Why Do People Setup A Self Managed Super Fund?

By Greg Suefong, Financial Services Consultant.

Challenging economic times have sparked a lot interest non-traditional approaches to save for retirement and many people are using self managed super funds (SMSF’s) to purchase alternative assets like direct property. According to APRA’s latest statistics, self managed super funds make up around one third (31.4%) of the total pool of superannuation benefits in Australia ($1.4 trillion) and continues to be a high growth sector.  

When it comes to how large a balance you need to setup a self managed super fund, the SIS Act does not state a minimum balance that you need to setup a SMSF. Of course some rationale should sit behind your decison.

Whether you are a baby boomer (born between the years 1946 and 1964), generation X (born between 1966 and 1976) or generation Y (born between 1977 and 1994) many Australians are attracted to taking control of their retirement assets. The following is general information only and you should consult with a financial adviser or planner to find out if a SMSF is appropriate for your particular situation.

Here are a list of reasons why many consider using a self managed super fund:

1. Full control of your assets

With an SMSF you can invest in whatever assets you like as long as you don’t breach the in house asset rules. So more options are available and you are not limited to a set menu of investments. Examples of assets include direct property, shares, cash, managed investments, bonds, commodities and currency. Owning assets directly can also lead to ongoing cost savings.

2. Not having to deal with other organisations lack of performance or service

Many organisations invest your money in accordance with a specific risk profile. This means that regardless of what is going on around the world economically you are fully invested according to the investment mandate of your asset manager. A lack of performance and service over a long period of time can cause many people to decide on running their own fund.

According to Rice Werner research the table below shows the aggregate rates of return for the APRA and SMSF segments for the years ending 30 June 2020 to 2011. It is based on ATO & APRA data.

Note: The above table does not propose that SMSFs are more superior investment managers versus APRA funds and more so demonstrates that members of SMSFs, as a whole are not at a disadvantage next to APRA funds.

3. Flexible transaction options, time value of money

The major super funds pay taxes and fees daily, which may mean less money working for you over the year. A SMSF has more flexibility as to when it must pay its taxes and fees. For example a SMSF lodges its tax returns once a year, so any accumulated tax liabilities can be fully invested elsewhere until the taxes are due post lodgment.  So you have the time value of money on your side.

For example Bob and Jane from Sydney are age 45 and have a SMSF. They each contribute $25,000 each year as concessional contributions. The contributions tax is 15% x $50,000 or $7,500. This tax does not get paid straightaway it gets paid after they lodge their returns through their accountant which could be over 18 months away. So they get the full use of $7,500 throughout this time rather than have to pay it immediately after the contribution is made. Make a free enquiry to contact a SMSF expert or accountant about how this may apply you.

4. Access to personal advice and administration

Most SMSF’s are managed and administered by accountants and advisers, so it may be easier to deal with any administration issues as they arise. Your SMSF adviser or accountant is a phone call away and you can contact the main person in authority usually very quickly. If you are paying for advice this could be a crucial part of ensuring you are up to date with changes in tax legislation, investment markets and latest superannuation or retirement strategies.

5. Buying direct property with super

One of the key asset classes that a typical super fund cannot provide access to is direct residential and commercial property. A number of advisers, accountants and property developers are marketing the idea of be able to use limited recourse borrowing to fund the purchase of real estate. The SMSF makes a deposit and completes the purchase with a complying loan arrangement. Once the member retires and meets a condition of release, they commence a pension using their SMSF and either the property will provide a tax free rental income or it could be sold capital gains tax free. For more information read the guide on rules for buying property with a SMSF.

6. Tax structuring and retirement benefits

There are various structural and strategic options available to SMSF’s such as small business tax concessions, transferring business real property and limited recourse borrowing arrangements (in other words you have the option of buying or transferring in your own business premises to your self managed super fund). These options can increase the  net worth of your retirement funding later on in life. Concessions on stamp duty in different states such as NSW, VIC and QLD can also apply under certain circumstances. For example in NSW if  an asset is transferred into a SMSF from a member such as business real property the stamp duty can be as little as $50 to $500.

7. Estate planning

For families creating larger levels of wealth beyond their lifetime there are additional estate planning benefits that can provide further protection to their estate, better tax outcomes and faster benefits payments. With increasing net worth it becomes more difficult to transfer inter-generational wealth tax effectively, so proper estate planning can make a large impact on retirement in the longer term.

As the abiove list makes clear, there?s not one simple explanation for the growth of self-managed super funds. Self managed super can be a complex strategy and typically requires the services of  financal advisers, accountants, legal professionals and financiers.

The ATO suggests that anyone seeking to set up and run a Self Managed Super Fund should seek professional advice from a licensed financial planner or SMSF accountant before they do anything with their super.

Speak to an expert about your super contact Greg by Clicking here to make an enquiry.

Disclaimer: The information on this site is general in nature and not financial advice. Visitors should consider obtaining independent advice before making any financial decisions.

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