For nearly two decades Self Managed Super Funds (SMSFs) have been the fastest growing sector of superannuation. The number of self managed funds in operation has grown from less than 100,000 in 1994 to more than 550,000 as at March 2015 with number of members crossing a million mark with total assets close to $ 600 Billion as per figures released in May 2015.
The key driver of this stupendous growth has been the desire to have greater control over the retirement assets, rather than leaving it to the fund managers. However, there are other key benefits too, that along with investment choice, makes Self Managed Super Funds such a powerful retirement vehicle.
Control over Retirement assets
Greater Investment choice
Pool family assets
Tax Effective Structure
For most Australians, superannuation is their second largest asset after the family home – so naturally they would want to understand it, control it and have greater visibility of their retirement assets. With an SMSF, you can decide how you would like to invest your retirement savings, and you can closely monitor your super assets.
The key driver of SMSFs has always been investment control, and the much wider investment choices (such as direct shares, direct property, hedge funds, art work etc) which trustees have compared to traditional retail or industry super funds. With an SMSF, you can invest in direct shares, high yield cash accounts, corporate debt, direct property, unlisted assets and more sophisticated investment strategies like derivative based strategies within equities such as hedging via CFD’s etc. to enhance returns whilst simultaneously attempting to reduce volatility. Other examples could be small business owners leasing their business real property (that is used by their business) from their SMSF, Leveraging their fund assets through Limited recourse borrowing, direct property investments, and many others.
For many people (but not all, and depending on your account balance), the cost of running a SMSF can be significantly lower than that of an alternative retail, industry of other commercial super fund. The main cost for a SMSF is the annual administration and audit requirements. With AVS, typical administration & audit costs for average fund would be around $ 1600+GST to $ 2000+GST mark. Commercial super funds on the other hand tend to charge as a % of your fund balance, with a range of around 1% to 2% pa depending on the fund and underlying fund managers used. So if you’ve got a flat cost of around $1800 and a fund balance of $300,000 in your SMSF, your cost would be 0.6% pa. Compared to most commercial super funds, this is very cost effective.
SMSFs can be a great way to pool super assets with a partner or family members. SMSF can have up to four members. This means multiple super accounts of family members can be consolidated to create a larger pooled balance which can be invested more efficiently and into potential larger assets. Also as multiple accounts are consolidated into one SMSF you only pay one set of fees.
Depending on individual situations, a major benefit of an SMSF is the control and flexibility over the tax position of the fund. Through either strategic investment planning (such as maximising franking credits) or internal structuring, tax can be significantly reduced and in some cases, even be totally eliminated with refunds paid from the ATO, particularly for those in retirement. There is also greater flexibility in terms of tax liabilities of the fund, as the fund only does one tax return even though there can be up to 4 different members in the fund. An SMSF can make use of complex strategies like anti detrimental payments whereby other current and future members can benefit from huge tax deductions for future years on the death of a member.
For those members nearing the pension phase, the SMSF allows the most seamless transition from accumulation into income streams through Transition to Retirement Income Stream (TRIS) and use of tax effective strategies around it.
SMSFs are now allowed to borrow money under Limited Recourse Borrowing Arrangement. These new rules can be effectively utilised by SMSFs, however they have limited application in large commercial super funds. This now makes it much easier for trustees to acquire direct property in their SMSF as property being a high value asset generally requires an element of borrowing. Thus by leveraging the fund balance better returns can be generated in SMSF.
Your superannuation benefits are not necessarily controlled by your will but there are excellent estate planning benefits inherent in SMSFs. You can devise strategies to accomplish exactly how you want to deal with your super benefits with exceptional tax efficiency. You can leave tax advantaged (even tax free) income streams to dependant beneficiaries and controlling when they receive a lump sum, and effectively look after child beneficiaries in a way that no other structure can offer. SMSFs can make non lapsing binding death nominations, contrasting commercial super funds where these have to be continually updated. When you start to understand powerful estate planning strategies that can be employed in a SMSF, it is easy to see how and why an SMSF can act as a tax advantaged intergenerational wealth vehicle.
In- specie contributions are non-cash contributions to your fund in the form of an asset. However only certain permitted assets like listed shares and securities and business real property (land and buildings used wholly and exclusively in a business) can be transferred to SMSF as contribution. In-specie contributions can be an effective strategy where these assets are held outside of super like a commercial property and you would like to bring these into super without selling it. This can also result in savings of stamp duty on such transfers. This flexibility is generally not afforded by commercial super funds.
Once you begin to learn it’s intricacies, you can start to understand why the SMSF is such a popular and effective retirement vehicle. However you must also be willing to take on the significant responsibilities that come with being a SMSF trustee. If you are, then you can enjoy the potential benefits of better control, greater investment choices, better returns, tax control, asset protection, effective succession planning and peace of mind, which can take the quality and security of your retirement to a whole new level.