in the post-Banking Royal Commission climate.
You might be wondering why, and what are the benefits of an SMSF, when compared to retail or industry super funds.
In this article we dive into the benefits of an SMSF, so you can get a clear understanding of what this could mean for you, and when it might be the right time to consider this investment option.
Liston Newton superannuation advisers are here to answer all your questions, and help you determine if an SMSF is right for you.
What is an SMSF?
A self-managed super fund is a trust structure run by its members—that is, run by you.
As the name suggests, it’s a super fund that you manage yourself. This makes it different to other funds because you’re in control, whereas other super funds are fun by external trustees, for thousands of members.
At present, there are no restrictions on who can establish an SMSF, however, this structure is more beneficial for people with high incomes, significant wealth, or business owners.
Key SMSF benefits
More investment control and flexibility
With an SMSF, you have a feeling of greater control, because you’re in charge of where you invest your money. If you identify that your funds aren’t earning, you can adjust and move them to higher-earning investments.
Particularly in the climate post the Royal Banking Commission, this gives a greater level of comfort for those concerned with low-earning superannuation funds.
You’re also able to increase the number of members in your SMSF. Your SMSF is able to have up to four members, compared to the single member of a retail or industry fund. This allows you to consolidate super funds with your partner, or with members of your family, resulting in a larger pooled superannuation balance.
This increased balance provides greater investment opportunities while still paying one account fee.
Wider investment choices
One of the big SMSF benefits is the wider investment choices available.
When using a retail or industry super fund you’re limited to where your fund directs your investments. But with an SMSF, you choose where you invest.
You can opt for investments like direct shares, property, term deposits, international markets, or even indulge in your hobbies through investing in artwork, or collectables.
Similar to the wider investment choices enjoyed by SMSFs, you also receive a greater degree of transparency. You’re able to see exactly where your money is being invested, so you can align your investment decisions with your personal values and goals.
With improved visibility of your investments, you get greater transparency over their performance, and on the level of tax and fees paid. You know exactly what’s happening, and why.
Increased control of your superannuation means you can structure your investments to minimise your tax. By choosing the right investment strategies, it’s possible to use the concessional tax nature of your funds to reduce the amount of tax you pay overall.
For example, during your accumulation phase, your investment income is capped at a rate of 15%. When you transition into your pension phase, there is no tax percentage payable, CGT events included.
Easier to access
Unlike retail or industry super funds, another benefit of your SMSF is that it’s easy to access your assets when it’s time to retire.
Due to the nature of an SMSF’s structure, it makes for a smooth, simple transition from accumulation phase to pension phase. There’s no need to sell your assets; just set up a Pension Income Stream from your SMSF to send periodic payments to your bank account, and you’re ready to start on the next step of your life.
Safer estate planning
Your SMSF allows you to flexibly manage your estate planning yourself.
With an SMSF you’re able to make binding death benefit nominations—and unlike retail or industry super funds, these nominations do not lapse. This means you can strategically plan your estate, so you know exactly who gets what.
You also have more option for specifying how your death benefits are to be paid, which enables you to structure income streams for your dependant beneficiaries in a more tax-effective way.
Minimise your fees
While the SMSF benefits far outweigh any cost involved, there are still some fees to be taken into consideration. However, unlike a retail or industry super fund, you only pay a set fee as opposed to a percentage fee.
As an SMSF trustee you’re required to lodge an annual tax return and pay ATO fees, however these are capped—so the larger your SMSF becomes, the more cost-effective it is. Accounting and administration fees for your SMSF can range from around $2,00 up to $5,000 or more each year. There will also be audit fees, and an annual ATO levy.
Speak to an SMSF specialist to get advice on how to minimise the costs involved with running your investment, so you can keep more of your hard-earned money in your pocket.
Benefits to your business
Small businesses owners can receive interesting tax benefits, thanks to an SMSF.
A good example of this is a small business owner who uses their SMSF to purchase a property for their business.
After the purchase, the SMSF itself owns the property. The SMSF can then rent the property to the small business, and the business owner pays rent to the SMSF. The business can then claim this rent as a business expense.
As there would have been borrowing occurring within the SMSF in order to purchase the property, the interest on this loan can be used to offset the income.
This results in minimal tax paid by the SMSF, and tax deductions on the rent paid by the business owner.
The increased flexibility of an SMSF also means you can invest directly in other businesses that aren’t on the ASX. This might take the form of a friend or relative’s business. This allows you to take part in their success, while building your SMSF wealth at the same time.